(gentle music)
[TEXT: DEMOCRACY, PROSPERITY, HUMAN RIGHTS, EDUCATION, SECURITY A PRODUCTION OF U.S. DEPARTMENT OF STATE]
- For many of us when we envision our future,
we hope for success and the ability to live
a comfortable life.
We may see ourselves getting an education, buying a house,
apartment, or car.
Maybe even starting a business,
getting married and having children.
There are many things that contribute to being able
to accomplish these goals.
But one of the most important is being able
to manage your finances, and you cannot do that successfully
without a plan.
[TEXT: Fundamentals of Personal Money Management: Budgeting for Your Future] Welcome to Fundamentals of Personal Money Management.
This lesson is Budgeting For Your Future.
My name is Yulianna Charris.
[TEXT: Yulianna Charris, Student Ambassador, Society for Financial Education & Professional Development] For several years,
I've been a financial student ambassador
for the Society for Financial Education
and Professional Development.
In this capacity, I work with college students
on building their financial literacy skills
to help them make sound financial decisions.
The society provides peer-to-peer training on budgeting,
credit management, and investment
to students across the United States.
This course wIll take a look at the basics
of personal money management.
It will provide information and recommendations
on developing skills to achieve your financial goals.
And it will help you to identify and avoid behavior
that adversely affects your financial wellbeing,
with the aim of developing economic prosperity
for individuals and communities.
It is important to understand
that every situation is unique.
The decisions you make to improve your financial health
are extremely personal
and tied to your direct circumstances,
especially when it comes to whether or not
to work with a financial advisor
and who you might choose in this capacity.
The path you choose to improve your money management
is up to you.
I will be sharing these concepts with you in general terms.
For information on your specific personal money management,
you should consult a qualified financial professional.
In this lesson,
[TEXT: Learning objectives: Making smart money choices.] we will examine the six key money management concepts.
[TEXT: Six keys to money management: Budgeting, Setting financial goals] They are budgeting, establishing financial goals,
[TEXT: Credit/debt management, Saving] credit and debt management, saving, investing,
[TEXT: Investing, Risk management/Insurance] and risk management or insurance.
We will look at the steps to create an effective budget,
understand different types of expenses
and how insurance is the tool to protect your finances
and managing risk.
I have learned that managing my finances and having a budget
is an essential element of financial success.
What comes to mind when you think about budgeting?
Budgeting is sometimes seen as an activity
that relates only to money.
In reality creating a budget
is just one of the many pieces
involving much broader aspects of your life,
including how to plan the use of your financial resources.
Budgeting is a planning process
for how to best use your money
to ensure you have the financial resources
for the things that you need and that are important to you.
Financial resources are a critical part
of your financial wellbeing.
There's nothing worse than the stress of worrying about
where the money will come from to cover an expense.
Budgeting requires identifying income sources to determine
how you will use your money toward your expenses
and personal goals.
How can you set up a budget and make sure it is effective?
Here are the primary steps to take.
[TEXT: Evaluate your personal values] First evaluate your personal values.
How do you live?
How do you want to live?
What are your life goals?
What are your financial goals?
What is your relationship with money, debt, saving
and spending?
[TEXT: Prioritize your values] Next, prioritize those values, rank them in importance.
Do you simply want to be a debt free
or would you like savings in case of a need
or an emergency?
[TEXT: Establish goals] Then establish goals,
what do you realistically want to achieve?
[TEXT: Distinguish between needs and wants] And finally distinguish between needs versus wants.
What do you need to live and accomplish your goals
compared to what are nice-to-haves, but not necessary
to achieve your goals?
Effective budgeting should focus
on what's most important to you,
so that you can put a plan into effect that works
at the different stages of your life.
Planning for savings and spending
must focus on the evaluation of your values, priorities,
and goals.
Budget planning also involves an accurate understanding
of your income resources.
When evaluating your income, consider all resources,
including income from your job,
self-employment, financial support from parents,
alimony and child support, gifts, tax refunds
or investments.
In addition, you should check your country's taxation laws
and regulation as this can differ from country to country.
Now let's break down a monthly budget.
The best way to do this
starts with creating a spreadsheet.
First, identify your financial resources.
Start by calculating your monthly income.
Income is money that an individual or business receives
in exchange for providing labor, producing a good or service
or investing money.
Individuals most often earn income through wages or salary.
Businesses earn income from selling goods or services
above their cost of production.
Whether your income fluctuates, is steady
or a combination of both,
you should be able to calculate a monthly average
based on your past earnings.
Then list any investment income, alimony, child support
gifts, or other income you have.
Next, consider what's important to you
and prioritize expenses.
When listing your expenses
divide them into three categories:
[TEXT: Fixed expenses, Variable expenses, Discretionary expenses] Fixed expenses, Variable expenses,
and Discretionary expenses.
