Money Management 1

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Money Management 1 Participants Guide
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Table of Contents

• Welcome
• Pre-Test
• Budgeting Process
• Needs and Wants
• Types of Expenses
• Organizing Data
• Budgeting for Periodic Expenses
• Goal Setting
• Establishing Priorities
• Tracking Expenses and other Data Collection
• Post-Test
• Glossary

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Welcome

• Welcome to the Money Management 1 module! The
  most important thing to do with your money is to
  give it a plan. A budget. A spending plan. A
  cash-flow plan. Call it what you will, but having
  a plan for how you spend money will set you free
  to actually enjoy it.
• Objectives
• After completing this module, you will be able
  to
• Understand why budgeting is a key element of
  financial freedom
• Understand how to track your spending and why
  its important to do so
• Set S.M.A.R.T. goals
• Take steps to create a budget
• Participant Materials
• This Money Management Participant Guide contains
  
• Information to help you learn the material
• Tools and instructions to create goals
• A glossary of the terms used in this module

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Pre-TestTest your knowledge about financial
management

• Following a spending plan helps you
• Meet expenses in a given period of time
• Control your financial situation
• Build assets
• All of the above
• In order to track your daily spending habits, you
  should
• Find ways to increase income
• Write down what you buy or pay for each day
• Find ways to decrease spending
• Determine your monthly income and expenses
• 3. Which of the following are examples of a
  variable expense? Select all that apply.
• Car payment
• Health insurance premium
• Electric/water
• Personal expenses

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Why Bother to Budget?

• Our current economic crisis clearly demonstrates
  the need to have our own financial houses in
  order, but many have not taken the steps to
  ensure their own financial sutures.
• Did you know?
• 61 of U.S. households don't have a budget.
• Over 11 million adults dont monitor their
  overall spending and dont know how much they
  spend on food, housing and entertainment.
• 24 of U.S. households admit to not paying all of
  their bills on time.
• 1 in 3 adults (34) carry credit card debt from
  month-to-month. 15 or 35 million people carry
  more than 2,500 of credit card debt.
• 32 have no retirement savings, and 34 have no
  emergency savings.
• Taking control of our money is essential for
  financial freedom. So how do we do that?

Source April 2014 Consumer Financial Literacy
Survey by Harris Interactive, Inc

• A spending plan or budget merely allows us to
  proactively determine the direction of our money.
  We designate how money will be spent in advance
  of receiving it. Having a written plan will
  allow you to gain greater control over your
  money and in working the plan, you will find
  ways you can redirect money to help you achieve
  your goals.
• No spending plan is complete unless you have
  addressed past, present and future needs. Your
  spending plan will include
• Funds to pay off debts
• Funds to provide for current needs such as
• Housing
• Transportation
• Food
• Shelter
• Medical
• Funds to provide for future needs such as
• Emergency Savings
• Goal Savings
• Retirement Savings
• A spending plan provides for needs first and then
  wants.

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Budgeting Process
Budgeting is a process. Your first budget is
likely going to be adjusted as you test it over
time. Data Collection Over the last couple
of months, we have been gathering data to use in
developing a solid spending plan. Your spending
tracker as well as data from other sources will
help you paint a picture of where your money
currently goes. Organize Data Once you have
data collected, you will organize this data into
budget categories. You dont want too many
categories or the budget becomes difficult to
manage, but you do want enough categories that
all the expenses are accounted for. Periodic
and Goal Spending Now you are taking your
budget from a backward looking accounting of
expenses to giving your budget direction for the
future. Break your periodic expenses and goals
into monthly amounts to be saved and add them to
your budget categories. As you include these
expenses, you will begin to save for future
anticipated goals. Periodic spending and goals
also help us to think about monthly spending
choices in a new way. Build your budget With
all the data, you should be able to construct a
budget. Just take your organized category
spending and add in the periodic and the goal
spending to create your basic budget. Evaluate
and Adjust the Plan If your spending each month
adds up to more than your income, you need an
adjustment. We will talk about adjusting your
budget in our next session.
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Budgeting

• Some people call it a budget some call it a
  spending plan some call it a map to spending. No
  matter what you call it, a budget is nothing more
  than a written plan for spending and a written
  plan is necessary because it allows you to see
  the big picture in your financial situation. The
  big picture will move you from a
  paycheck-to-paycheck cycle and allow you to
  understand the importance of tracking cash flow,
  setting aside money for ongoing and anticipated
  expenses and maintaining an emergency fund.
• The first step to taking control of our money is
  to track our spending. Most of us can easily
  recognize our big expenditures rent/mortgage,
  grocery bills, etc. but its the little things,
  the coffees and candy bars, that often throw us
  into a tailspin.
• Start tracking where your money goes. Its
  important to track everything. If you toss a
  dime into a fountain, write it down. If you grab
  a soda from the machine, write it down. Bills,
  regular expenses, write it all down. Your goal
  is to see where youre actually spending.
• Track your spending for at least two weeks
  (preferably for a month) and then evaluate your
  spending. Do you see any patterns? Where are
  your weaknesses? What needs to be controlled?
  This is the information youll need when creating
  your budget.
• Overcome Temptations Review your temptations
  list and consider how you might control your
  spending in the areas where you are tempted.
  Often, we need to take a pro-active measure to
  avoid temptation. For example, if you are
  planning to cut back on eating out, you may need
  to take some extra effort to plan meals to fit in
  your routine.
• Identify Priorities You need to determine which
  are controllable expenses and which are not
  controllable expenses. For example, your rent or
  mortgage is not controllable. Sure, you may be
  able to refinance or move to a less expensive
  apartment but for right this minute, it is what
  it is. This worksheet will be part of your
  homework for the next class and is found on page
  35 of your Passport. This is also the step where
  youll create your S.M.A.R.T. goals. Remember,
  change is always easier when you know what youre
  working toward.
• Determine Wants vs. Needs Needs are essential
  and must be funded. Wants can be funded with any
  discretionary money left after all other
  priorities are funded.

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Separating Wants and Needs

• Separating Wants and Needs
• Sometimes its hard for us to tell the difference
  between wants and needs. We are bombarded daily
  with messages that tell us we simply must have a
  certain product or do a certain thing to be
  happy. Spending all our money on wants is a key
  reason many of us fail to achieve financial
  freedom. Knowing the difference between your
  wants and needs will help you be successful.

Wants Needs
Home phone (landline)
Cell phone(s)
Cable or satellite television
High-speed internet access
Gym membership or other memberships
Eating out at restaurants
A second or third vehicle for kids to drive
Vacation trips
New clothing for every style and season
Purchasing music, books or other hobby items
Going to concerts, movies or other events
Being able to buy lunch instead of brown bagging it
Life is meant to be lived, not survived. Treat
yourself to some wants along the way, but do so
when you can afford them. Enjoy those wants as
the extras that they are.
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Expense Types

• Fixed expenses are easy to budget for because
  they are the same each month.  The budgeted
  amount for fixed expenses is whatever the cost
  for that item is.
• Variable expenses happen every month, but the
  cost fluctuates (groceries, entertainment,
  doctors, etc.).  They are harder to budget for
  because the amount can change from month to
  month.  To create a budget for variable expenses,
  you will want to look at some prior months and
  take an average of the expenses. 
•                 Example  Food Costs
•                 Month 1  178 Month 2  256
  Month 3  204 Average cost 
  212.67
• In the months where you spend less, you can put
  away the extra money to help you meet your needs
  during the more expensive months.  In this
  example, in Month 2 you would have to borrow from
  savings or from another budget category to supply
  the need because you havent built up a savings
  reserve yet for the months when you are short. 
  Month one would have helped some because you
  would have set aside 34.67 but that wouldnt be
  enough to fund Month 2.  You would have to
  readjust spending somewhere else.
• Periodic Expenses (commonly known as budget
  busters) happen occasionally and can be
  expensive
• Vacation Back to School Weddings
  Birthdays
• Holidays Tuition Insurance Property
  Tax
• Income Tax Car Maintenance Clothing
  Home Repairs
• Planning for these requires a little extra
  homework.  Getting a good estimate of the cost
  for the item is key.  For fun items like Vacation
  and Holiday spending, getting the entire family
  involved in saving for the event can be an
  opportunity to teach children about financial
  planning and the importance of savings.
• To budget for these items
• Determine the timeframe of how often the expense
  occurs (annually, quarterly, twice per year,
  etc.).
• Figure out the total amount needed to cover the
  expense.

