Financial Literacy: How to Create a Budget (A)

This course aims to teach you how to create a budget. After learning this course, you will be able to know:

1. How to set up a saving goal

2. How to estimate your income and read the payment stub

3. How to estimate and evaluate your expenses

4. How to create a budget

 

Pre-test

Question 1

The amount of money you earn that you actually take home is your

  • Net income
  • Total income
  • Neat income
  • Gross income

Question 2

  • Needs and wants could be different for different people. For example, one person's need could be another person's want

Chapter 1. Set up a Saving Goal

Needs & wants

Needs

Things that we require or need to live. Such as food, water, shelter…

Wants

Things that you would like to have but could do without if you do not have the money to buy them. Such as eating out, buying a new bicycle, stylish clothes by famous designer...

Set up your Goals

Understanding the Importance of Goals

1.Goals are what you hope and plan to achieve in the future 

2.Goals are based on your values 

3.Goals can change as your interests, income, life-style, and personal circumstances change

The "SMART" Principle of Setting up Goals

Follow ‘SMART’ principle:




1. Specific: What you plan to do exactly 

2. Measurable: How to tell if you are achieving your goal

Click here to listen to how to set up measurable goals.

3. Attainable: Are there available resources to achieve the goal

4. Relevant: Is your goal of some importance to your life and does not compete with other life goals.

5. Time-oriented: Is there a deadline to check the results of your goal

Specific: 

✔ What do you see in your mind when you picture yourself working towards your goal?)

✔ What is the action step?

✔ What will you achieve finally?


Measurable:

✔ How will you know when it is done?

✔ What are some objective benchmarks you can hit along the way?

✔ Would someone else be able to tell that it’s complete?

Attainable

✔ Are there available resources to achieve the objective?

✔ Are there any time or money constraints that need to be considered? 

✔ Am I being too ambitious to start out?

Relevant

✔ Why am I doing this?

✔ Is this a priority for me?

✔ Will it compete with other goals in my life?

Time-oriented

✔ Is there a deadline?

✔ Did I put it on the calendar?

✔ Will I know in 3 months if I’m on the right track?

Practice Quiz 1

  • Amy is having trouble separating her wants from her needs. So she asks her roommate if buying lunch everyday at a deli near work is a want or a need. Her roommate’s answer was, “It’s a need. Because you have to eat!” Is Amy's friend correct?

Practice Quiz 2

After taking the Financial Literacy Intro course, Amy sets her goal: “I need to get better with money.” Could you help her improve her goal?

Chp 2. Estimate Income

The Key Elements of a Payment Stub

Deductions

  • Federal Tax Amount: When you were first hired by your employer, you were required to fill out a W-4 form. This form covers any tax that you may owe to the Federal government come tax time. It is deducted incrementally from each paycheck and can vary depending on the number of exemptions you chose to claim.
  • State Tax: Depending on your state of residence, you may or may not be required to pay a state tax. Most states however, do participate, so this amount is deducted from your paycheck (the same way as Federal tax) to cover the amount of tax that you may owe to the state when your tax return is filed.
  • Social Security: The Federal government requires every employee to have a certain percentage of their paycheck withheld for social security purposes. This entitles you to receive a monthly social security payment upon retirement. For wages paid in 2018, employees and employers pay 6.2 percent in OASDI taxes. Thus, an individual with wages equal to or larger than $128,400 would contribute $7,960.80 to the OASDI program in 2018, as would his or her employer.
  • Medicare: Like Social Security withholdings, Medicare withholdings are also mandatory. Every employee pays 1.45% of his or her paycheck toward Medicare, and every employer contributes an additional 1.45% on behalf of the employee. Upon eligibility for Social Security, an employee is entitled to coverage for a majority of their medical expenses.

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Practice Quiz 3

What is the difference between gross income and net income?

  • Gross income is the total amount of all money collected on sales while net income is the amount after subtracting the direct cost of those sales.
  • Net income is the total amount of all money collected on sales while gross income is the amount after subtracting the direct cost of those sales.
  • None of the answers given describes the difference between gross and net income.
  • Gross income is the total income after subtracting COGS, but before subtracting the cost of running the business; net income is the profit left after subtracting the cost of running the business.

