Do you need a budget?

Answer

You already have one!

Complete Answer

Simply put, a budget is how you spend your money. If you receive money (income) and spend money (expenses) you  have a budget. What you need to develop is a “Spending Plan.” I prefer this term because budget has such a negative connotation, i.e. “that’s not in the budget”, “I can’t buy this or that”, “I can’t buy fun stuff because fun stuff is not in the budget” et cetera.

So what is your Spending Plan? Would you be able to clearly explain to someone your income and expenses for the month? You should be able to describe your Spending Plan for one month. For example, “This is the amount of money I take home (income) each month and this is how I spend the money (expenses) each month.”

Knowledge/Skill

Describe your Spending Plan for one month.

Do you have to know how to manage your money?

Answer

Yes, as long as you have money you should know how to manage it.

Complete Answer

Starting around the early teens, we begin to earn money and make decisions about it – how to spend our lunch money, what shoes we like, what movie we would like to see, et cetera. By the time we are adults, we have to make most, if not all of the decisions about our money. So it follows that if you will be making decisions about money, you would benefit from a basic understanding of money management, “Financial Literacy.” These decisions will impact your financial wellbeing now and in the future.

We live in a country that values freedom, and this includes freedom in the market place – we get to spend or not spend our money however we wish. This coincides with a basic tenant of the Church that we all have free will, and that includes freedom to make decisions about money. We have the freedom, as well as the right, to make our own financial decisions.

Knowledge/Skill

Money management skills (Financial Literacy) will help you make  prudent1  financial decisions.

 

What should be your child’s first lesson about Financial Literacy (money management)?

Question  What should be your child’s first lesson about Financial Literacy (money management)?

Answer  How to save money.

Complete Answer  A basic assumption of Financial Literacy (money management) is “Don’t buy stuff if you don’t have the money to pay for it”. Most children know that instinctively. Unfortunately some adults who find themselves in financial difficulty seemed to have forgotten that basic assumption of Financial Literacy.

A child’s first lesson in Financial Literacy is how to save money. It’s called “Pay Yourself First” (PYF Savings). Every time a child has money to spend, a birthday gift, money earned for raking a neighbor’s yard, et cetera, 10% should be saved. This should be automatic and nonnegotiable.

Although these concepts are beyond the understanding of a child, in the future the PYF Saving account could be used as a rainy-day fund, a child’s personal bank to borrow money from, and eventually a retirement account.

Financial Literacy Knowledge/Skill

Teach your child how to save money using the concept of  “Pay Yourself First”.

Comments or Questions

Thank you for visiting the Financial Literacy a Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

 

How much should you be spending for a car?

Question How much should you be spending for a car?

Answer 15% of your take-home pay.

Complete Answer To clarify the question, “How much should you be spending for transportation?” The answer is the same – 15% of your take-home pay. It is important to understand that transportation is an expense – it is not an investment nor a way of saving. A car is a depreciating asset.

Each month, set aside 15% of your take-home pay into your Transportation Account. Take money out of that account to pay for your transportation expenses. Walk or use public transportation to get where you need to go. If your Transportation Account never grows in value, that is a good indication that you cannot afford a car.

On the other hand, if the money in your Transportation Account continues to grow in value, you can start considering different options for getting around. For most of us, a car is our transportation. “How to” buy a used car or new car, should I lease or buy a car, how to negotiate the price of a car, et cetera, are beyond the scope of this blog. The focus of this blog is how to plan and pay for a car you have selected.

Generally speaking;

  • You should save 15% of your take-home pay until you have enough to pay cash for your first car. It will probably be used car. This will give you the experience of realizing how costly it is to own a car.
  • You should not put yourself in a position of making car payments and car repairs at the same time.
  • In addition to carrying liability insurance, most lenders will require you to carry comprehensive insurance on a car that you finance.
  • Car maintenance is required for all cars – new or used.

I actually know two people who do not nor do they want to own a car. They walk or use public transportation to get around. For road trips, they rent a car. For each, their respective Transportation Expenses are considerably lower than 15% of their take-home pay. Conversely, I know someone who buys a new car every year. He can afford it, that is important to him, and that is how he has decided to spend the money he has earned.

Financial Literacy Knowledge/Skill

Your Transportation Expenses should not be greater than 15% of your take-home pay.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How do you get out of  debt?

What banking services do you need?

