[MUSIC] So in this lecture segment, we're going to be talking about one of the basic most fundamental concepts in the financial planning process, specifically budgeting. So just to define what budgeting is, it's simply the process of itemizing your income and expenses over a specific period of time and taking a look to see if those income and expenses align with one another. Now that may seem like a pretty boring and maybe tedious process, but budgeting is an extremely useful process for monitoring your income and expenses. And understanding exactly where your cash is coming from and where it's going each week, each month or over anytime period that you might define. But maybe in the situation where the money that you're making each month is always covered your expenses, you've always have a little bit of money leftover at the end of each month. You’re not let me paycheck to paycheck. So why would someone like you, you need to go through the budgeting process? Well, budgeting is not only about looking at your history and how you have spend your money and where your money has gone and where it has come from, it's also extremely useful for planning for the future. Whether we're talking about identifying potential budgeting problems before they come up and become unmanageable or whether we're talking about planning and preparing for future expenses that we might need to develop a savings plan for and those future expenses could be anticipated, or unanticipated. And we might also be using budgeting, as a way to respond and adapt to changes in your financial situation. And that's going to be particularly important for young adults as you may be transitioning from college to a new job or you may be progressing through your career, or maybe moving and switching locations for the job that you have taken and your expenses might differ from what they have been in the recent past and your income level might be changing as well. The other thing that budgeting is useful for and I mentioned a little bit about savings goals and we can use budgeting to plan for savings to help us achieve some of those short, medium and long-term financial goals that we talked about in the module on goal setting. So, I'm going to go over just quickly the steps in the budgeting process. The first thing that we're going to talk about is accessing your current financial situation. So what do you currently have in terms of assets and what do you owe in terms of liabilities, any loans that you might have to be paying off in the near future. We're going to talk about putting together an itemized list of both your income, or your cash inflows as well as your expenses, or your cash outflows and then we're also going to talk about identifying goals and any additional savings needs that you might have to be able to reach those goals. Finally, we're going to add everything up. Compare your income with expenses to see whether you're running a surplus or a deficit during that period and then we'll go back, and take a look at that budget, and make any adjustments if they are needed. So, the first step in the budgeting process is assessing your current financial standing. So basically, taking a look at your personal balance sheet. So, your personal balance sheet and you net worth is something we cover in a little bit more detail in the module on short-term savings. But just in case you haven't and had a chance to complete that module, I'll just quickly go over an overview of this process. So your personal balance sheet is going to include your assets or the things that you own and then also the debts or the things that you owe, the difference in the two being your net worth. On the asset side, we're going to take a look at anything that you have, the balances in your checking account or any cash that you may be holding. Anything you maybe holding in shorter terms savings or money market accounts and then also any financial assets that you might have and longer term savings, or investments accounts. This is again, a very good idea again of what you have an asset or what you own. On the debt side, you want to take a look on your credit card balances as well as any existing loans that you already have that you're going to be required to pay off in the near future. So any installment or other loan balances, this might include your student loans if you have a loan for your car or maybe even have a mortgage loan if you own a home. Second step in the budgeting process is sitting down and itemizing all of your income sources. So for some of you, this may be very straightforward. You have a single full-time job. You just want to make sure you know and understand what your pretax, and your hourly wages that you take home in terms of income from that job. For young adults or people throughout theirs lives, there may be other sources of income that we might want to include as well. For young adults, we might be looking at student loan income. That might come in at different points throughout the year or scholarships that we might be receiving, or possibly income assistance from family, or friends. Later in life, we may be looking at having income sources from our retirement accounts or pension. Or at any time during our life cycle, we may be looking having income in addition to our employment income coming from investments or interest earned on anything that we have in savings. Next, we want to sit down and itemize our expenses or where our cash is being spent every period. So, I like to look at this and break things down into three different categories. My fixed expenses, things that I know are going to be billed to me. I know what the amount is going to be. Variable expenses, things that I know I'm going to be paying for each month, but I don't know exactly what that amount might be. So, that's why we throw those in the variable category. And then finally, non-essential expenses. So thinks it we maybe spend money on regularly, but we could adjust fairly easily things we don't necessarily need. And the fixed expense category I've thinks listed, such as your rents, your cell phone, your cable and your internet. Again, monthly expenses that your typically again know exactly how much you're going to need to pay each period. Maybe you want to think about also your any insurance premiums you have for for any order insurance, health insurance as well as any loan payment that you might have. So again, if you payoff those students loans, payoff a car loan. You're typically going to know what the payment schedule is on those loans, so you can plan for those expenses within that fixed category. In variable expenses, I've listed things like food, gas, utilities. This might vary from week to week, day to day, month to month. You may drive more during the summer than you do in the winter when you're going vacation, so your gas fill might be higher during certain periods. You might use more electricity or gas seasonally on your utilities and your credit card payments are also typically going to fluctuate from month to month. Finally, the non-essential expenses, I have items listed here as entertainment or luxury items this could be anything from going out to the movies, to maybe splurging on some new clothes or some electronics. And maybe a key point to make here is that what one person classifies as a variable expense versus a non-essential expense, that's going to differ from person to person. So some people