Budgeting TechniqueChapter 16-2

What is a Budget?

A plan for saving and spending.Allows you to meet your

personal goals with a system of wise spending.

Purpose of a Budget

Live within your income

Achieve your financial goals

Buy wisely

Avoid credit problems

Plan for financial emergencies

Develop good money management skill

Budget Process

1. Set financial goals

2. Plan budget categories

3. Maintain financial records

4. Evaluate your budget

Setting Financial Goals

Goals point to where you would like to be financially.

This should consist of long term and short term goals for spending and saving money.

Plan Budget Categories

Saving is an all-important part of reaching your financial goals.

The secret to doing this is P.Y.F. or “pay yourself first”.

Saving should become another “expense” included in your budget.

There are two types of living expenses; Variable and Fixed.

Fixed Expenses

Cost that occur on a regular basis and are for the same amount each time.

Examples: rent, mortgage payment, insurance premiums

Variable Expenses

Living costs that differ each time and may not be as easy to estimate.

Examples: food, clothing, utilities

Allowances

The amount of money you plan to use for a certain budget category.

Common Budget CategoriesSavingsFoodClothingHousingTransportationHealth and Personal CareRecreation and EducationUtilities

Maintain Financial Records

Individuals should record their income and expense to find out if the plan is working.

Expenditures are recorded throughout the month.

The checkbook serves as a reference.

Evaluate Your Budget

Actual spending is compared with budgeted amounts and any difference between these amounts is a budget variance.

Deficit: when actual spending is greater than planned spending

Surplus: when actual spending is less than budget amount

Characteristics of an Effective Budget

Realistic Flexible Evaluated regularly Well planned and clearly

communicated Simple format