Transcript Slide 1

Planning For A
Healthy Financial Life
Budgeting
Prepared by Adam Galovan
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What role do finances play in my life?
Some might wonder, “Why should I worry that much about my
finances? I have more important things going on in my life.”
Troubled finances have been shown to be a significant source of
contention and conflict in many marriages. Additionally, a poor
financial situation is often associated with greater amounts of life
stress. Having a healthy financial life will enable you to focus on
things you might consider “more important,” such as your
relationships or other life goals.
Additionally, habits formed as you effectively manage
your finances can benefit you in other areas of life.
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How does managing my finances
interface with other areas of my life?
Consider this thought from Dr. Craig L. Israelsen, of
the School of Family Life at BYU:
“Because financial decisions and choices are part of
our daily lives, they represent a continual source of defining
and refining who we are and what we value. Financial
[duties], viewed in this way, [are] not a burden but rather a
necessary tutorial in becoming more patient, more focused,
more selfless, more enduring, and more self-reliant.”
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Finances in context with daily life
He concludes that “our [actions] in one part of life
often [have] ‘spillover’ benefits in other parts of life
inasmuch as behaviors often come in packages. As we
adopt one behavior, other behaviors that are part of that
‘package’ are generally easier to adopt. …
“For example, as we repeatedly work to hone our
budgeting skills, we are also gaining experience in
prioritizing, a vitally important interpersonal life skill
that can help us learn to put relationships ahead of
possessions.”
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Finances in context with daily life
So, as we review concepts and principles of
effective budgeting, think specifically about
how they apply to your financial life and
how they may also apply to other areas of
your life.
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Justification for Budgeting
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What does “budget” mean to you?
When you hear the word “budget,” what thoughts and
feelings come to you?
Does it make you feel antsy and worried?
Do you feel empowered, knowing that you are in control?
Do you feel constrained, like you don’t have any freedom?
What memories come to mind (good or bad) from prior
experiences with budgeting, either as a child or in the time
since then?
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A “New” Definition of a Budget
Budgeting is telling your
money where to go
instead of wondering
where it went.
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A budget…
Is an organized listing of your:
Cash Inflows
(Wages, Salary, Gifts, Other Income)
Cash Outflows
(Rent/Mortgage, Utilities, Groceries,
Taxes, Debt Payments, etc.)
Reflects your lifestyle
Provides a plan for spending
Causes you to think about how you use your money
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Budgeting—A Roadmap to Freedom
A well-known Canadian businessman,
N. Eldon Tanner, has noted:
“Many people think a budget robs
them of their freedom. On the
contrary, successful people have
learned that a budget makes real
economic freedom possible.”
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Budgeting Steps
The following are some helpful
steps to effective budgeting:
1. Set Goals
2. Organize
3. Decide
4. Implement
5. Control & Evaluate
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Step 1: Set Goals
Remember the purpose of a budget!
“It is to enable [you] to realize [your] most cherished desires
by defending them from [your] casual wishes.”
—The Richest Man in Babylon (p. 30)
What do you hope to achieve by budgeting?
Why do you want to budget?
What “cherished desires” will your budget defend from your
“casual wishes”?
What is your overall purpose in budgeting?
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Make Your Goals “SMART” Goals
Once you have a purpose for budgeting, it can be
helpful to set some “SMART” goals:
Specific: Effective goals are focused on a specific,
desired outcome.
Measurable: In order to track your progress,
goals should be measurable.
Attainable: Goals shouldn’t be too high; they
should be challenging but reachable.
Realistic: Even if a goal is attainable, does it
make sense? Is it practical for your situation?
Time Bound: You are more likely to make progress
toward your goal if you have a specific time frame.
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3 Time Frames for Goals:
As you set goals, it is helpful to consider at
least one goal for each of the following time
frames:
Short Term:
Within the next year
Medium Term:
Between 1 and 5 years
Long Term:
Longer than 5 years
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For a more detailed discussion of goal setting click here. A sample goal sheet
is available here.
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After Setting Goals…
Prioritize:
Focus on the
top 2 or 3 most
important goals
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Step 2: Organize
Track Expenses
You need to know
where you are to
determine where you
want to be!
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Tips for Tracking Expenses
Tracking, in and of itself, can help you cut expenses. As you
track your purchases, you may notice that you are thinking
more about what you are buying.
The main point is that you keep track of what you are
spending your money on.
Some people save receipts and add them up. Others carry a
notebook and write down everything they spend.
Tracking will help you know if your budget estimates are
realistic and help you know where you need to cut back.
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Spending more than you earn?
What if, after tracking your expenses,
you discover you are spending more
than you earn? There are 3 options:
Increase your income
Decrease your expenses
Combination of both
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Do I really need to buy this?
For most people decreasing expenses is often easier
and more practical than increasing their income.
Consider this from bestselling author of The
Wealthy Barber, David Chilton:
“It is a rare person who can . . . budget for both
needs and wants . . . because, for too many people,
a want becomes a need” (p. 36).
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Differentiate Between Needs and Wants
When faced with the decision to buy:
Wait 24 hours before buying
Ask yourself, “Do I really need this?”
Ask yourself, “How many hours would I have to
work to pay for this?”
Use the “Step-Down” principle.
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The Step Down Principle
Movie Theatre,
New releases,
Night show $8.00
Movie Theatre,
New release,
Matinee $5.00
Movie Theatre,
Less recent release,
Night show $3.00
Like this example, “step-down”
from a higher-level expense to
a lower level. You don’t need
to step-down to the lowest step
to save money. By stepping
down just one or two steps you
can save.
