Budgeting (Review)

What does it mean to "pay yourself first?"

Every payday, the very first thing you do is set aside a percentage of your income in a savings account...BEFORE you pay any other bills or spend money on things you want

Which metrics will give the best sense of whether a college prepares a student to be financially successful?

graduation rates, student loan repayment rates, and average salary after leaving school

cost of living

how much money is needed to provide a person or family with an average standard of living; found by adding up the prices of the goods that people need to live an average life— food, housing, transport, energy and healthcare and taxes.

Zero-Based Budgeting

method that has you allocate all of your money to expenses, savings and debt payments each month; goal is that your income minus your expenditures equals zero by the end of the month because all money has been assigned somewhere

Cash Envelope System of Budgeting

putting your cash into different envelopes based on various budget categories; you decide what amounts go into each cash envelope based on your spending goals. EXAMPLE: you put $300 in the "grocery" envelope, $100 in the "utilities" envelope, and $150 in the "fun" envelope

Explain the financial incentive to having one or more roommates.

splitting the cost of rent/utilities reduces the financial impact of a rental property on your budget

50/30/20 budgeting rule

-50% of your monthly income goes towards your NEEDS -30% of your monthly income goes towards your WANTS -20% of your monthly income goes towards your savings/paying down debt

calculating your "baseline"

-Baseline = the bare minimum expenses you need to cover on a monthly basis; absolute essentials such as housing (rent or mortgage), utility bills, transportation, groceries, and childcare. -Once you've created your bare-bones budget, you need to come up with a list of discretionary expenses to cover everything else that is non essential

Why is developing an emergency fund of savings particularly important for a gig worker?

-Gig economy workers have inpredictability in their cashflow -they are not entitled to the benefits that a standard employee receives (healthcare, insurance, unemployment checks, etc.). -When you're an employee, your employer picks up half of your payroll taxes, but self-employed workers must pay the entire 15.3% rate.

gross income vs net income

-gross income = the total amount of money you make in a given period of time -net income = the money you have left after taxes and other deductions have been subtracted (money actually received on payday)

What does a budget show you?

-how much money you make/spend -how/where you spend your money

Buying a home achieves which two financial goals at the same time?

-provides a place to live -investment in your future

reasons for creating and sticking to a budget

-stop overspending; spending money without thinking carefully about where it all goes can easily lead you to spend more money than you can afford each month -helps you reach your goals; budgeting allows you to focus your money on the things that are most important to you -helps you save your money; stop dipping into your savings or emergency fund by planning for your expenses in advance -less anxiety about paying for future expenses (predictability) -flexibility; budgeting allows you to adjust in order to cover unexpected expenses when they arise -you are in control; a budget allows you to prioritize your spending, track how you are doing, and realize when you need to stop

wages vs salary

-wage = hourly pay (i.e. $8.50/hour) -salary = agreed amount set yearly (i.e. $59,000/year)

What does a budget help you decide?

-what you absolutely NEED to spend your money on -if you can spend less money on some things and more money on other things (and what those things are)

What three requirements should you meet before you consider buying a home?

-you qualify for good mortgage terms -you have enough money saved for a downpayment AND money left over for an emergency fund -you plan to stay in the home for at least five years

What is the maximum amount students should borrow to attend college?

100% of anticipated income their first year after graduating

How much money should you put toward your home's downpayment?

20% of the price of the home

How can you avoid underpayment penalties from the IRS?

As long as you end up paying at least 90% of what you are expected to owe for the year, or 100% of what you owed the previous year, the IRS won't hit you with underpayment penalties.

How is it possible someone could pay their mortgage monthly for years without reducing their principal by very much?

In early years, most of the payments go toward interest

How do you "pay yourself a salary" while working side gigs?

Once you've created your bare-bones budget and added up your unnecessary expenses, you'll know exactly how much money you need to make it through the month without dipping into savings. So, on the first of the next month that comes along, deposit that amount of money into your regular checking account - and nothing else.

What types of technology have enabled gig jobs to become a larger part of the workforce?

Social media, mobile phones, computers, the internet

"thrifty" food plan vs "liberal" food plan

THRIFTY PLAN - weekly: Female (19 to 50 years): $40.00 Male (19 to 50 years): $45.10 Child (5 years): $26.40 LIBERAL PLAN - weekly: Female (19 to 50 years): $79.40 Male (19 to 50 years): $90.20 Child (5 years): $49.80

Why is it helpful to track your spending for at least two months BEFORE creating a budget?

To identify your spending patterns and then prioritize your needs, wants, and savings goals

employee vs freelancer

YOU'RE AN EMPLOYEE IF... -Your employer decides when, where, and how you work. (For example, your employer tells you you have to be at an office every day during primary business hours, provides you with a laptop to do your job, and instructs you exactly how to do your job. -Your employer decides how much to pay you, how much of a raise or bonus you get, and reimburses you for job-related expenses. -Your employer provides benefits (like retirement and health insurance) and expects you to work at the company until you either quit or are terminated. YOU'RE A FREELANCER IF... -You get to decide when, where, and how you work without any constraints (with some exceptions). -You set your own rates and choose who you want to work for. -You don't get any benefits and have a specified end-date (meaning, when the project is complete, you are no longer working for the employer).

gig economy

a labor market characterized by the prevalence of short-term contracts or freelance work as opposed to permanent jobs.

unit price

a rate that gives the cost per unit; divide total price by number of units in order to determine the unit price

budget

an estimate of income and expenditure for a set period of time that helps you decide how you will spend your money each month; helps you make sure you will have enough money every month to pay for your wants and needs

How does the IRS classify your employment status?

the IRS examines three things to help it determine if you are an employee or an independent contractor: -Behavioral control: who decides when, where, and how you work? -Financial control: who controls and directs the financial and business aspects of your job? -Relationship control: does the employer provide benefits, and is there an end date to the employment?

How much money should you have left over to cover emergencies and disposable costs AFTER your downpayment?

three times your monthly expenses

Besides taxes, what are the three largest cost categories for families?

transportation, housing, and food

Create a simple equation for determining a person's wealth.

wealth = assets - debt (stuff owned minus stuff owed)

If you are spending more money than you are making month after month, what are the two main options for solving the problem?

you can cut your expenses and/or increase your income