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Chapter 28
Managing Personal
Finances
Section 28.2
Money
Management
Read to Learn
Discuss the importance of budgeting.
List the steps for preparing a budget.
The Main Idea
Meeting your financial goals requires you to know
your income and expenses. A budget can enable
you to track your spending and make choices about
your money.
Key Concepts
The Importance of Budgeting
Preparing a Budget
Key Terms
money
management
a method of planning to get the
most from one’s money
budget
a plan for using your income in a
way that best meets your wants
and needs
Key Terms
the actual amount of money you earn
income
or receive during a given period
gross
pay
the total amount of money you earned for
a specific time
Key Terms
amounts that are taken out of your
deductions
pay before you receive your paycheck
net pay
your gross pay minus deductions
Key Terms
expense
an amount of money used to buy or
do something
fixed
expenses
expenses that occur and are
regularly paid
Key Terms
variable
expenses
expenses that change and can be
controlled more easily than fixed
expenses
budget
variance
the difference between the budgeted
amount and the actual amount that
you spend
Key Terms
surplus
extra money that can be spent or saved,
depending on a person’s goals and
values
deficit
when more money is spent than is
earned or received
The Importance of Budgeting
Money management
is necessary for
consumers,
businesses, and
governments.
money management
a method of planning to
get the most from one’s
money
The Importance of Budgeting
A budget helps
people set financial
priorities.
budget
a plan for using your
income in a way that best
meets your wants and
needs
The Importance of Budgeting
A budget includes a record of
your expected income
your planned expenses
your planned savings over a certain
period of time.
Figure 12.1
Average Household Expenses
Everyone Budgets
The budget of a government is similar to your
budget, setting up the intended income and
expenses for the year. Nearly all large
businesses reforecast their budgets on a
quarterly basis. In the future, annual budgets may
be replaced with monthly or rolling forecasts.
Preparing a Budget
Preparing a budget is a seven-step process.
Graphic Organizer
The Seven Steps of Planning a Budget
1
Set Your Financial Goals
2
Estimate Your Income
3
Budget for Unexpected Expenses and Savings
4
Budget for Fixed Expenses
5
Budget for Variable Expenses
6
Record What You Spend
7
Review Spending and Saving Patterns
Step 1: Set Your Financial Goals
As you prepare to
set your financial
goals, you should
consider several
questions.
What do I want to
accomplish in the next
month, year, five years?
What is important to me?
Are my goals practical?
Step 1: Set Your Financial Goals
You might find it helpful to separate your
goals into short-term, intermediate, and
long-term goals.
Step 2: Estimate Your Income
Start your budget by
recording your
estimated income for
the next month.
income
the actual amount of
money you earn or receive
during a given period
Step 2: Estimate Your Income
Your gross pay is
reduced by various
deductions.
gross pay
the total amount of money
you earned for a specific
time
deductions
amounts that are taken out
of your pay before you
receive your paycheck
Step 2: Estimate Your Income
Your take-home pay is
also called net pay.
net pay
your gross pay minus
deductions
Withholding
Withholding is income tax withheld from an
employee’s wages and paid directly to the
government by the employer. It is a form of
deduction from pay. The funds are applied to
the worker’s federal, state, and local income
taxes as well as his or her contribution to Social
Security or Medicare.
Step 3: Budget for Unexpected Expenses
and Savings
You have to plan for
expense
expenses such as
an amount of money used
to buy or do something
food, rent, and
clothing to satisfy your
basic needs.
Step 3: Budget for Unexpected Expenses
and Savings
Unexpected expenses include medical visits
or accidents.
Savings make it possible for you to meet
future wants and needs.
Step 3: Budget for Unexpected Expenses
and Savings
In your budget, make sure that the total
income figure is the same as the total for
planned expenses and savings.
Step 4: Budget for Fixed Expenses
Fixed expenses
include payments for
rent, insurance, and a
car loan.
fixed expenses
expenses that occur
regularly and are regularly
paid
Step 5: Budget for Variable Expenses
Variable expenses
include expenses
such as food,
phone charges,
entertainment, and
gifts.
variable expenses
expenses that change and
can be controlled more
easily than fixed expenses
Step 6: Record What You Spend
Keeping track of your expenses will help you
revise your budget if necessary.
Step 6: Record What You Spend
Recording what you
spend will show you
your budget
variance.
budget variance
the difference between the
budgeted amount and the
actual amount that you
spend
Step 6: Record What You Spend
Your budget
variance might show
a surplus or a
deficit.
surplus
extra money that can be
spent or saved, depending
on a person’s goals and
values
deficit
when more money is spent
than is earned or received
Step 7: Review Spending and
Saving Patterns
You need to review your budget each month
and consider making changes.
1. What are the seven steps to preparing a
budget?
set goals, estimate income, budget for
unexpected expenses and savings, budget for
fixed expenses, budget for variable expenses,
record what you spend, and review spending
and saving patterns
2. What is the difference between gross pay and
net pay?
Gross pay: total amount earned. Net pay: gross
pay minus deductions
3. How are fixed expenses and variable
expenses different?
Fixed expenses occur regularly. Variable
expenses change and can be controlled more
easily.
End of
Chapter 28
Managing Personal
Finances
Section 28.2
Money
Management