2
Income, Expenses and Budgeting
Learning Outcomes
After studying this chapter, you should be able to understand:
the needs and wants and classifybetween them;
the income and expenses;
budgeting and how to prepare the samplebudget.
2.1 Introduction
Are you sometimes short of cash at the end of the month? Don't seem to be able to save for the things
you reallywant? You can learn to balance your income with your expenses- and even have some money
et over for savings and extras. Let us show you how to manage your incoming and outgoing finances.
2.2 Setting Priorities: Needs and Wants
iIt s
i very important to know the difference between your needs and your wants and how they influences
unancial decisions. This will help them to set your priorities so that you know where to spend your
money.
1. Need: A necessity, something required, something essentialfor life. A need is something thought
to be a necessity or essential items required for life. Examples include food, water, and shelter.
2. Want: A desire, something wished for, something nonessential but desired or items which
ncrease the quality of living. Examples include a car stereo, CD's, car, and designer clothes.
Depending upon what a person defines as a need or a want will influence his/her financial
aecisions. For example, a person who deems a vehicle as a need will have larger expenses than
2.2 || Financial Literacy
person who rlies on a bicycle for transportation and sees a vehicle as Awaes
definitions, a roof over my isa ned. So are clothing, food, tools for
head work and me Using these
Watching movies in theatre is a want, and so are addictions like chewing paan, smoking
drinking and
Exercise Identify the following item/activity as need or want.
Item/Activity Need
Want
Clothing
Going to the movies
Going out to eat
Aplacetolive
A car/truck
A computer
Owning a CD player
Going to a basketball game
Owning a vacation home
Food
Did you know... The average consumer spends 85% of their income on items
which last fewer than 3
years
2.3 Income
Income is what is earned or
received in a
given period. There are various terms for income because there
are various ways of
earning income. Income from employment or self
Deposit accounts, like saving accounts, earn
interest, which
employment is wages or salary
entitles the shareholder toa could also conme from lending.
dividend, if there is one. Owing a Owing st0a
corporation entitles one to adraw. piece of a partnership or a privateiy
Most of us have a source of
income
receiving interest income from their through
our job,
be business, farming or other work. Many may also
how to keep track of it investments. Whatever the sources of income, need toknow
and manage it to cover you
your expenses and save for the future.
Income (Source of Money)
Salary or wages Amount (
2000
Earnings from Farming Business
3000
Total
5000
24 Expenses
Expenses are costs for items or resources living
Expenses recur (i.e., they happen over that are used up or consumed in the ofdaily so
course
couioy and
on
are used
up on a daily basis. and over again) because food, TBY
and
so
housing, clotniug
Income, Expenses and Budgeting | | 2.3
You will usually have two
categories
of expenses in your
budget. First, you will have your regular
monthly expenses. Ihese are
expenses you know you will have each month. Second,
you will have your
irregular expenses those that come up every now and then or
may have an annual car insurance bill you will need to pay orperhaps
once a year. For example, you
phone you know you are going to need soon. You will want to
a club
membership - or a new cel
plan for such expenses in your budget and
allocate some funds each month so that you can pay them when
they are due.
It costs money to live. You need to
pay for food, clothing, housing, transportation, communication,
and a dozen other necessary expenses. Then there are
things like vacations, entertainment, childrens
education and marriage, gifts for relatives and so on.
Expenses (Used of Money)
Amount R)
Food, shelter, clothes
2000
Education
1000
Repayment loan
700
Sickness 300
Drink, drugs, gutka 500
Gambling 400
Excessive expenses on Marriage, Festivals, Pilgrimage etc.
1100
Total
6000
Track Your Expenses
Ihe best
way to start taking control of money is to "track your expenses. And that isn't hard today with
how easy it is to carry a little notebook or use the note pad on a cell phone or other hand-held device. All
that you have to do is, over a month or two or three, write down what
you spend your money on: 7500
ovie 100 scarf 7500 book: {300 bus pass; and so on. Then, take a few minutes at the end ofthat time
and write down number of categories. These include:
a
might
Transportation;
Snacks, eating out, and food in general;
School supplies;
Movies, music and entertainment;
Your hobby;
Cell phone or Internet;
Savings;
And so on.
NEX, before you add up how much you have spent on each category, write down the percentage of
your
"ney you think you spend on each category.
2.4 || Financial Literacy
Then add up how much money you actually spent on each category. See if the results surnriee .
Or see if the results come close to what you expected. This will give you one sign as to whether you kn
you
know
where your money is going - and it you are in control. Ihere is one other thing you can do too Look
at how much you are spending in each category. Is that the way you want to be using your money? AAre
you spending more in some areas than you would
like to -
or think you should? Are you savina ac.
much
a s you would like or need to? Going through this exercise - seeing where your money is going - and
nd
thinking about where you want it to go should tell you pretty clearly if you need to budget. If you:re
pleased with how things are, and happy with how you are using your money, you may not need a budget
-at least not yet. It may be that you are in control of your money and managing it well. However,as
you make more money, take on new expenses, and life becomes more complicated, you may find that a
having budget will help you stay in control.
