Financial Literacy Unit 3

What does it mean to "pay yourself first?"

Every payday, you have to set aside a percentage of your income in a savings account.

How do you think keeping a budget can impact your overall wealth?

It can actually increase my overall wealth because I can think about what I need to actually spend on and what I want to spend on. For instance, the person in the video who had a large mansion(Ann) did not pay her student debts and other debts, but instead she spent her money on the things that she wanted: a mansion, a garage with fancy cars, etc. This caused Ann's wealth to be really low.

As a teenager, why might creating a budget be important?

It might be important because teenagers typically want to spend on the things that they want, not need. However, the things teenagers need are more important than the things they want.

Core characteristic that defines a zero-based budget

Your goal is to have zero dollars at the end of the month. If you have leftover money, you can use that for different things such as paying debts, emergency fund, spending that money on something, or saving the money for next month.

Savings

Your savings are extremely important. This is not just for long term goals such as buying a house or retirement. This is also for short term goals such as annual payment, computer upgrade, emergency fund, etc.

All of the following options are considered "wants" EXCEPT... A) Electricity and gas B) New fall sweater C) Eating at your favorite local restaurant D) Netflix subscription

Answer: A(Electricity and Gas)

Step three for creating your financial freedom

Automate your finances. Everybody should have three different accounts. You should have a spending account, you should have a bill account, and you should have a savings account. Automatically, send 10% of your paycheck to your savings account.

Step one for creating your financial freedom

Change your mindset about money. Stop being a consumer and be an investor. Instead of spending a lot of money, have a balance between assets(the things you own) and liabilities.

Step two for creating your financial freedom

Create multiple streams of income. Don't only have one source of income.

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

100% of planned income their first year after graduating. Financial-aid experts recommend students not borrow more in total than the amount of money they plan to make their first year out of school. If a borrower planning to earn $35,000 takes out $35,000 in loans—roughly the average debt at graduation for the class of 2015, according to Edvisors—she'll need to devote about 12.3% of her monthly income to pay off the debt in 10 years.

Why do I want a budget?

A budget helps you decide what you must spend your money on and if you can spend less money on some things and more money on other things.

Reason #2 for budgeting(helps you reach your goals)

A budget is a plan that helps you prioritize your spending. With a budget, you can move to focus your money on the things that are most important to you. It may be getting out of debt, saving up for a home, or working on starting your own business. Your budget creates a plan and lets you track it to make sure you are reaching your goals. Set aside money in your budget each month for your goals.

Zero-Based Budget

A cash flow plan that assigns an expense to every dollar of your income, wherein the total income minus the total expenses equals zero at the end of each month.

All of the following options are considered a "need" EXCEPT... A) Music streaming subscription B) Gas for your car C) Monthly health insurance premium D) Rent

Answer: A(Music streaming subscription)

Which of the following statements about saving is TRUE? A) Saving is best for long-term goals only B) Setting aside money each month consistently will help you in the long run when future needs come up C) You should dedicate 20% of your income to computer upgrades each month D) Monthly expenses like utilities should be categorized under saving

B) Setting aside money each month consistently will help you in the long run when future needs come up

Reason #5 for budgeting(Allows you to be flexible)

Budgeting can be flexible. You can move money between categories as you need to throughout the month. Generally, you should restrict yourself from touching the money you have set aside for savings, but you can adjust the amount you spend on each category as you go. It's another way that you can keep yourself from overspending. It also allows you to recognize issues and adjust so that you do not end up eating ramen at the end of every month. Budgeting lets you adjust to cover unexpected expenses as they happen. You can easily transfer money between categories in your budgeting app or software.

Reason #6 for budgeting(Puts You in Control)

Budgeting can help you gain a feeling of control over your money. It allows you to prioritize your spending, track how you are doing, and realize when you need to stop. It puts a solid plan into place that is easy to follow and gives you the chance to plan and prepare for the future. It is the biggest tool you have to change your financial future, and it gives you the power to make changes starting today. Checking on your budget each day can help you maintain control and prevent you from overspending. Making decisions at the beginning of the month makes it easier to manage your money.

If you have to spend more money on your needs, what should you do?

Cheaper options, earn more money, or sacrifice for your needs from another category

What information should you make sure you know about your student loan before you borrow? A) The amount you need to borrow B) Your repayment options C) The details of the interest rate D) All of the above

D) All of the above

Different ways that a college you choose can affect your future adult finances

Graduation rates, average salaries after leaving school, and student-loan repayment rates

Step four for creating your financial freedom

Have an emergency fund. This is money for an emergency. Have at least 6-8 months of money in your emergency fund.

Examples of needs

Housing, insurance, clothing, transportation, cellphone, groceries, and utilities

Two main categories of a budget

Income and expenses

In your own words, describe an example of how Jayla could use the cash envelope system with a monthly budget of $150 to split between clothes, sports equipment, snacks, and going out with friends.

Jayla could put $75 into the "clothes" envelope, $35 into the "snacks" envelope, $20 each into the "sports equipment" and "going out with friends" envelope.

Does using a zero-based budget mean that your bank account will hit $0 at the end of every month? Explain.

No, because there should be some cushion or extra money in your bank account for emergencies and other things.

What are the two reasons that "pay yourself first" works so well?

One of the reasons is it will cause you to become addicted to saving money. The more you save, the more you'll want to save. The other reason is this process is automatic.

Explain the two different ways you can automate the process of paying yourself first.

