Living on a budget!ongrats, you finally made it. High school seems so long ago. The past four years in college just flew by and now you’ve

got a few decisions to make. First and foremost, should you live at home, or venture out on your own? You decide to stick around the home front for a while, to save a few bucks and enjoy some home cooking. But then you get the itch to strike out on your own. It took a while, but you managed to land a decent position with a local company with a starting salary of $35,000 a year. Thanks to that college degree! You think you can make it, but to be sure you’ve decided to get an apartment with a friend to split the rent and utilities. You think back on those economics and finance classes you took in high school and figure maybe you can really use some of those AOF courses after all. So, get out your pencil and calculator and begin to plug in the numbers to see just what it will take to live on a budget.

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Budget Lesson Created by Mike Martin, Lansdowne High School Academy of Finance, Baltimore, MD

Cover designed by Jenny Martin, Boston University

STEP 1: Show me the money!

elcome to the real world. You’re thinking 35 K for a first job is pretty cool, but hold on! Before you can write that first rent check, you have to know how much you’ll actually have at

your disposal to pay for all these new –found bills. Yes, your employer will do all the deductions for you but you still need to know just how much Uncle Sam is going to take. And then there’s the Free State, which is hardly free. Yes, Maryland wants its cut, too – both on the state and local levels. And don’t forget about Social Security and Medicare. They’ll get their share as well. So, in order to compute your net take-home pay – your disposable income – complete the chart using the tax rates given here. After doing the math, record your answers on the accompanying answer-worksheet.

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Figuring your disposable income

MONTHLY INCOME

Gross Income

FED TAX State TAX FICANet Income

*

$ $ $ $ $

* Put this figure on the final budget chart

What you need to know to figure your MONTHLY NET INCOME:

Your federal income tax rate is 15%

Your Maryland state income tax rate is 7.283% (which includes 2.83% to Baltimore County, where you live)

FICA – or, Social Security and Medicare – is a combined 7.65% (the good news here is you only have to pay this

much as an employee – your employer picks up the other half! If you were self-employed it would be twice this!). Actually Social Security represents 6.2% and Medicare is the other 1.45%.

STEP 2: ‘Pay Yourself 1st’

o what does this mean? Just what it says – pay yourself first. Remember learning this during the investing unit at the beginning of the course? Before you allocate any funds for

monthly expenses, include some for yourself. In other words, put something away for retirement, college, a new home, or just for a rainy day fund if times get tough (like today!) To figure this, stash away 10% of your disposable income and put this figure on your budget chart. One last thing here – go to

http://individual.troweprice.com/public/Retail/Mutual-Funds/Our-Fund-Family and select two mutual funds. Put half the money into each fund and explain why you chose these two from the more than 60 funds T. Rowe Price offers and include at least two examples of stocks that are in the mutual fund. T. Rowe Price is one of the oldest established, most respected and conservatively run investment firms in the world – and its headquarters is right here in Baltimore! Now you know why Mr. Martin stressed “buy what you know” when investing.

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T Rowe Price mutual fund # 1 ___________________

Why you selected it?

T Rowe Price mutual fund # 2 ___________________

Why you selected it?

STEP 3: Home, sweet homeemember, you have decided to live with a classmate to share the rent and any utilities. In order to locate a suitable place to live – in the southwest area of Baltimore County – go to the internet

and then search for 2-bedroom apartment rentals. Search for what you would like but make sure it is affordable. To do this, take your monthly GROSS INCOME and multiply it times .41 to get your maximum rent. This is the qualifying formula that lenders use to calculate the housing payment someone can afford. Remember, you are only paying half the lease payment so what ever you come up with as the rent figure only use your part for your total cost of the apartment rent. In other words, you can affectively double your rent portion for the purpose of locating an apartment. You need to include the following information about your apartment here:

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ADDRESS _______________________

WEBSITE ________________________

TOTAL MONTLY RENT $ _________

RENT (per month) – your part only $__________ * Include this figure on the budget chart

UTILITIES (gas and/or electric) - INCLUDED: Yes ____ or No ___

If No, you must calculate the approximate cost for utilities. To obtain this information you need to phone BG&E at 410-685-0123 and give them the actual address of the place you want to rent. Please explain what you are doing and be polite when asking! Since BG&E is a public utility this data is public information!

