Personal Finance Unit 2 - Budgeting

How is net pay calculated?

(Gross Income) - (Payroll deductions [taxes, retirement, health benefits]) = (net pay)

How do you calculate a variance?

(The money you reserved for that expense) - (The money you actually spent on that expense) = variance

What is a budget?

A budget is a plan for managing your money for a given period of time to meet your NEEDS and WANTS.

Does a budget use gross pay or net pay?

A budget uses a net pay because that's the money you have access to.

What is a LIABILITY?

Any debts or financial obligations that you have

What is an ASSET?

Any financial resource that you have that is worth money (liquid or illiquid)

How do you calculate your NET WORTH?

Assets - Liabilities = Net Worth

How can you decrease your net worth?

By increasing liabilities and decreasing assets.

What determines how your budget looks (where you plan to spend your money and how much you plan to spend)?

Determined by your income and you expenses.

What money can you use to spend on wants?

Discretionary income is the money left to pay for wants since the needs have already been taken care of.

examples of ASSETS

Ex) cash, stocks, bonds, real estate, car, etc. (don't include money you will soon consume, like a trip won't result in an asset)

examples of LIABILITIES

Ex) loans, unpaid taxes, credit cards, lines of credit, fines, etc.

What is an expense?

Expenses are the cost required for something, the money spent on something.

Which payroll deductions are mandatory?

Federal Income Tax, State and Local Income Tax, Social Security Tax, Medicare Tax,

What is a fixed expense and what is an example of one?

Fixed Expenses: Same amount on a regular basis. Ex) Monthly house payment, monthly car payment, internet bill, union dues, etc.

What is gross pay?

Gross income (pay) is the total amount of money an employee earns in a pay period.

Which payroll deductions are voluntary?

Health/Life Insurance, Premiums, Union Dues*, Contributions to Charities, Pensions/Retirement Plans, Direct Deposits to credit union/bank,

What's a salary?

How much you get paid regardless of how many hours you work.

What are the two types of cash flow?

Income & Expenses

How do you calculate net cash flow?

Income - expenses = net cash flow Technically: your INCOME and your EXPENSES

What is a zero balance?

Income = Expenses /Achieved by adjusting Variable Expenses and Savings

What is a budget deficit?

It means you've spent more money than you have./Spending more money than you have coming in.

How does liquidity risk affect your net worth?

Liquidity risk affects you net worth by rendering some assets you own as invalid because they may be difficult to turn into cash, or into as much cash as you estimate. An example may be jewelry.

What is a balance sheet?

List of assets, liabilities, and net worth

What is a budget surplus?

Meaning at the end of the month you had extra money that wasn't spent/ Spending less money than you have coming in.

What is income and what are some sources of income?

Money received. Examples include: Salary, part-time job, gifts, investment payouts, retirement, social security, etc.

Will your budget ever change?

Our budget is meant to be flexible, it will likely change when we make purchases we didn't plan on making.

What is your NET WORTH?

Overall measure of financial health; how much an entity is worth

What is a periodic expense?

Periodic Expenses: Occur occasionally & can be fixed or variable. Ex) getting your car fixed, health care/doctor visits, etc.

How do you increase your NET WORTH?

Reduce liabilities, increase assets (work more)

Why should you add savings as an expense item in your budget?

Savings should be treated as an expense to hold you accountable for saving money, and to ensure it's really a priority. (It should be treated as a fixed expense too, so it's more suppoerted)

What are some examples of payroll deductions?

Taxes, retirement, health benefits, union dues, etc.

What is cash flow?

The amount of money going in and out of your wallet (or checking account). [Sum of your financial actions, some will be negative]

What is a budget variance?

The difference between what you budgeted and what you actually spent./ Difference between estimated & actual expenses

What is market value?

The price at which an asset would sell for

What is income risk?

The risk of losing your source of income (being fired/let go)

Why it it important to have a balanced budget?

To make sure you are spending your surplus effectively, and avoiding any deficit.

Why is it important to create a budget?

To make sure you don't spend more money than you have, as well as to ensure that you have enough money to be able to pay for things you may want/need in the future.

What does Pay Yourself First mean?

Treating your savings as a fixed expense

What is a variable expense?

Variable Expenses: Different amount on a regular basis. Ex) Groceries, gas for you car, clothing, entertainment, etc.

What is hourly wage?

a specific amount of money paid per hour to an employee

What is a commission?

an amount of money paid to an employee based on a percentage of the employee's sales

What is overtime rate?

the amount paid above the normal rate for overtime, usually 1.5 times the employee's regular hourly wage

What is net pay?

the income you receive after deductions.

What is discretionary income?

the money left after paying for the essentials, such as food, clothing, shelter, transportation, and medication.