Fixed expenses are those necessary and unavoidable expenses
in which the amount you pay monthly does not vary.
These include your mortgage payment or rent,
property taxes, alimony and child support,
and a car payment.
Include any other fixed expense like insurance premiums
or other loans or debt payments.
Remember, these are the expenses for which you pay
the same amount every month.
Variable expenses are also necessary
and unavoidable expenses,
but the amount you have to pay can vary from month to month.
These are a bit trickier than fixed expenses to budget for
because the amounts change.
Examples of variable expenses include utilities,
groceries, public transportation, medicine,
credit card payments, gasoline, clothing,
and your cell phone bill, depending on your usage.
In these cases, develop a best estimate for your budget,
looking at what you've normally spent in the past.
Finally add your discretionary expenses.
These are the avoidable expenses, the luxuries,
or nice-to-haves.
They might include items such as entertainment like movies
or concerts, eating out, games and recreation,
gifts and vacations.
These are expenses that are not necessary
for you to achieve your financial goals.
Depending on those goals,
you'll want to keep your discretionary expenses
as low as possible on a monthly basis.
Use them more as rewards
for hitting some of your financial goals.
Now use your budget to compare income versus expenses,
to see whether your monthly income
covered your monthly expenses.
It's time to do the math.
If your income exceeds your expenses
[TEXT: Income > Expenses = Budget surplus] you have a budget surplus, this is good.
That means you have discretionary income
or surplus income.
If you have a surplus,
it can be used to increase your savings and investments.
If your expenses exceed your income
[TEXT: Expenses > Income = Budget deficit] then you have a budget deficit.
This means that you don't have enough income or resources
to cover your plan expenses.
The first place to look to address this deficit
is in the discretionary spending section of your budget.
These are expenses that you can adjust
so that your spending decisions become aligned
with your available resources.
Determine which discretionary expenses to decrease
or eliminate.
Remember be realistic about what you are willing to give up.
If something is eliminated from your budget
this will require modifying your decisions, activities,
and behaviors to correspond with that expanding adjustment.
For a example, it is hard to save money in your food budget
if you don't change your habit of regularly eating out
or ordering take out.
Keep in mind that your budget is a way to plan your spending
and to help you use your money wisely
toward what's most important and essential to you.
Your plan for your money
is intended to help you remain accountable
for what you truly want
and remain aligned with your goals and priorities.
Monitor your budget regularly,
to see how well you're doing in sticking to your plans.
Compare your actual income and spending each month
with the budgeted amounts to identify the challenges
in balancing your budget.
Goals and priorities may need to be regularly reevaluated
to see if a spending readjustment in certain categories
is necessary.
You should also keep in mind
ways to optimize your income over time.
Have a deficit spending problem?
That's okay, your budget can still be useful
in helping you plan how to realign
and prioritize available resources
to keep you on your best financial footing.
Surplus or deficit, your budget planning and planned budget
can help highlight and guide what decisions and actions
to focus on to improve your circumstances.
By taking a thoughtful approach
towards a plan to live within your financial means,
your spending and saving decisions remain in line
with your resources.
Think of a budget as a tool for empowerment
that keeps your focus on financial choices
that support your goals.
[TEXT: Understanding the value of insurance]
Insurance is another essential expense
that should take priority
over variable categories of spending.
Insurance is an arrangement by which a company
or government agency provides a guarantee of compensation
for specified loss, damage, illness, or death
in return for a payment of a premium.
Insurance is like an emergency fund,
it protects your financial resources.
It provides financial resources
in the event of an unplanned incident
like a natural disaster or accident.
Examples of the type of insurance most individuals would carry
include automobile insurance
that will replace or repair your car in the event
it is damaged.
Health insurance to cover medical expenses
and hospitalization.
Business insurance to cover downturns in sales
or productivity.
And life insurance to cover funeral expenses
and provide for your family.
These types of insurance
typically involve paying a relatively
small premium that protects you financially
from greater risk or loss.
Insurance helps to insulate you
from the financial impact of life events
that can cause dire economic consequences.
Paying for the appropriate insurance
for your specific circumstances,
is a small price to pay for protection
against a catastrophic loss from which it might be difficult
or impossible to recover.
Again, seek competent professional advice
from a trusted source
for more information on insurance in your community.
Ultimately budgets are flexible documents to use as a guide
to successfully manage your money and resources.
Remember a budget will only work if you make a commitment
to stick to it.
By doing so, this will allow you to manage your money wisely
and invest in your future.
[TEXT: For more on this course and to access related resources, visit our website.] For more on this course and to access related resources,
visit our website.
[TEXT: DEMOCRACY, PROSPERITY, HUMAN RIGHTS, EDUCATION, SECURITY A PRODUCTION OF U.S. DEPARTMENT OF STATE]