Chp 3. Estimate Expenses

Fixed and Flexible Expenses

Fixed Expenses

Fixed Expenses: regular expenses you pay on specific days that are consistently the same. Such as rent, car payment, and insurance…

Flexible Expenses

Flexible Expenses: the amount that you spend differs from month-to-month. Such as food and clothing…

To know where you spend money, you need to keep track of your expenses for at least a month!

Practice Quiz 4

Read the following scenario and identify which costs are fixed costs: Jennifer is a college student. In order to save money for college and minimize her student loans, she tracks every dollar she spent over the course of a month.  Jennifer collected all her receipts in a shoebox and reviewed them at the end of the month. Which of them are fixed costs?

  • Rent: $530/month

  • Coffee: 10 lattes, $4 each

  • Movies: 3 movies, $12 each

  • Food: 4 meals with friends at a special restaurant, $12 each; 20 snacks/energy drinks, $3 each

  • Clothes: 3 trips to the mall with friends, $30 per trip

  • Health insurance: $70/month 

  • Cell phone plan: Parents expect her to pay $50/month toward family plan

  • Shoes: 1 pair, $60

  • Rent
  • Coffee
  • Movies
  • Clothes
  • Health Insurance
  • Food
  • Shoes
  • Phone plan

Chp 4. Create a Budget

Steps to Create a Budget

Once you know your income and expenses, you’re ready to set up your budget. 

  1. Open an Excel worksheet or use a piece of paper to record all the work for your budget

  2. Add up all your income. Use the monthly net income/pay:

    • Net income/pay = Gross income/pay - Deductions

3.  Add up all your expenses, both fixed and flexible

(1)Calculate your total monthly budget for the cost of living:

  • Living = Rent + Renter’s Insurance + Utilities (for example: Cable/Satellite, Internet, Cell Phone, Gas/Electric, Home Phone)

(2) Calculate your total monthly budget for the cost of transportation:

  • Transportation = Public Transportation Fee + Car Payments + Car Insurance + Car Maintenance + Gas

(3) Calculate your total monthly budget for the cost of food:

  • Food = Groceries + Dining Out + Others (for example: Coffee)

(4) Calculate your total monthly budget for the cost of health:

  • Health = All Health Insurance (for example: Dental and Vision) + Gym Membership

(5)Calculate your total monthly budget for the cost of personal items:

  • Personal Expenses = Entertainment (for example: Movie and Concert) + ‘WANTS’ (for example: Clothes, Gift Giving, Travel, etc.)

4.     Calculate monthly spending

  • Total Cost = Living + Transportation + Food + Health + Personal Expenses

5.       Calculate the balance

  • Balance = Net Pay/Income – Total Cost

Steps to Evaluate a Budget

To manage your money wisely, you need to balance your expenses to your income:

  1. Do you spend less than you earn? Surplus!

  2. Do you spend more than you earn? Deficit!

  3. If you have more expenses than income, you need to cut back on expenses. HOW?

  • Cut back on flexible expenses first, check fixed expenses next
  • Explore getting more income
  • Use savings

Final Test

Begin Assessment Test

Assessment Test Begins!

Notice that in this part, you will answer questions regarding what you have learnt in the previous 4 sections! Even if you've made a wrong answer, please go ahead and finish the test. Do not click on "Try it again" as it might interfere with your grading results. Remember that this test is only for testing our teaching materials, it is not testing or judging you. Are you ready? Go!

Question 1

  • Needs
    Something you must have to survive
  • Wants
    Something that you would like to have but that you could live without
  • Fixed Expenses
    Regular expenses you pay each month that are consistently the same
  • Flexible Expenses
    The amount that you spend differs from month-to-month

Question 2

The amount of money you earn that you actually take home is your

  • Gross Income
  • Net Income
  • Total Income
  • Neat Income

Question 3

Money that is subtracted or taken out from your pay is:

  • Net pay
  • State taxes
  • Deductions
  • Federal taxes

Question 4

  • Gross income is the total amount earned before deductions.