efore you move on, don’t forget about your ‘other’ utilities – cable TV and internet. A land-line phone isn’t vital so you can skip that since you and your roomy will no doubt each have their

own cell phone, which you can research a plan and add it to the monthly budget, or simply use the cost of the present phone you have now under your family’s plan. Whatever cell phone plan you pick, record that much on your budget chart. The two of you will have to decide on which cable TV option is best for you – Comcast, Verizon’s Fios, or something else like a dish. Choose what you want, then record

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the cost in your budget (again, you only have to pay your half!). The same goes for the internet. Pick a provider and split the cost.

Briefly explain why you two decided on this apartment (location, amenities (what’s this?), price, whatever your rationale! Also, include either a picture of the place or a floor plan. Finally, describe your cable TV, cell phone, and internet plans, the cost of each and why you chose them.

STEP 4: Hot wheels!

ou have to get to work so you’ll need some wheels. With the tough economic times you wisely figure to look for a used – or should we say, pre-owned – car, or truck. Buy what you like, but

remember you have to handle the monthly payment, which we’ll get too shortly. Because you’re short on cash you’ll have only 10% down (some of the money you saved right out of college living at home) and finance the rest. First, you need to search. Go to www.autotrader.com or www.carmax.com or www.everycarlisted.com and look for a car but when doing so don’t look for anything older than 5 years. Financing will be next to impossible, otherwise.

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To find the cost you’ll pay for the vehicle you have chosen go to www.kbb.com and look up the actual Blue Book value of the vehicle and use that, or the actual asking price (whichever is less) as your final price to pay!

Once you’ve got your car use the monthly payment calculator at www.lendingtree.com/partners/autotrader/AutoHowMuchCalc.asp to figure your monthly payment. In order to get a loan you have to know your credit score. The higher the score the lower the interest you’ll pay. To make this realistic we’ll use your grades and convert them to a corresponding credit score. Here’s how!

To figure your payment, use the following:

REMEMBER TO SHOW YOUR WORK! TERM:

2007, 2008, 2009 models maximum of 60 months2005, 2006 models maximum of 48 months2004 model maximum of 36 months

INTEREST RATE:Based on your credit rating

A 800-850 score 6%A- 750-799 score 7%B+ 700-749 score 8%B - 650-699 score 9%C+ 625-649 score 11%C- 600-624 score 13%D 550-599 score 15%E = below 550 can’t get a loan rate

To figure your credit rating, use your unofficial transcript (provided by Mr. Martin who obtained it from records office) to compute your GPA over the most recent quarter (spring, 2010) and convert it into your credit score:

A 3.8 + GPAA - 3.5 – 3.79B+ 3.25 – 3.49B - 3.00 – 3.24C + 2.75 – 2.99C - 2.25 – 2.74D+ 1.90 – 2.24D 1.75 – 1.89 E = Do we really need to go there?

My GPA is ______ therefore my credit score is _______ and therefore I

can expect an interest rate of _______

My monthly car paymentKBB Retail Price or actual price (whichever is

less)$

Plus - Tags $140.00

Plus – MD title tax (6%)$

= Gross amount due $

LESS Down payment (10%)$

NET Amount Due – This is what you’ll finance $

In a well-written statement explain why you decided on what vehicle to purchase, including at least 4 features it has and how your grades affected your payment using this ‘credit scoring system’ and then place your final numbers in the appropriate sections of your budget chart.

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STEP 5: Not so fast!

ust because you found your car, and somehow managed to obtain financing doesn’t mean you’re through with the expenses for your car. In fact, they’re just beginning to add up. J

Now you have to calculate how much gas you’ll use for a typical month. Time to put on your thinking cap! To do this, figure you’ll drive the typical average of about 12,000 miles per year. Even though gas has come down quite a bit over the past year figure about $2.50 a gallon for the year (this is one area you may have to readjust if prices go on wild swings). So what do you do now? Come on, think. This is just a typical SAT math word problem, isn’t it? So crunch the numbers and come up with your answer once you’ve gotten one more item – MPG – or miles per gallon for your car. To get this, go to http://www.edmunds.com/calculators/true_fuel.html?fuelcost=2.50 and locate this bit of vital info. Now you can calculate your costs for gas each month and when done, put your answer on the monthly budget chart.

Remember to show your work here to obtain full credit!

STEP 6: Are you in good hands?

on’t forget the insurance. You can’t drive without it. To find about how much you’ll pay each month

you’ll have to check out the actual policies for typical 16-year-old drivers. It just so happens, that Mr. Martin has actual policies for drivers your age – courtesy of his State Farm agent. Your cost will be based on your sex, grades, and driving record and place of residence. So go check it out and remember to fill in your answer in the right spot on the monthly budget. But wait! Here the good news. Remember – you’re graduating from college so you’re not a just-starting-out, high-risk 16-year-old driver. Your 21 and that means a huge discount on your insurance premium. A whopping 1/3 discount to be exact, so make sure you figure that into your final answer and remember, too, when you graduate college a 3.0 GPA will carry on until age 25 as a good student discount!

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With good grades, a good driving record and other incentives your car insurance doesn’t have to go through the roof!

As for other types of insurance – life, disability, and health – here’s what the typical single person would likely opt for. You don’t need any life insurance, so pass on this one. Disability insurance is probably a good idea. Because you’re young and hopefully in somewhat decent shape, you can probably get away with a low cost policy that will set you back about 1% of your gross monthly income. Health insurance may be offered by your employer

at a discount but you will have to be on your job for a certain time (likely 6 months or so) before you can possibly get a substantial portion paid for you. For your cost, check out the health insurance options offered by Blue Cross and Blue Shield at www.prefercarefirst.com. Choose a plan that best suits your needs and include it on your budget chart. NOTE: You don’t have to provide your real identity – just use your birth date

So where did you rate as a 21-year-old driver? Briefly explain here what your personal insurance 6-month premium is using the actual State Farm Insurance policy that best fits your situation – sex, grades, driving record, residency and then put the insurance figure in the appropriate place on the budget worksheet. You can get the actual cost for a 16-year-old driver from a real policy from Mr. Martin, who has policies written by State Farm Insurance. And remember, once again, your grades, affect your overall cost of insurance. How much did you save with the ‘age’ discount at 21? Be sure to note, too, which part of the car insurance policy is the most expensive – and why is this?________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

As for disability and health insurance, how did you figure these two out and what health plan did you ultimately decide on, and why? Specifically, what kind of coverage did you opt for, what co-pays will you have and what prescription plan and associated costs are there?_________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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STEP 7: What’s in your wallet?

n this day an age it’s most likely that you’ll want to have a credit card handy just in case you need to charge something once in a while. Since the crash occurred in September, 2008 credit has

gotten real tight. Even those with an excellent payment history can find it tough to obtain credit. But don’t despair. You can still get a credit card if you do your homework.

IIn order to select the best card for your individual situation here’s what you need to do. Go to www.creditcards.com or www.bankrate.com orwww.lowcards.com and research the best credit card for your need.

Explain here why you chose the credit card you did. Be sure to include the rate you’ll pay (any intro rate, if it applies and for how long), any rewards program you will benefit from, and

exactly how you plan to use the card and your new found credit and how it can help you.________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Step 8: Food for thoughtYou have to have food and this part can really eat up a lot of your monthly budget. But you don’t have to let it take a big bite out of your plan. In fact, a plan is all you need. Take the time to figure out a monthly menu and then go shopping – yes, to your favorite grocery store – and load up with a month’s worth of groceries and household items. You can buy specials, store brands, name brands, and even use coupons. You can also share some of the cost of food with your roommate. Lunches during the work week are on your own (since you’ll both hopefully be at work) but all other meals and other supplies can be shared if you so desire. If you buy lunch, figure $6 per day. You decide. But whatever you decide you need to complete the monthly menu and then fill out your shopping list for the month, listing each item and price paid, and where you shopped. Also, you will dine out twice for the month, at a sit-down restaurant (no fast food here!) and will need to select your menu items and include a 15% tip for each meal.

Use the menu calendar provided to create your shopping list and then put your final shopping bill on your monthly budget

list!

