Creating a Personal Budget

Great! You’ve now covered the basics of currency, banking, and earning power. Time to go buy whatever you want! A new Wilson Evolution basketball? A gold Rolex watch? The newest iPhone with unlimited data and the maximum amount of storage? A fifth Xbox controller? Now that you know about money and its value you can purchase all of these things and more, right? Wait a minute… why are you buying a fifth Xbox controller when you can only use four? Why do you need a gold Rolex when you have never owned a watch and can’t tell time on an analog clock? What are you going to do with all 256 GB of iPhone storage? You already own three basketballs, why do you need the Evolution? A better question might be, how are you going to pay for all of these items while still having enough money to pay for the items you need to live, like housing, food, and clothes? Are you really prepared to skip meals to own a watch you won't  even use?

The process of organizing your money to pay (or not pay) for different types of goods and services is called budgeting. A budget helps to determine how much money to spend and how much to put aside for savings and unexpected events. A budget also helps to separate your spending into wants and needs. By creating a budget and sticking to it, you can effectively save your money for large and unexpected expenses. Imagine you are at the bowling alley and decide you want to use the heaviest ball, but it slips out of your hands and lands on your foot. Without a budget, it may be difficult to pay the doctor’s office for the  x-rays and cast you need on your broken foot. By creating a budgeting plan, you are in control of the situation and can  get through that difficult time without a financial hitch. 

The process of creating a budget may seem daunting at first, but it is actually very simple. There are only three things you need to start creating your very own personal budget. Firstly, you need to know your income, which is how much money you earn in a given period of time. Next, you need to know your expenses, which is how much money you spend in a given period of time. Lastly, you need to know how you can modify your spending habits to save for unexpected events and get the most value out of your money. We’ve already discussed income and value, but if you need refreshers, check out the previous posts on those topics Value and Earning Power. 

Expenses can be split into three categories to make budgeting more clear. The first category is fixed expenses. These are expenses that occur regularly and do not change on a month-to-month basis. An example of this would be rent, which is generally a consistent amount every month. The second category is flexible expenses. These, like fixed expenses, occur regularly; however, you can control how much you spend on these flexible expenses. An example of this would be gasoline for your car since you can control how much you drive your car and therefore how much gasoline you use in any given month. Finally, the third category is discretionary expenses. This is money that you choose to spend. This category also includes money that you save. An example of this would be a ticket to see the new Marvel universe movie in theaters with your friends.

Attached is a good example of a budget used by many adults. As you can see, it includes categories for all three types of expenses. In broad terms, approximately 50% of this budget is devoted to fixed expenses (housing, debt, and utilities). Another 25% (approximately) goes towards flexible expenses (food, clothing, and transportation), while the final 25% is set aside for flexible expenses (medical, savings, and personal and discretionary). Everyone has a different budget with different allocations depending on your income, where you live, and other factors. 

The important thing to remember as you create a budget is that it is a personal plan. Everyone has spending habits, but as long as yours are responsible and fit your plan, your budget can be as flexible or inflexible as you’d like. If you still want the gold Rolex watch, that’s great! Just make sure you have adjusted for it in your budget so you can stay prepared for whatever the future may hold. Please complete the worksheet below for practice on creating a personal budget. See you next week!

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Worksheet and Answer Key:

https://youth.handsonbanking.org/wp-content/uploads/2019/08/InstructorGuide_MiddleSchool.pdf (pages 22-30)

Pie chart citation:

5 Ways to Budget Your Annual Income throughout the Year, 1 Jan. 1970, jillianjlary.blogspot.com/2015/12/5-ways-to-budget-your-annual-income.html.

http://jillianjlary.blogspot.com/2015/12/5-ways-to-budget-your-annual-income.html

Additional Resource:

Budgeting Basics! - https://www.youtube.com/watch?v=sVKQn2I4HDM