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ABudget:Whatisit?ABudget:Whatisit?•Abudgetisafinancialdocumentusedtoprojectfutureincomeandexpenses.Thebudgetingprocessmaybecarriedoutbyindividualsorbycompaniestoestimatewhethertheperson/companycancontinuetooperatewithitsprojectedincomeandexpenses.•ABudgetisatooltohelpyouunderstandwhereyourmoneygoes•ABudgetallowsyoutodecidehowmuchandwhenyouspendyourincome.•ABudgetallowsyoutomakeandreachyourfinancialgoals•ABudgetisthecornerstoneofasolidfinancialfuture.ABudget:Whatisit?“Budgetsareallaboutfinancialfreedom.Withoutaplanforsavingandspending,you’llnevermakethemostofyourincome–nomatterhowmuchmoneyyouearn.”“Budgetsareveryempowering.”“Budgetscreatefinancialsecurity.”“Budgetingdoesn’tleadyouawayfromsomethingitleadsyoutowardsafinancialgoal.”“Abudgetcanhelpyoureachafinancialgoalbecauseitcontrolshowmuchyouspendandhowmuchyousave.”“Budgetscanhelpeliminatemanymoneysurprisesbecauseyou’veplannedaheadandknowwhattoexpect.”“Agoodbudgetcanhelpkeepyourspendingontrackandevenuncoversomehiddencashflowproblemsthatmightfreeupevenmoremoneytoputtowardyourotherfinancialgoals.”ABudget:Whatisit?WhatdoIneedtoprepareabudget?•Incomedetails•Listofexpenses,includingdebtpaymentsWhatarethetypesofExpenses?Fixedexpenses:•RemainthesameeachmonthVariableexpenses:•VaryfrommonthtomonthPeriodicexpenses:•Occuronlyonceortwiceayear.ABudget:Whatisit?CreatingaBudget•Identifyyourmonthlyincome•IdentifyyourmonthlyexpensesRuleofThumb:Ifyourmonthlyincomeisgreaterthanyourmonthlyexpensesthenyouareabletosave$$$$$$MIME=$avingsIfyourmonthlyexpensesaregreaterthanyourmonthlyincomethenyouaregoingintodebt.MEMI=DebtABudget:Whatisit?SettingFinancialGoals“Peopledon’tplantofail;theyfailtoplan”Thinkfirst:•Budgeteachpaypacket.•Whatneedstobepaidfirst?Remember:•Whenitisgone;itisgone!•Don’tbetemptedbycredit/debitcards!Rethink:•Isthisexpenseabsolutelynecessary?•Isita‘need’ora‘want’?ABudget:Whatisit?SettingFinancialGoals“Goalsettingisaterrificmotivator!”ShortTermGoals:•12monthsorlessMidTermGoals:•Within1-3yearsLongTermGoals:•Within3-5yearsExamples:•Buildan‘EmergencyFund’•Getyourdebtundercontrol•Saveforadepositonacarorhome•Savemoreforretirement•Saveforaholiday.•SaveforanythingyouwantABudget:Whatisit?Keepinmind“SMART”S=SPECIFIC=whatisityouwanttoachieveandwhyM=MEASURABLE=amounttobesavedeachmonth/intervalA=ATTAINABLE=whenistheduedateforthegoalR=REALISTIC=haveyougivenenoughtimetosaveT=TRACKABLE=specifictimeframeABudget:Whatisit?SimpleInterest*“InterestRate”:thestatedrateofinterestpaideachyearPrincipalamounttobesaved:$1,000InterestRate@6%perannum/year:6%of$1,000i.e.6/100[.06]x1,000=$60perannum•Valueaftertwoyears:$120interest+Principal[$1,000]=$1,120•Valueafterfiveyears:$300interest+Principal[$1,000]=$1,300•Valueaftertenyears:$600interest+Principal[$1,000]=$1,600•Valueafter12years:$720interest+Principal[$1,000]=$1,720Note*:SimpleInterestdoesnottakeintoconsiderationbankfees,changesininterestrateoranyothermatterthatmayinfluencetheinterestgained.“SimpleInterest”calculationistogiveyouageneralideawherethe‘value’ofyourinitial“Principalamount”willbeinasettimeframe.ABudget:Whatisit?‘Ruleof72’isasimplifiedwaytodeterminehowlonganinvestmentwilltaketodouble,givenafixedannualrateofinterest.Formula:Howmanyyearstodoubleis:72/’fixedannualrateofinterest’=‘Yearstodoubleyourmoney’Itworkslikethis:Take72dividedbytheinterestrateyouwillearnonyourmoney.Theanswerequalsthenumberofyearsitwilltakeyourfundstodoubleinvalue.Example@4%pa:72/4(%)=18(yearstodoubleyourmoney)Example@10%pa:72/10(%)=7.2(yearstodoubleyourmoney)ChoiceofRule:Thevalue72isaconvenientchoiceofnumerator,sinceithasmanysmalldivisors:1,2,3,4,6,8,9,and12.Itprovidesagoodapproximationforannualcompounding,andforcompoundingattypicalrates(from6%to10%).Theapproximationsarelessaccurateathigherinterestrates.Forcontinuouscompounding,69givesaccurateresultsforanyrate.ThisisbecauseIn(2)isabout69.3%.Sincedailycompoundingiscloseenoughtocontinuouscompounding,formostpurposes69,69.3or70arebetterthan72fordailycompounding.Forlowerannualratesthanthoseabove,69.3wouldalsobemoreaccuratethan72.ABudget:Whatisit?‘CompoundInterest’Compoundinterestispaidontheoriginalprincipalandontheaccumulatedpastinterest.Formulatofindinterestforfixedtermdeposit:A=P(1+r)tA=istheamountofmoneyaccumulatedaftertyears,includinginterest.P=istheprincipal(theinitialamountyouborrowordeposit)r=istheannualrateofinterest(percentage)t=isthenumberofyearstheamountisdeposited.Youhave$1000atarateof5%paforoneyearA=1,000(1+5%)1A=1,000x(1+0.05)1A=$1,050Youhave$1000atarateof5%pafor3yearsA=1,000(1+5%)3A=1,000x(1+0.05)3A=$1,157.63ABudget:Whatisit?‘ASavingsPlan’SAVE,SAVE,SAVE…•Startnow!Nomatterhowsmallyoursavings!•Payyourselffirst,useautomaticdeductions.•PutyoursavingsintoaseparateaccountthatdoesnothaveATMaccess.•Putanypayraises,bonusesortaxrefundsintosavingsafteryoucompleteyouremergencyfund.Budgeteachpaypacket.Determinewhichcategoriesyouwillpayincash.Paywithcashandkeepreceipts.Don’tbetemptedbydebitcards.Don’tpaytheminimumsoncreditcards.Don’tlivewithoutemergencysavings.Don’tspendmorethanyouearn.Setfinancialgoals.ABudget:Wh