One of the ways is automatic transfer. Most banks and all online savings accounts would allow me to set up automatic recurring transfers between accounts. I can pick the amount I want to save, the date on which I get paid, and my bank takes care of the rest. For example, if you get paid every other Thursday, your savings bank will automatically debit your checking account on the same day your paycheck hits. The other way is to split direct deposit. This can help me to split my direct deposit between my checking and savings accounts.

Reason #3 for budgeting(helps you save money)

People who do not have a budget tend to save less money than people who do. That's because when you budget, you assign your money to do certain things. You can have money automatically transferred into a savings or investment account each month. And a budget can help you stop dipping into your savings each month. As you do those things, you can begin to build wealth and give yourself true financial freedom. Budget money to transfer into savings each month. Use your budget to help you stop dipping into your savings or emergency fund by planning for your expenses in advance.

Say that Bianca has take-home pay of $800, she budgets every cent out at the start of the month, and she needs less gas money than expected in August. She no longer spends the full $65 she budgeted there. What should she do with the leftover?

She should pay for her remaining debts with that money, transfer that extra money to her emergency fund, spend that money on something, or save that money for next month.

Why do you think people spend so much money on their wants despite the financial costs?

Some people spend so much money on their wants because they don't create a budget or just simply think about what they actually need. They also don't ask themselves if they can function in life without items that they want.

Reason #1 for budgeting(stops overspending)

Spending money without thinking carefully about where it all goes can easily lead you to overspend each and every month. Overspending limits your spending power in the future as more and more of your income has to be applied to debt payments. If you are worried about restricting your spending, consider what it would feel like to have the majority of your paycheck being applied to credit card payments. The stress of finding a way to pay for your everyday needs can be astronomical when most of your paycheck is already spoken for. Use your budget to help you determine when to stop spending.

Cash Envelope System

The cash envelope system is exactly what it sounds like. You put your cash into different envelopes based on the budget categories. You'll decide exactly what amounts go into each cash envelope based on your spending goals. For example, you might put $300 in the grocery budget and $150 in the fun budget. The key is that you'll only be able to spend the cash out of these envelopes for the specific budget category until the next cycle of your budget.

Wealth

The total value of everything someone owns(assets) minus the debts or liabilities. Wealth is not only about owning "a lot of stuff." Just because someone looks wealthy does not mean that person is actually wealthy. For instance, although Ann from that video looks rich, her wealth is -1 million dollars because she still has to pay all her debts.

Wants

The wants is the most flexible category in this budgeting strategy. Examples: dining out, concerts, movies, fashion, electronics, travel, subscription services, etc. Your wants are your non-essential purchases.

What are some reasons that a cash envelope system can be an effective way to budget for your "wants"?

This can be an effective way to budget for my wants because it is my choice for how much I will spend on each of my "wants." For instance, Jayla does not have to spend equally on sports equipment and going out with her friends. She can put more money in the "sports equipment" envelope than in the "going out with friends" envelope.

Budget

This is a plan you write down for deciding how you will spend your money each month. A budget shows you how much money you make and how you spend your money each month. Without a budget, you might run out of money before your next paycheck.

50/30/20 budgeting strategy

This is when you spend 50% of your income for each month on needs, 30% on wants, and 20% on savings/debts.

Why is it helpful to track your spending for 2 months?

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

Step five for creating your financial freedom

Understand your credit and improve it if needed. As long as you have been paying bills on time for the past two years, you can improve your credit.

How can I figure out roughly how much I'll pay for a college after financial aid is taken into account?

Use a net price calculator

How can students and families maximize the financial aid they'll receive?

Use extra cash to pay off debts outstanding and apply to as many scholarships as possible

Assets vs. Liabilities

What you own vs what you owe. Assets are the items that you own that can provide future economic benefit and liabilities are what you owe to other parties. In short, assets put money in your pocket, and liabilities take money out!

Reason #4 for budgeting(Helps You Stop Worrying and Enjoy Your Money More)

When you're budgeting, you get to decide how much you spend in each category. So if you want to put a significant portion of your money toward leisure activities, you shouldn't feel bad about that as long as you are still saving and meeting your other needs. Budgeting is not about limiting the fun in your life; it's about opening up opportunities to have more fun. And helping you worry less about your future. You will know how much you have to spend on each category. You will have less reason to be anxious about paying for future expenses.

How the cash envelope system can transform your finances

With the cash envelope system, you'll be able to easily see how much you are spending in each category. Instead of simply swiping your debit or credit card and forgetting about it, you'll be forced to hand over cash in exchange for your purchase. The physical action of handing over cash can make you stop to think about exactly how much you are spending in the checkout line. It is a more tangible process to spend cash as opposed to plastic funds. As you spend down the money in each cash envelope, you'll be forced to watch your cash funds dwindle.

Reason #7 for budgeting(Can Be Simple)

You can simplify the budgeting process by using percentages of your income for set expenses, savings, and spending money. Then you simply track the money as you utilize it. Keep at it: The first few months of budgeting are a bit more difficult as you adjust your categories to find the amounts that work for your situation. If you are married, holding regular budget meetings with your spouse can make handling your money much easier.

Potential downside of the cash envelope system

You can't pay for everything using a cash envelope budget. For instance, you can't pay your fixed expenses such as your mortgage. You can only pay for your variable expenses(groceries, going to the theater, etc.)

When deciding if you should buy something, what can you ask yourself to determine if the item is a need or want?

You should ask yourself if you can function in life without this item. You should also ask yourself if something bad will happen if you don't have this item.

Assume Tristan's monthly post-tax income is $2900. If he's using 50/30/20, how much money goes into each broad category?

a. Necessities: $1,450 b. Wants: $870 c. Savings & Paying Off Debt: $580