may be very passionate about, making sure that they're very fashionable and they may consider clothing more of a variable expense. Whereas others might view that as a larger element, as something they can easily cut back on if they needed to. So again, it's very personal in terms of how you categorize some of these expenses. In the next step then, once we've taken a look at our income and our expenses is to sit down and think about what are you're required savings to meet any short, long or intermediate term goals that you might have? And the first point that I'm going to bring up here is just spend a few minutes talking about setting up a savings to develop an emergency fund. So, this is an extremely important thing to do. Any professional, financial planner that you talk to is going to typically suggest that you establish some level and an emergency fund to cover things in case you lose your job. Any anticipated home or auto repairs that might come up. An anticipated medical expenses are often things that are thrown in this into this category as well or just maybe any unanticipated expense can fall into this category. So it might just be that your laptop dies and you need to replace that or you drop your cellphone, and crack the screen, and need to replace that. Those are all things that you can use your emergency funds savings for. Now I typically try to stay away from rules of thumb, but what most professionals advice is that you save maybe three to six months of expenses at least build up that level in your emergency fund. I think that is tied to the job loss issue in terms of emergency fund use, specifically. But again, this could vary by person. If you're more risk adverse and you'd like to have a more sizable emergency fund, you could definitely build that larger. Maybe you're more risk neutral or loving and you'd like to have a smaller emergency fund. So, that's a very personal choice. There also might be some short-term savings goals that we have. So, maybe you're saving up for that spring break trip or maybe you want to go on a vacation at some point during the year and you know that your going to have to put away a certain amount every month to reach the goals that you need to be able to finance that vacation. Maybe you want to buy a new TV or something like that and you want to put some money away to help finance that purchase in the short-term. You might also have some longer term savings goals that we want to include in our budget just to dedicate some money each month to that, so we can stick to it easier. Saving for college or education, if you have children. Maybe you know that in the next two or three years, you want to purchase a new car. So putting some money away each month can help with that or maybe you have a longer term goal of buying a new home within the next five to ten years, you might want to think about putting some money away to help finance that purchase or to help build a down payment for that purchase in the future. The other one I have listed here in terms of long-term savings is retirement. Now while many of you, if you have full time jobs, you're employer may be automatically matching some automatic savings out of your paycheck each month. You may want to consider whether or not that's going to be sufficient for retirement and think about possibly, including some additional retirement savings in your budget each month as well. Once we have all those things documented, your income sources, all of your regular expenses as well as any savings goals that you might have come up with, we can add all those things up. Add up all your income. Add up all your expenses and compare the two to determine, if you're going to be running a surplus or a deficit during that time period that you've completed your budget. Once we know if we're running a surplus or a deficit, we can go back then and make any required adjustments that we think might be necessary. So if we're running a surplus, this is a case where your income might exceed your expenses for the period. That's going to provide you some more flexibility for some of your variable and non-essential expenses. One thing I always advise in a case like this if you are running a surplus, just make you you double check and go back to make sure that all of your expenses have been accounted for. Maybe you can use that surplus that will give you the ability to dedicate that towards additional savings or maybe you want to think about using that surplus for some additional expenses beyond what you've budgeted for. In the case where you run into deficit or your expenses exceed your income, things you can do is take a look at the income side. Is there any way that you can generate more income? If you're a student, do you need to take a look at taking on a part time job? Maybe you can identify areas where you can reduce some expenses. Again, typically starting with that essential or non-essential and luxury expense category. Taking a look at some of your variable and fixed expenses to see, if some adjustments can be made there to reduce those expense categories. The other thing you could do, the other category we talked about is your savings goals. So, maybe we reevaluate those. Maybe some of your savings goals are unrealistic. Maybe you're looking at putting in a way too much relative to your ability to do so during the bunch of period. So we can reevaluate some of those savings goals, it's another way to make some adjustments in our budget. So here, we have just a simple monthly budget example just to take a look at some actual numbers and kind of relate those back to some of the things that we've talked about in the previous slides. So in this example, we have an individual with an income level of $3,500 a month. That would equate to roughly a 60, maybe a $65,000 annual salary after accounting for tax withholding and benefits. And our expenses, I've included here a rent level of $1,200 a month. $300 going to utilities. A car payment $300 a month. Car insurance $50 per month. We have cellphone expenses. You will pay enough some school loans. We are dedicating some savings each month to go into a emergency fund, as well as some additional savings for retirement. We've got $400 budgeted for groceries and food or about $50, or $100 per week throughout the month. Gas and parking about $50 a week or $200 per month, and then we've also got some entertainment expenses in here also budgeted at $400 a month. Total expenses add up to $3,430, which means we are running in a surplus or an expected surplus of $70. So again, here is a case where income does exceed our expenses. It doesn't exceed expenses by a great amount, but it does give some flexibility here in terms of that $70 in income exceed in our expense levels. So to summarize this lecture segment while budgeting may seem like kind of a tedious task and maybe one that is unnecessary, if you've always had enough to cover your monthly expenses. It is a very useful process for monitoring and understanding where your money's coming from, and where it's going. And again, not just viewing budgeting is kind of historical practice of monitoring your cash flows, but it's also extremely helpful for planning for the future. Whether that is help into make sure that you can achieve some your savings goals or whether it something that can help you to identify some potential problems and adapt the changes that may occur in the future. [MUSIC]