Question What banking services do you need?

Answer A checking account, savings account, debit card, and a credit card.

Complete Answer  As with the purchase of any good or service, shop around for cost, features, and convenience.

Your checking account is your operating capital account. Deposit all monies received into this account. Use this account to pay all monthly bills on time and withdraw spending money, cash, as you need it. You will need a checking account that allows you to deposit money (checks and cash), write checks, both electronically and manually and access to your account using an ATM for both deposits and withdrawals.

The first expense to be paid each month is to you. Deposit 10% of your take-home pay (Pay Yourself First) into a savings account. If you have money left over at the end of the month, put that amount into your savings account. Use your savings account if you must as explained in the posts of October 10, 2016, but always pay yourself back. You will be pleasantly surprised how quickly the amount grows and how much will be in your savings account at the end of the year.

Helpful Hint  Through no fault of your own, you could be the victim of identity theft and or bank fraud – unexpected financial emergencies. Because of the threats of identity theft and bank fraud, use two completely different banks (not affiliated with one another) for your checking account and your PYF Savings Account. If an account is compromised, you will still have access to some money from the second bank until the problem is resolved.

With a debit card you do not have to carry a lot of cash. It is an option you have with most checking accounts. A debit card, also known as a check card, may be used to make purchases, pay bills, and make cash withdrawals from an ATM. A debit card is especially handy for making purchases when you don’t know the amount of the purchase in advance, weekly groceries or a tank of gas for example.

In reality, a credit card is a short-term loan to make a purchase. As such, interest is charged for credit card balances that are carried for more than the one month billing cycle. A credit card is ideal for Internet purchases and a must when traveling. In most cases, you will also need a credit card to rent a car. I personally use my credit card for automatic payments, and pay off the balance each month. It gives me a record of the date of the payment and I have more control over the automatic payment process.

Financial Literacy Knowledge/Skill

A checking account, savings account, debit card, and a credit card are the basic banking services you will need to manage your money effectively.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How much should you be spending for housing expenses?

How much money should you be saving?

Question How much money should you be saving?

Answer  Ten percent of your take-home pay.

Complete Answer  At the very minimum, you should be saving 10% of your take-home pay.

The 10% Affect  Saving 10% of your take-home pay may seem like an impossible task. It is if you try to do it all at once. If you do it one pay check/one purchase at a time, it’s not that difficult. I like to think of it as, “Small change equals big bucks.” For example, If you have $10 to spend on lunch, how different would your lunch be if you only spent $9? Instead of spending $100 for clothes, you only spent $90. Could you really notice the difference? That’s “small change”. If you do that for a year, you will have saved 10% of your take-home pay, that’s “big bucks”.

Financial Literacy Knowledge/Skill

Save 10% of your take-home pay.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How should you be using your savings?

How do you save money?

Question  How do you save money?

Answer  If you spend less money than you take home, live below your means, you will have money to save.

Complete Answer  There are many ways to save money, every thing from putting your spare change in a piggy bank each day to money automatically deducted from your pay and put into diversified investments. Do what ever works for you. The important things to remember are:

  1. Start right now! Albert Einstein said, “Compound interest (earning interest on interest) is the eighth wonder of the world. He who understands it, earns it . . . he who doesn’t . . . pays it”9. For example Adam and Alice agree to save $10,000.00 each for retirement which is 30 years away. Alice started right now by investing her $10,000.00. It took Adam ten years to save the $10,000.00 to invest in his retirement. Even though both invested $10,000.00 for retirement, in 30 years, Alice will have $24,568.42. Adam, because he waited ten years to invest his money, will have $18,207.55. They both saved $10,000.00 for retirement. But because Alice was earning interest on interest (compounding) she will have $6,360.87 more than Adam. For this example the interest rate is 3% compounded monthly.
  2. Make savings a priority. The first thing in my Spending Plan is savings. Each month I begin by saving 10% of my take-home pay. That financial literacy concept is called “Paying Yourself First”.
  3. Make it easy. If a task is inconvenient or cumbersome, it’s easy to put off or skip it altogether. Have part of your pay directly deposited to a savings account, have money automatically transferred from checking to savings each month, round up purchases to the next even dollar and then leave that amount in your checking account, or putting your spare change in a piggy bank at the end of each day are just a few ways to save money.

Misconception  A common misconception about saving is some people believe or are led to believe that buying something on sale is saving money. Some people go so far as to believe that buying something on sale is actually investing money. Both concepts are incorrect. When you buy something on sale, you are simply spending less money.

Financial Literacy Knowledge/Skill

Saving money begins with living below your means, make it a priority, make it easy to do, and begin saving now.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How much money should you be saving?

Is saving money important?

Question  Is saving money important?

Answer  YES!

Complete Answer  Without savings;

  • You are living paycheck to paycheck. Any interruption in your regular paycheck, such as a sudden illness, a cut in your work schedule, a temporary layoff,  will cause your finances to quickly spiral downward.
  • You don’t have money for a financial emergency expense.
  • You cannot afford big ticket items (down payment on a house or a car, purchase of a washer/dryer, furniture, et ectera).
  • There is no possibility of a comfortable retirement in your future.
  • Most disheartening of all, at the end of another year,  you have nothing to show for a year’s worth of work.

Financial Literacy Knowledge/Skill

Understand that savings is an important element of your financial literacy.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How do you save money?

Can you afford that?

Question Can you afford that?

Answer By answering these two question you will know the answer; 1. What is your take-home pay for the month? and 2. Is the expense equal to or less than the recommended category amount in your spending plan?

Complete Answer Ironically, as a kid you knew the answer. When your parents gave you $10 to buy your school lunch, you knew you only had $10 to spend on lunch and you spent it accordingly. The same principle applies as an adult. Unfortunately as adults, at times we have to buy things that we cannot pay cash for at the time of the purchase. Most of us could not pay cash for a house or a new car. For those purchases that have to be financed, the same principle applies. What is your take-home pay for the month and what is the monthly cost of the item you are buying.

For Example: Can you afford an apartment? The total expenses (rent, utilities, insurance, et cetera) should not be more than 30% of your monthly take-home pay. Can you afford a new car? Again, the monthly expenses of that new car (payment, insurance, scheduled maintenance, gas, et cetera) should not be more than 15% of your monthly take-home pay. You get to set up the categories and the amounts (percentages) for your spending plan. The important thing to remember is that your total expenses should never be more that 100% of your take-home pay.

Financial Literacy Knowledge/Skill

Know what you can afford.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Is saving money important?

Where are you spending too much money?

Question Where are you spending too much money?

Answer  Only you can answer that question.

ExampleFor one month, Adam’s (imaginary person) income was $3,600. Tracking his expenses revealed the following; housing $1,170, car $590, credit cards $525 and lifestyle $1,500.

Income Expenses
Amt. % Amt. %
Take-Home Pay  $3,600  100
 Housing Expense  $1,170  33
 Car Expense  $590 16
 Credit Card Expense  $525  15
 Lifestyle Expense  $1,500  42
 TOTALS  $3,600  100  $3,785  106

Can you identify where Adam is spending too much money?

Complete Answer  You have all the information needed to answer that question.

  1. You know how to calculate income for the month. (Post of July 18, 2016)
  2. You can track spending. (Post of August 15, 2016)
  3. You know what a typical spending plan (budget) should look like. (Post of Jul,y 25, 2016)

In the above example, Adam’s total expenses ($3,785) are greater than his total income ($3,600). Adam will eventually go bankrupt if he continues spending more than his income.

To identify where Adam is spending too much money let’s examine his spending.

  • Housing Expenses which include mortgage/rent, utilities, cable/satellite/Internet  service, cell phone, insurance, et cetera. Adam is spending 33% of his income. The recommended amount is 30% and may vary between 25% and 35%. Adam’s amount spent for housing is a little on the high side, but within the recommended amount.
  •  Car Expenses which includes car payments, gas and oil, maintenance and repairs, license plates, insurance, et cetera. Adam is spending 16% of his income. A little over the recommended amount, but close enough.
  • Credit Card Expenses are in reality debt. Credit card debt will be address in a future post. For this example, we will assume it is debt pay down. Fifteen percent is within the recommended amount.
  • Lifestyle Expenses could be classified as discretionary spending, which would include such things as dining out, clothing, entertainment, hobbies, vacations; all those things that that you enjoy and like. Adam is spending 42% of his income on lifestyle things. The recommended amount for lifestyle is 25%. Adam is spending too much money on lifestyle things.

Financial Literacy Knowledge/Skill

Identify where you are spending too much money.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: What’s the difference between needs and wants?