Movie Theatre,
Less recent release,
Matinee $2.00
Rental $0.50- $3.99
Local Library $0
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Step 3: Decide
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Pick a Budgeting System
After looking at how you are spending your money, it’s time to decide
on a budget system that will work well for you. As we review several
budgeting methods, remember:
No one budgeting system is better than another.
Each system has different strengths and weaknesses.
The most important part of picking a budgeting system is that you find one
that works for you.
You are free to adapt and change any method so that it meets your needs.
If your income varies from month to month, as you plan your budget
use your average monthly income.
You may also find the Income-Draw system helpful. Click here
for an explanation of this system.
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What does it mean to “Live Well?”
As we budget, plan, and think about how we live, it is
helpful to ask ourselves what we envision as a “good life.”
In other words, if we considered ourselves to be living well,
what would our lives look like? As you think about this,
reflect on the following thought from Dr. Israelsen:
“It is important to remember that living well is better measured by
how well we earn and utilize our resources, rather than by how
much we earn and spend. Moreover, living well does not imply
that [our] life will be free of challenges or that we will have all the
money we want. Both of those misguided hopes would seriously
jeopardize our opportunities for growth.”
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Spreadsheet Method
Click on the spreadsheet
for a PDF copy or here
for an excel spreadsheet.
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Spreadsheet Method
Postal Service
Bank Teller
$1998
$1205
$2,000
$1,200
$3203
$3,200
$2,052
$1,181
$3,233
$52
-$19
$33
With the spreadsheet method you simply write down what you plan
to earn and what you plan to spend.
You can divide your spending into as many categories as you want.
A spreadsheet can also be helpful in tracking.
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Spreadsheet Method
Here is an example of some common spreadsheet categories:
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Spreadsheet Method
Postal Service
Bank Teller
$1,998
$1,205
$2,000
$1,200
$2,052
$1,181
$52
-$19
$3,203
$3,200
$3,233
$33
$3,012
$3,000
$3,154
$191
$200
$79
$154
Total the columns and subtract your expenses from your income.
You can also keep track of how close you come to your actual plan by subtracting your
actual income and expenses from what you planned.
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Click here for a PDF copy or here for an excel spreadsheet.
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Checkbook Method
With the checkbook method you use your check register and write
down what you plan to spend in just a few categories, separated by
vertical lines.
As you spend money a running total of how much remains in each
budget category can be carried down. It is also important to keep
the column on the right, with your current account balance,
updated.
The example on the following page will illustrate this.
Click here for more detailed instructions on how to use the checkbook
method.
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Check Book Method
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Envelope Method
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Envelope Method
You simply label different envelopes with categories of expenses such as:
eating out, entertainment, groceries, etc.
The envelope method works best with variable expenses, such as groceries
or entertainment. There is no need to use it for fixed expenses, such as
your mortgage payment.
After labeling the envelope simply place the amount of cash you have
allocated to each category in the envelopes. When the cash for the
envelope has been spent, you must wait until the next budget cycle
begins.
Some people like to put receipts back in each envelope so they are aware of
how the money was spent.
If you prefer not to use cash, you could write the budget amount on a
piece of paper and place it in each envelope. As you spend, subtract the
amount. This way you know how much money you have left in that
category.
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Cash Flow Calendar
For those who find budgeting difficult, there is another option that many
have found to be helpful. This method is called cash flow planning.
A cash flow plan isn’t limited by an arbitrary time period, such as a
month. It is ongoing and flows from month to month.
In a cash flow plan, you plan your budget for the shortest pay period in
the household and divide up the month accordingly. You list when your
various sources of income will be received as well as when your
expenses will be paid. An example is shown on the next page.
A more detailed description of Cash Flow Planning is available
by clicking here.
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Cash Flow Calendar
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Other Budgeting Systems
Computer Programs,
i.e. Quicken, Microsoft Money
Your own spreadsheet system
Combination of several systems
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Step 4: Implement
Once you’ve decided on a system, work at it! Stick to it
and do your best to make it work for you.
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Step 5: Control & Evaluate
Evaluate the system and
change if it isn’t working!
This is often the step many forget. You have a budget to help you, not to cause you problems.
Periodically check and see how it is working for you and make any changes that might be necessary.
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Why Do Budgets Succeed?
Adequate savings
Enough personal allowance
Sufficient Time Spent
Positive attitude
Flexible
Good communication with spouse/family
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Adequate Savings
Emergency Savings:
At least 3 – 6 month reserve
Long Term Savings:
Retirement, education
Revolving Savings:
Irregular expenses
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Click for a PDF or Excel version of this form.
Budgeting for Irregular Expenses
Car Insurance
Car Registration
Birthdays
Tuition
Christmas
300
300
15
1500
600
15
15
100
15
1500
500
100
60
3000
500
$4260
$355
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Saving Tips
Set a goal to save today!
Become a Utah Saver! Visit www.UtahSaves.org
Make savings a part of your budget
(Revolving, Emergency, and Retirement Savings)
Use direct (automatic) withdrawal
Start saving in small amounts
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Saving Tips (con’t)
Pay yourself first!
As you pay yourself first, “strange as it may
seem, [you will be] no shorter of funds than
before. [You will notice] little difference as
[you] manage to get along without [the
money].”
—The Richest Man in Babylon (p. 15)
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A Final Thought
Remember the purpose of a budget!
“It is to enable [you] to realize [your] most cherished
desires by defending them from [your] casual wishes.”
—The Richest Man in Babylon (p. 30)
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