Step 9: Paying for that sheepskin

he good news is you’ve graduated college and don’t have any credit card debt –

yet! Hopefully you can keep it that way and pay off any monthly balances should you decide to obtain and use a credit card. You

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do, however, have one monthly installment debt that needs to be repaid. It’s your student loan you got for some of your college education. It is a federal direct loan that is available to every student regardless of affordability. To know how much you took out go to http://www.staffordloan.com/stafford-loan-info/faq/whats-the-difference-between-unsubsidized-and-subsidized-loans.php and check out the chart for the maximum amount that can be borrowed. Add up the 4 years and use that total for your total student loan. Then make sure you locate the annual interest rate you’ll pay (this can be found on the link provided) when you start repaying the loan and figure your payment over a 10-year period. To calculate your monthly payment, use this link. Put your final answer in the appropriate place in the budget.

http://www.finaid.org/calculators/loanpayments.phtml

Federal Stafford Student Loan

Loan $Interest Rate

Freshman yearSophomore yearJunior yearSenior yearTOTAL

Step 10: Time is money

emember that ‘pay yourself first’ item way back when? Well, it’s time to do a little calculating to see just how much you would amass by regularly putting aside 10% of your income each

month. Since you’re about 15 you can figure to have about half a century (that’s how many years?) to accumulate your pot of gold.

R To do this, use the figure you saved and plug it into the calculator on the site provided here to see just how much you have – assuming a reasonable 8% rate over time (the stock market has averaged about 10% annually for the past 100 years, despite this current economic crisis we’re facing). So how much will you have? http://cgi.money.cnn.com/tools/savingscalc/savingscalc.html

Savings for Half Century

Total $ invested each month$

Total $ invested in one year$

Total $ invested over 50 years$

Total Amount accumulated with compounding of interest

$

Step 11: A slice of pie

o see just how our final monthly budget looks it’s time to make – a little pie. Using Excel – and the accompanying directions – take your monthly budget figures by groups – taxes, housing,

transportation, food, retail, loans, insurance, medical, fun money – and create an eye-popping pie chart in color. When finished be sure to print out your final pie chart. Something that looks like this:

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My Monthly Budget

Household23%

Transportation14%

Food10%

Medical4%

Loans7%

Taxes31%

Fun Money4%

Savings7%

Household

Transportation

Food

Medical

Loans

Taxes

Fun Money

Savings

Step 12: So how did you fare?

Was there anything left to spend on entertainment or do you need to start to look for a part-time job to make ends meet?

So were you in the red or in the black? To finish out the Living on a budget project you have one final assignment to complete. Take the handout – In the Red or in the Black -and complete the 4 questions for homework. Be sure to share the total project with your parents and get their input on final question included.

And now, the rest of the story…

ow it’s time to see just how much you spent overall for the month. To do this use the following budget and complete it using ACTUAL figures that you calculated

during the budget process. For categories on the monthly budget list that are footnoted figure your costs based on the info for each provided.

NMonthly Budget

INCOMETOTAL GROSS INCOME $MINUS – Taxes: Fed, state, FICA (subtract from Gross)

$

= NET or DISPOSABLE INCOME

$

EXPENSESPay yourself 1st – savings $Housing - rent $Utilities $Transportation Car payment $ Car insurance $ Gas $Insurance – health, disability $Medical – Rx $Food – home/dining out $Retail – Clothing1 $

Retail – Other (Target, etc.)2 $Cell phone, internet $Laundry costs3 $Installment loansStudent Federal Direct Loan $Total Expenses (add all expenses)

$

Subtract total expenses from disposable income and record

answer belowDiscretionary Income (hopefully what’s leftover!)

$

For footnotes 1-5 see the following information.

1For clothing this is where it gets interesting. You’ll need to estimate, based on your own experience about what you might spend on clothes for a year and then average for a month. Be realistic!

2Expenses like toilet paper, paper towels, shaving, soap etc. also needs to be estimated based on a list you do individually or with your roommate. You may either look for prices at a place like Target or simply include them in your grocery shopping.

3Laundry costs should be estimated by using the following: figure about $3 per load (wash & dry) at a typical laundry mat or using the apartment’s main washer-dryer. Figure about two loads per week.