Emergencies
Unexpected, necessary, expenses that could happen anytime. (illness, injury, transportation, etc.). This
could significantly effect your months budget, limiting the discretionary and variable expenses as well as
savings. Emergencies are, by nature, often costly and therefore demonstrates the importance of having
a regular contribution to savings. Having savings prevents or limits you from going into debt to pay for
sudden emergency expenses.
2.5 Budgeting
A budget is a
plan for how you
use your money on a month-to-month basis. It
helps you look at you
expenses- both those you have each month and those that come up now and then. It helps you woork
out how you will cover your expenses from your income. A budget also helps you to save, build up yoour
savings over time, and achieve your financial goals.
A budget helps you know where your money find
ways to cut back or ways to save more.
isgoing. As you work out your budget, you may
If you can, use your budget to pay yourself nrsu. " *
yourself last, it often ends
that there is nothing left. Put some
up n you
of your
get it and budget how you will use the rest. Even if it is a small amount, try money
in
savi
and start by pay**yoursell
-with savings. And try and make saving a habit from a can
be an young age. It is a great hadi
important way to achieve your goals. c vith
your expenses. gives you a
It
Basically, a budget involves
comparing o ing. And
picture of your financial situation - and where you may De
it should
give you a very clear indication
of whether or not vou are on the road to accop
i ing our
longer-term goals.
Interestingly, survey after survey shows that most budget is importan
and people think that having a Du
budgeting is a wise thing to do. But, as surveys also show, most people n t work
h abude
with a
budget.
don
| 2.5
Income, Expenses and Budgeting
Why not? Many people dont budget because they feel that they don't earn enough money to neea a
budget. In reality, the less money you have, the more likely it is that a budget can help you.
You wIu
wan
to get the most out of your money. You won't want to waste any. You'll want to make as many good
money decisions as you can. Budgeting can help - and can help most people regardless of how mucn
money they have. There are also many people who don't budget because they fear that a budget wil put
them in a "financial strait-jacket." They think a budget will have too much control over what they do.
Actually, a person who fears that a budget will control them too much is often a person whose spending
is out of control. if you fear a budget, you probably need to budget. A budget helps you gain control - not
lose it. Deciding to budget is a sure sign you have decided to take control of your money. But have you
any idea how your money is being used - where it is going?}
It is simply a comparison of income and expenses. Is the difference between your total income and
total expenses a positive or a negative figure?
Ifit is positive, you have a surplus. Congratulations! With the extra money you must pay offany
debt or loan you have. Otherwise, you can increase your monthly savings or invest for future.
I f it is negative, you have a deficit. You need to make changes to balance your budget.
Reduce your expenses by focusing on your needs rather your wants. This can be ok in the short
term but is not sustainable in the long terms.
Budgeting isn't a one-time thing. To make it work. you need to do it regularly. At first, do this weekly
and once you are comfortable you can do it monthly.
Did you ever think of having a budget to help you? Do you already have a budget? Do you know if
yourfamily works with a budget?
Most often this is done on a monthly interval as this provides a consistent, yet accurate description
of actual income in comparison to expenses. Income can either be in the form of a regular paycheck or
spontaneous sources such as gifts or sales. Regular expenses are also best understood on a monthly basis
as this helps you stay in line with your budget.
The first thing to work out is your monthly income. That will tell you what you've got to work
with. The second step is to list your monthly expenses. Some expenses you will be able to control (for
example, entertainment). Others you can't control as readily (tor example, your housing costs/rent - at
lcast you can't control them today). You can always take more control of a cost like rent by moving to less
xpensive accommodation orgetting a roommate to help share the cost but that will take some time.
When you add up your total monthly income and your total monthly expenses, you will see whether
you are able to save money or not. You will find if you are spending more than you would like in certain
reas. You will quickly see if you are in control of your money -or heading toward money problems. In
Or, you can learn a great deal about you and your money by creating - and using - a budget.
2.6 || Financial Literacy
A. Sample Budget
2. YOUR EXPENSES:
1. YOUR INCOME:
A. Your Regular Monthly Income
Sources A. Regular Monthly Expenses
Food
Wages/Allowance
Interest
Transportation
Phone/Internet
Other
Total (RM)
Recreation/Entertainment
Savings
B. Irregular Annual Income Loan Payments
Income tax refund Emergency Fund
Gifts Housing Costs (including utilities)
Bonus Other
Other Total (ER)
Total (IT) B. Irregular Annual Expenses
Divide (IT) by 12 = (IM)
Medical/dental costs
Total Average Monthly Income Insurance
(RM+IM) =(MI) Gifts/Charitable contribution
Tuition/School Expenses
Clothing
Vacation/Holiday
Other
Total (IE)
Divide (IE) by 12 = (EI)
Total Average Monthly Expenses
(ER+EI)= (ME)
3. TOTAL MONTHLY INCOME (IM) - TOTAL MONTHLY EXPENSES (ME) D*NGS
BALANCE, OR SHORTEALL
wouldbe
Eercise: f you were to put together a budget right now, what do you think the resu result
Savbeg something each month? Spending all you make? Running short each monin
Review Questions
1. What's the value of a
budget? In what ways can it help?
2. Why is saving -
and paying
yourself first
3. What kinds of things are important?
-
so
4.
usually in a budget?
What are the two kinds of
expenses that are usually in a budget?
5. How can a
budget help you gain, and keep, control of your money: