TNC college 2016/17

MODULE TITLE: Developing and Using a Personal Budget:

LEARNING OUTCOMES:
At the end of this module the trainee will be able to
LO1:Analyze and discuss budgeting as a financial tool
LO2:Develop a personal budget
LO3:Implement and monitor the personal budget

LO1:Analyze and discuss budgeting as a financial tool

Defining budgeting:
Estimation of the revenue and expenses over a specified future period of time and a budget can be
made for a person, family, group of people, business, government, country, multinational organization
or just about anything else that makes and spends money. A budget is a microeconomic concept that
shows the tradeoff made when one good is exchanged for another
Or
Simply put, a budget is an itemized summary of likely income and expenses for a given period. It
helps you determine whether you can grab that bite to eat or should head home for a bowl of soup. It
is typically created using a spreadsheet, and it provides a concrete, organized, and easily understood
breakdown of how much money you have coming in and how much you are letting go. It’s an
invaluable tool to help you prioritize your spending and manage your money—no matter how
much or how little you have.

Principles of budgeting:
Timeless Principles of Personal Finance: Rich or poor, you need a strategy for personal finance.
You must watch what you spend so that your outgo does not exceed your income. Although there are
no debtor's prisons anymore, owing money, especially for everyday living expenses, is a stressful,
unpleasant way to live. Use some time-honored principles to put your finances in order.

1. Spend Less Than You Earn

A tried and true rule of personal finance is that you should never spend all the money that you earn.
Keep your total living expenses and outgoing payments at no more than 80% of your take home pay.
This gives you a cushion that you can use to implement a plan for future needs and even a few
luxuries. If you are close to 80% or over already, review your finances to find areas that you can cut
back, or look at ways to increase your income.

2. Pay Yourself First

The best way to be sure that you have some money set aside for a rainy-day is to pay yourself first.
One way to accomplish this is to arrange for your employer to deduct a portion of your take home pay
before you receive it. You should aim for at least 10% and go higher if possible. Another method is to
set up automatic transfers from your checking account to a savings account at your bank on a specific
date. With a little discipline, you can even sweep your checking account, once a month or bi-weekly,
so that your savings grow by any amount you have available at the beginning of your next paycheck.

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3. Needs First, Wants Later

Make a monthly budget for your needs only. This budget should include the basics such as food,
shelter, transportation, healthcare and work-related clothing. You should consider entertainment and
recreation, but give them a lower priority. This will help you separate mandatory expenses from
discretionary income. It also allows you to figure out how much of your income is being directed
towards things you want and luxuries. A good plan for optional things (wants) is to plan how to get
them without decreasing the amount that you save or taking the money from everyday living expenses.
Delaying the purchase of non-essential items also gives you time to decide if your money could be
better spent in another way.

4. Set Smart Financial Goals

Set goals for managing your finances. Create a roadmap for your future, so you will know where you
are going and how long it will take to get there. Your financial goals should be specific and
measurable. Do not just say you will cut expenses. Decide how much you can decrease one or two
expense items. Your goals should be achievable and realistic. If you want to buy a home, you need a
plan for setting aside extra money to come up with the down payment. That might include doing odd
jobs or seasonal work to reach your goal.
Your goals should be timely. Set a date for them to happen. Even if you miss a milestone, here and
there, you can get back on track by reviewing and revising your personal financial goals and strategies
regularly. Generally the principles are:

1. Spend less
2. Earn more
3. Invest wisely
Steps in effective Budgeting:

1. Set financial goals

2. Estimate your income
3. Record what you spend
4. Budget for actual and unexpected expenses
5. Review and evaluate monthly
 Role of credit and savings in personal wealth:

The importance of credit and saving are:

To meet your short- and long-term goals
To promote income and weather make your money grow faster. Therefore, to opening a savings
account and make a credit or borrowing money to invest wisely.
How much you earn, spend, budget, and save are the most dominant determinants of your long-term
financial well-being. Self-control in your financial decision-making regarding budgeting and
consumption is far more important than clever investing.

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Analyzing the role of budgeting:

Budgeting, when done properly, can serve as a planning and controlling system. The company's goals
and performance objectives are documented in financial terms. Once formulated, these plans are used
throughout the year. ... Budgeting is concerned primarily with the planning and controlling functions
of management. Generally the role of budgeting;
 Help to identify wasteful expenditures
 Adapt quickly as your financial situation changes
 Help to achieve your financial goals
Analyzing budget appropriately to meet expenses:
Create a good budget to cover expected expenses. And try to avoid any budget deficit or large amount
of budget surplus.
Importance of setting financial goals:
Personal goal-setting is crucial when you are planning for the future. Because your financial affairs
will have an impact on every other area of your life, it is critical to know how it fits into your life and
whether it allows you to reach your other goals. Two of the benefits you will receive as a result of
defining and aligning your major goals in life are peace of mind and focus. Let us take a look at a few
of the other benefits of personal goal-setting:
 Know, be do and have more
 Use your mind and talents fully
 Have more purpose and direction in life
 Make better decisions
 Be more organized and effective
 Do more for yourself and others
 Have greater confidence and self-worth
 Feel more fulfilled
 Be more passionate and motivated

Remember, you will not pay a price for setting goals. You will pay a price for not setting goals. We
can choose to get caught up in the everyday activity of our lives without feeling any real sense of
purpose or we can choose to accomplish something meaningful with our lives that give us a sense of
direction and self-motivation.
There is a very simple process in seven steps that you can go through to set any goal whether personal
or professional. To be effective, the goal you choose must include all seven of the following steps:
Seven Steps of Goal Setting:

• Identify your goal by writing it down.

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• Set a deadline for the achievement. Put a date on it.

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• List the obstacles to overcome in accomplishing your goal.
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• Identify the people and groups you need to work with to reach your goal.
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• List the skills and knowledge required to reach your goal. What do you need to know?
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• Develop a plan of action to reach your goal.
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• Write down the benefits of achieving your goal. (“What is in it for me?”)
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On a periodic basis, it is important to re-evaluate your goals to make certain that they are in alignment
with what you truly value and want out of life. Remember, goal-setting is a life-long process. Once
you have completed one goal, be sure to replace it with something else. This way you will always reap
the benefits that goal-setting provides.

Skills required for successful budgeting:

Most of the information you need for successful budgeting. To create or rework your budget, follow
the simple steps outlined below to get a clear picture of your monthly finances. The following skills
are required.

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1. Add up Your Income

to set a monthly budget, you first need to determine how much income you have. Using the worksheet
at the bottom of this page, write a dollar figure next to each relevant income source. Make sure you
include all sources of income such as salaries, interest, pension and any other income–including a
spouse's income if you're married.
If you get a salary, be sure to use your take-home pay rather than your gross pay. Taxes are usually
taken out automatically, but if they're not, remember to include them as another expense. If you
receive money from somewhere not listed, enter the source along with the amount under "other
income."
2. Estimate Expenses
The best way to do this is to keep track of how much you spend for one month. The worksheet below
divides spending into fixed and flexible expenses. Fixed expenses are those that generally do not
change from month to month, such as rent and insurance payments. Flexible expenses are those that do
change from month to month, such as food or entertainment. If some of your expenses for one or more
categories change significantly each month, take a three-month average for your total.
3. Figure Out The Difference
Once you've totaled up your monthly income and your monthly expenses, subtract the expense total
from the income total to get the difference. A positive number indicates that you're spending less than
you earn--congratulations. A negative number indicates that your expenses are greater than your
income. This means you will need to trim your expenses in order to begin living within your means.
Well done–you've created a budget. The next step is to track your budget over time to make sure
you're sticking to it. If you find you aren't able to follow your budget successfully, it may mean that
your plan isn't flexible enough. It can take revisiting your budget a few times to find the balance that
works for you.

LO2:Develop a personal budget:

Having control over your money is important, both for your financial well-being and for your peace of
mind. Creating a budget with the help of a template can help you feel more in control of your finances
and allow you to save for your short- or long-term goals.
Estimating income and expenses:
Before you can budget wisely, you need to know how much money you will have during the planning
period. Be realistic and think on facts of life that could happen. Plan your budget for twelve months.
Therefore, accurately estimate your income and expenses. Most students, budget planning may be
easier to do on a semester basis. If your income fluctuates from one month to the next, you may want
to set up a three-month trial plan. After you see how it works, you can expand it to cover a longer
period.

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Using spread sheet for recording budget:

Budget spreadsheet 3month budget:
Income date/ month:
May June July
Salary 3000 3000 3000
Dividend 1000 800 1100
Other 200 450 350
Total income 4200 4250 4450
Expense
Rent house 800 800 800
Tuition for child 300 300 300
Loan payment 250 250 250
Transport 300 200 380
Entertainment 350 200 800
Consumption 1000 1000 1100
Saving 1000 1100 800
Total expenses 4000 3850 4430
Total income minus 4200 4250 4450
total expenses 4000 3850 4430
Budget variance 200 400 20

A budget is something you keep working and reworking until it “fits.” Do not expect to have a perfect
budget the first time you set one up. With each budget plan, you can expect improvement. As
circumstances change, you will need to readjust your budget around your new goals, needs, and wants.

Identifying source of income and determining expenses:

To prepare your budget, first carefully evaluate your expenditures, including your present living needs.
Establish a list of priorities; rank the items below in importance from most important to least important
for the present.
-Clothing - gifts
-Savings -Contribution
-Job - Education
-Housing -summer/school
-Graduation -vacation
-Entertainment -transportation
-Food -loan payments
-Other -health care
Now compare those items as ranked with the amount you are spending on them. Are you spending a
disproportionately large amount of your income on an item that is not very important to you?
And identifying your source of income in order to help created good budget.
Determining a surplus or deficit budget:

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First, what is budget surplus and budget deficit?

Budget surplus is budget greater than expected expenses.
Budget deficit is budget less than the expected expenses.
Here is an example of to demonstrate personal budget performance.
Mr. Alemu is an employee of commercial bank of Ethiopia earning monthly salary of birr 12,000 per
month and his monthly salary of Mr. Alemu annually by 5% of his basic salary on January new year.
He prepares his monthly budget of expenditures.
 Variable expenditures of Mr. Alemu 30% of his income and the rest his fixed expenses.
 Remember no other source of income.
 Mr. Alemu savings plan is 5% of his fixed expense.
 During the month of January he planned to;
 Increase his variable cost by 5%
 No change his fixed expense
Actual expenditure for the month of December is 80% of to the variable budget expenditure and the
rest as planned. If there is budget deficit or surplus it will be deducted or added to personal savings.
1. Demonstrate personal budget performance report for the month of December and January.
2. Demonstrate budget performance report for the month for the month of December.
3. What is the reason of the budget variance for the month of December?
Solution
1. Mr. Alemu personal budget performance for
the month of December and January.
Descriptions Budget December Budget January
Income from salary 12000 12600
Variable expenditure 3600 3780
Fixed expenses 7980 8379
Savings plan 420 441
Total 12000 12600

2. Mr. Alemu personal budget performance for

The month of December.
Description Budget Actual variance
Variable expenditure 3600 2880 720
Fixed expenses 7980 7980 -
Savings 420 1140 720
Total 12000 12000 1400

3. What is the reason of the budget variance for the month of December?
 To decrease a consumption
 Inflation
 Comparing pricing for essential items
 Controlling and monitoring use of utility
 Reducing expenditure
 Share of accommodations

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Investigating reasons for a deficit budget :

Budgeting is not a one-time exercise Keep in mind that the tips, charts, and worksheet you have used
here will need to be reworked. Your goals, both long-term andimmediate, need be reassessedand
investigate the reason when the budget became a deficit. And reassessed on a regular basis to help
budget more accurately and attain your goals.

LO3:Implement and monitor the personal budget:

Planning the budget followed according to a period of time:
A good plan is a guide –not a detailed accounting of every penny. A plan is based on each individual.
It should be based upon your ideals and principles, and the way you want to live. Our personal goals
grow out of values and dictate our financial goals. Once you have identified your goals, financial
planning and saving is much easier. Try to put the most important goals first, since not all your goals
will be reachable at once. You should include both short and long term planning.
If you have a small income and/or large debts, you may be unable to do more than take care of
immediate necessities. You may find it unrealistic to even think of long-term goals. Any ways your
plan budget encompassed by period of time.
Implementing actual expenses and income for the period:
The best way to have money available for major expenses and future goals is to set aside money
regularly before you spend your income. By earmarking your money and planning your expenditures,
every pay period will give you greater flexibility in managing your money. When you start budgeting,
you will want to set aside a designated amount to cover any emergencies that may arise. Once you
have decided on the amount needed, enter it on the planning sheet on the next page. And implementing
actually your income covers the expected expenses.
Managing the personal budget:
This budget workbook was compiled to help you find a simple and practical guide for managing your
money. Money management abilities can have a great effect on the degree of satisfaction we gain from
life. No one is born with the ability to manage money effectively. It is a skill that can be learned and
developed with practice.
The overall key to money management is that a plan is required to think things through before
spending. On-the-spot purchases often cause money to disappear quickly. A personal budget can help
you:
-$ Live within your income
-$ Realize personal money more effectively
-$ Develop economic competence and can achieve your goals
-$ Maintain a good credit history.
-$ Spend wisely
A good management of a personal budget mean that a good money management.

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