Question 5

Amy’s birthday is coming up and her father wants to buy her a birthday gift. He knows that Amy wants a car, as it is always her dream to buy a new car. She also wants a laptop because all her classmates have one. Besides, Amy loves traveling and she is saving money for her next trip to Florida.  Which of the following is Amy’s need:

  • A Florida vacation
  • A car
  • A laptop
  • None of them above

Question 6-1

Read the pay stub above and answer the questions that follow: 

Harold recently graduated from college and has a full-time job. Each month, Harold’s salary is paid into his bank account. This is the Harold’s pay stub for Jan.

Question 6-1 

How much money did Harold’s employer pay into his bank account on 4 Feb?

  • 2307.69 USD
  • 1808.08 USD
  • 499.62 USD
  • 7232.31USD

Question 6-2

How much money was taken out from Harold’s paycheck in total between 18 Jan and 1 Feb?

  • 281.54 USD
  • 86.69 USD
  • 1998.46 USD
  • 499.62 USD

Question 6-3

Harold wants to set up a financial goal. Choose the example that is a clearly written financial goal.

  • Save $1,000 for a trip in 5 months
  • Invest in a 401k for retirement
  • Pay off credit card bills for the next 6 months
  • Establish an emergency fund for the next three years

Question 6-4

To reach his financial goal, he tracks every dollar he spent over the course of a month. He went to the grocery store twice per month and spent $150 in total on food. Besides, he ate 15 meals with friends at restaurants and spent $340 in total. If he wants to decrease the amount of money he spends on food, which of the following would help? Select all that apply:

  • Cut back on eating out and choose to eat at home.
  • Go to the grocery store whenever he wants
  • Plan menus before grocery shopping and stick to his list
  • Go to the grocery store around dinner or when he is hungry

Question 7-1

Read the following scenario and answer the questions that follow.

Carrie wants to create a monthly budget form to help her achieve financial goal. She uses her debit card for most purchases, so she can easily track her monthly spending by looking at her bank account transactions. The following is her last bank statement:

Please help Carrie to decide which of the following items are fixed expenses and which are flexible expenses and drag them to their corresponding categories:

1. Lightening Gas & Electric $132.00

2. Tony's Tacos $31.55

3. SaveDriving Auto Insurance $75.00

4. 24 Hour Fitness Gym  $80.00 

5. The Movie House $40.00

6. City Apartment Rent $900.00

7. Rolling Bowling $40.00

8. Hometown Grocery Mart $201.48

9. Verizon Mobile Plan $81.00

  • 1. Lightening Gas & Electric
  • 2. Tony's Tacos
  • 3. SaveDriving Auto Insurance
  • 4. 24 Hour Fitness Gym
  • 5. The Movie House
  • 6. City Apartment Rent
  • 7. Rolling Bowling
  • 8. Hometown Grocery Mart
  • 9. Verizon Mobile Plan

Question 7-2

Help Carrie create her monthly budget form.

Step 1:

Carrie works 40 hours per week at a retail company and she’ll be earning a gross income of $3893/month. She has to pay 20% of her gross income in taxes with a gross income of $3893/month and a 20% tax deduction, Carrie’s monthly net income is $ .

Question 7-3

Question 3: Help Carrie create her monthly budget form.

Figure out Carrie's living and transportation expenses and drag them to the corresponding places in her budget form 

  • Renter's Insurance
  • Car Insurance
  • Gas/Electric
  • Internet/Cable
  • Verizon
  • Gasoline

Question 7-4

Help Carrie create her monthly budget form.

Step 4:

Carrie’s monthly balance is $.

Does Carrie spend more or less than she earn? Carrie spends than she earn.

Question 7-5

Carrie decides to go to grad school and wants to save $4,000 in 5 months for her education. If Carrie wants to increase her saving from $200/month to $800/month, what expenses could she lower to increase her savings? Please list three expenses and explain your reasons.