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Organizing Your Data
TRACKER
X-Mart apples, socks, paper 23.59
Car Payment 259.34
Convenience Store gas and coffee 35.97
Electricity 159.75
Rent 950
Restaurant lunch 8.23
CATEGORY
Groceries 5.39
Eating Out 9.66
Auto 293.88
Misc. 7.25
Housing 1,109.75
Clothing 10.95
Now that youve learned about different types of
expenses, you will now learn to categorize them.
When you group your spending together, it
actually makes budgeting more simple. This
month, you will be grouping your spending that
you have tracked and continue to track spending
by category. Use the worksheet on page 25 of
your Passport to organize your spending into
categories. You want to have simple major
categories for spending, but enough categories
that all your regular expenses are captured
Housing Groceries Auto
Debt Entertainment Clothing
Savings Medical Miscellaneous
Investments Childcare Education
Charity Insurance
You determine how many categories you need for
your budget. Look at the categories listed in
the spending plan on page 24 of your Passport for
an example that you might want to apply to your
first budget. Unfortunately, some transactions
may be a little harder to organize into
categories than others. These tricky transactions
are where multiple categories are covered in the
same purchase. In the example above, the X-Mart
purchase included groceries (or food), clothing
and miscellaneous. NOTE If you operate a small
business, keeping track of the business related
expenses is vital for accounting at tax time.
The more expenses you track, the less tax you
will end up paying in the end. You must have a
written record of all business expenses.
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Organizing Spending by Category
  Week 1 Week 2 Week 3 Week 4 Total
Housing 850 120 75 1045
Groceries 250 20 100 370
Auto 50 300 100 50 500
Debt 100 100
Entertainment 30 10 70 10 120
Clothing 50 50
Savings 100 100 200
Medical 120 45 120 285
Miscellaneous 35 20 55
Investments 50 50 100
Education/Childcare
Charitable  30 30 30 30 120
In order to categorize expenses, it is important
to consider what types of expenses should be
included in each category. Housing - includes
rent/mortgage, utilities, maintenance and
telephone expenses Groceries - includes
costs of food prepared at home, eating out
included in entertainment Auto - includes
costs of loan payments, insurance, maintenance
and repair (can include costs of mass transit and
rides) Debt - includes consumer debts
like credit cards and personal loans (not
mortgages) Entertainment - includes eating
out, movies, events, internet and
cable Clothing - includes accessories,
undergarments, coats and everyday
wear Savings - includes emergency fund and
savings for periodic expenses Medical - includes
medical insurance, co-pays, pharmacy, dental and
vision Miscellaneous - includes gifts,
allowances, subscriptions, postage, personal
care, etc. Investments - includes long term
savings for retirement, etc. Education -
includes costs of books, tuition and supplies for
both adults and children (also includes student
loans) Charitable - includes church, workplace
giving, support of nonprofit and political
organizations Insurance includes life and
disability coverage
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Budgeting for Periodic

• As mentioned earlier, not every expense happens
  every month. So how do we plan for periodic
  expenses ahead of time?
• Identify cost and timeframe for your goal What
  is the total cost for your goal and how long do
  you have to complete this goal?
• EXAMPLE 1
• I have to pay personal property taxes in June
  each year. Estimated cost 360.
• Calculate monthly cost
• 360 12 months 30 per month
• EXAMPLE 2
• I have to pay 180 quarterly for auto insurance.
  
• Calculate monthly cost
• 180 3 months 60 per month

• Without a plan for periodic expenses, you will
  find yourself either depleting other savings or
  incurring additional debt just to cover expenses.
  Just because they dont happen every month
  doesnt mean they are not important.
• Regular periodic expenses are easier to plan for
  because you know when and about how much those
  expenses will be.
• Irregular periodic expenses may require more
  research. For example, how much should you plan
  for maintenance and repairs on your car? You may
  be able to rely on historical averages or you
  might choose to do an internet search to find out
  average costs for your make and model. No matter
  how you choose to estimate, it is important to
  plan for these expenses so they dont catch you
  unaware.
• The goal is to set aside regular savings each
  month to cover periodic expenses. Once you have
  a list of all your estimated expenses, you can
  add up how much you should be saving monthly.
  With this information in hand, you know how much
  to save and can consider how to minimize the
  impact of periodic expenses when they occur.
• As part of your homework, you will be completing
  your own estimate of periodic expenses and
  calculating the monthly cost. The worksheet is
  on page 26 of your Passport.

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Estimated Schedule of Periodic Expenses
  Expense Budget Spent Saved
January
February
March
April
May
June
July
August
September
October
November
December
In our classroom lesson, we had an example of
needing 570 per month for periodic expenses, but
because there wasnt enough savings prior to the
actual expense, we had to make adjustments. Knowi
ng when expenses might occur may give you some
latitude to make changes in when you plan for the
expense. It could also give you the opportunity
to save a little extra in the earlier months to
ensure you have enough savings when the expense
actually occurs. By doing advanced planning
for these expenses, you have the ability to adapt
and not be caught unaware.
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S.M.A.R.T. Goals

• In the Budgeting Process diagram on page 6, you
  see that goal setting is an important step of the
  budgeting process so use these guidelines to
  help you add focus and direction to your goals.
• Goals are important because they let you see what
  youre working toward. Change is never easy, but
  its a lot easier when you know all your hard
  work will pay off.
• There are two main types of goals short-term
  goals (less than one year) and long-term goals
  (one year and longer). The people who are most
  successful in reaching their goals do two things
  
• They write them down, and
• They know what steps are necessary to achieve
  those goals. The easiest way to determining
  those steps is to create S.M.A.R.T. goals.
• S.M.A.R.T. goals take regular, ordinary goals and
  chunk them up into steps for success
• Specific State exactly what is to be done
• Measurable Include how the goal can be
  measured
• Actionable Determine steps to reach the goal
• Realistic Do not set goals for something
  unrealistic

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Budgeting for S.M.A.R.T. Goals

• Identify cost and timeframe for your goal What
  is the total cost for your goal and how long do
  you have to complete this goal?
• EXAMPLE
• I want to save 3,000 over 2 years for a down
  payment on a new car.
• Calculate annual cost
• 3,000 2 years 1,500 per year
• Calculate monthly cost for your budget
• 1,500 12 months 125 per month
• As you create life goals for yourself during your
  homework assignment, break the cost of the goal
  into monthly savings needed and include that
  savings in your monthly budget.

Prioritizing Goals

• Rank goals by importance Of your goals listed,
  what should take greatest priority? You assign
  the priorities according to your values. See
  worksheet in Passport page 30.
• When the entire family is involved in
  establishing and prioritizing goals, you get
  greater engagement in seeing a goal through to
  the end. Involve children and spouse and make
  your goals family projects with everyone playing
  a role.
• Common goals and common priorities bond family
  members together.
• Highest priority goals receive greatest
  attention.
• If you encounter a conflict, evaluate your
  options available. Do you need to reprioritize?
  Can you still accomplish your goal with more
  time? Can you generate more money to help you
  reach your goal?

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Data Collection

• Although data collection is mentioned as the
  first step in the budgeting process, it is also
  necessary at the end. It will take you time to
  adjust your spending plan to something that works
  for you, and youll need to continue to track and
  collect data to see if your initial budget is
  realistic. The key is to move from looking at
  where your money goes to telling it where you
  want it to go. When creating your budget make
  sure to consider both historical spending as
  well as future needs.
• Helpful Documents
• When planning your budget, historical records can
  help you fill in the gaps on where your money has
  gone in the past. You may find the following
  documents helpful
• Two or three recent paystubs for each worker and
  each job
• Debit card and checking account statements and
  register for the past three months
• A recent statement for each credit card and other
  debts and your actual payment for each
• Two or three recent statements for all ongoing
  bills, such as utilities and insurance
• Outstanding bills, such as medical, dental,
  repairs, etc.
• Having a few months of history allows you to
  capture more of the irregular expenses that occur
  so that you can create a more detailed spending
  plan. No two months are the same so the more
  history you have, the better you will be able to
  plan for the future.
• Historical statements are great tools to help you
  identify where your money HAS gone. As we
  develop our spending plans, we will be
  integrating our emergency savings, periodic
  expenses, S.M.A.R.T. goals and debt repayment
  plans to identify where our money SHOULD go.

WHERE DID GO? HISTORICAL RECORDS WHERE SHOULD GO? FUTURE PLANNING
Spending Tracker Emergency Savings
Bank Statements Periodic Expense Planner
Credit Card Statements S.M.A.R.T Goals
Computer/Online Quicken/Mint/etc. Debt Repayment
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Post-Test

• A spending plan helps you control spending
  because you are able to
• Keep track of your daily spending and bills due
• Determine your monthly income and expenses
• Find ways to decrease spending
• Find ways to increase income
• All of the above
• What is the definition of a fixed expense?
• An expense that may change annually
• An expense that changes from month to month
• An expense that stays the same from month to
  month
• An expense that stays the same for a period of
  time, and then changes
• Which of the following are generally considered
  examples of fixed expenses? Select all that
  apply.
• Car payment
• Personal expenses
• Electric or gas bill

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Glossary

• Discretionary Expenses Expenses that we can
  control. Often associated with the wants of
  our spending plan. Discretionary expenses are
  lifestyle expenses that integrate our values with
  our spending choices.
• Fixed Expenses Expenses with amounts that do not
  change from month to month.
• Variable Expenses Expenses with amounts that
  often change from month to month.
• Gross Income Total income without deductions.
• Net Income Gross income minus deductions such as
  Social Security and other taxes.
• Non-Discretionary Expenses Expenses that are not
  easily controlled. They are the vital expenses
  that must be accommodated in the budget.
• Periodic Expenses Household expenses that occur
  generally one to four times a year, instead of
  monthly, such as quarterly insurance premiums or
  property taxes.
• Spending Plan A step-by-step plan for meeting
  expenses in a given period of time.
• Keep track of your daily spending
• Determine what your monthly income and expenses
  are the month before they are due
• Find ways to decrease spending
• Find ways to increase income