Making the money and bringing it
home: Paychecks and Budgets
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Know your bank balance.
Know what you spend.
Don’t buy on impulse.
Make a budget.
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What is a budget?
Step1: List all your monthly income.
Step2: List all your monthly expenses.
Step3: Subtract your total expenses from your
total income to determine your net monthly
cash flow.
Step4: Make adjustments as necessary.
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Mortgage/rent
Transportation – gas, insurance, oil, tires,
registration
Utilities – gas, electric, trash, water, sewer
Food and Necessities – personal hygiene,
grooming, clothes, cleaning supplies
Extras – cable tv, cell phone, internet, home
phone, gym membership
Government – taxes, health insurance, lawyer,
fines
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Compute the total cost per year:
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Maria spends $20 every week on coffee and spends
$130 per month on food.
Suzanne’s cell phone bill is $85 per month, and she
spends $200 per year on student health insurance.
Vern drinks three 6-packs of beer each week at a cost
of $7 each and spends $700 per year on his
textbooks.
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Compute the total cost per year:
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Maria spends $20 every week on coffee and spends
$130 per month on food. Answer: 20 x 52 + 130 x 12
= $2600.
Suzanne’s cell phone bill is $85 per month, and she
spends $200 per year on student health insurance.
Answer: 85 x 12 + 200 = $1220.
Vern drinks three 6-packs of beer each week at a cost
of $7 each and spends $700 per year on his
textbooks. Answer: 3 x 7 x 52 + 700 = $1792. He
should drink cheaper beer or less …
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Prorate the following expenses and find the
corresponding monthly expense.
During one year, Luisa pays $5600 for tuition and
fees, plus $400 for textbooks, for each of two
semesters.
 Lan pays a semiannual premium of $650 for
automobile insurance, a monthly premium of $125
for health insurance, and an annual premium of $400
for life insurance.
 Randy spends an average of $25 per week on
gasoline and $45 every three months on the daily
newspaper.
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Prorate the following expenses and find the
corresponding monthly expense.
During one year, Luisa pays $5600 for tuition and fees,
plus $400 for textbooks, for each of two semesters. In a
year: 5600 x 2 + 400 x 2 = $12,000. Monthly this is
12,000/12 = $1,000.
 Lan pays a semiannual premium of $650 for automobile
insurance, a monthly premium of $125 for health
insurance, and an annual premium of $400 for life
insurance. For a year: 650 x 2 + 125 x 12 + 400 = $3200.
Monthly this is 3200/12 = $266.67.
 Randy spends an average of $25 per week on gasoline
and $45 every three months on the daily newspaper. In a
year: 25 x 52 + 45 x 4 = $1480. Monthly this is 1480/12 =
$123.33. (We multiplied the newspaper by 4 because there
are 4 groups of 3 months in a year.)
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You currently drive 250 miles per week in a car
that gets 21 mpg. You are considering buying a
new fuel-efficient car for $16,000 that gets 45
mpg. Insurance premiums for the new and old
car are $800 and $400, respectively. You
anticipate spending $1500 per year on repairs
for the old car and having no repairs for the
new car. Assume gas costs $3.50 per gallon.
Over a five-year period, is it less expensive to
keep your old car or buy the new car?
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Let’s start with the old car. At 250 miles per week for
52 weeks for 5 years it will drive 65,000 miles (the same
for the new car). At 21 mpg this is 65000/21 = 3095.24
gallons of gas. At 3.50 per gallon we will pay $10,833.34
for gas over 5 years. Add to that $400 x 5 = $2000 for
insurance and $1500 x 5 = $7500 for repairs and the old
car will cost $20,333.34 for the five years.
The new car will drive the same 65,000 miles but at 45
mpg this will be 65000/45 = 1444.44 gallons of gas. At
3.50 per gallon we will pay $5055.54 for gas over 5
years. Add to that the $800 x 5 = $4000 for insurance
and $16,000 for the cost of the car and the new car will
cost $25,055.54 for the five years.
Sometimes it is cheaper in the long run to just pay
repairs, even if the gas mileage isn’t as good.
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You could take a 15-week, three-credit college
course, which requires 10 hours per week of
your time and costs $500 per credit-hour in
tuition. Or during those hours you could have
a job paying $10 an hour. What is the net cost
of the class compared to working? Given that
the average college graduate earns nearly
$20,000 per year more than a high school
graduate, is paying for the college course a
worthwhile expense?
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The 3-credit class costs $500 and will take up 10
x 15 = 150 hours of work. That 150 hours of
work would have paid you $1500. This means
that you are actually losing out on $2000 by
taking the class versus working during that
time.
In my opinion, it is worth it to take the class.
Consider the $20,000 per year more you are
going to make by having your degree. If you
work for 30 years, that is 30 x 20,000 = $600,000
more. This is worth the initial $2000 sacrifice.
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Expected pay is rarely the same as actual pay.
Federal Taxes
State Taxes
Additional Withholding
Voluntary Deductions
Considerations
Source: eHow.com – What deductions from a
paycheck are reasonable for a worker to expect
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Why do we need a retirement account?
Savings Plan Formula –
𝐴𝑃𝑅 𝑛𝑌
[ 1+
− 1]
𝑛
𝐴 = 𝑃𝑀𝑇 𝑥
𝐴𝑃𝑅
(
)
𝑛
 A is the accumulated savings plan balance
 PMT is the regular payment (deposit) into the
account
 APR is the annual percentage rate, as a decimal
 n is the number of payment periods per year
 Y is the number of years
1.
2.
At age 25 you set up an IRA (individual
retirement account) with an APR of 5%. At the
end of each month, you deposit $75 in the
account. How much will the IRA contain when
you retire at age 65? Compare that amount to
the total deposits made over the time period.
You put $200 per month in an investment plan
that pays an APR of 4.5%. How much money
will you have after 18 years? Compare that
amount to the total deposits made over the
time period.
1.
If you start at age 25 and end at age 65, this is a
total of 40 years. We have PMT = $75, APR = 0.05,
Y = 40 with n = 12 (monthly). We will have 𝐴 =
75
2.
(
0.05 12𝑥40
1+
−1)
12
0.05
( 12 )
= $114,451.51 in the account at
age 65. We only deposited 75 x 12 x 40 = $36,000
so that is a ton of interest!
Using the same formula we get 𝐴 =
200
(
0.045 12𝑥18
1+ 12
−1)
0.045
( 12 )
= $66,373.60 in the account.
We deposited 200 x 12 x 18 = $43,200.
3.
4.
Your goal is to create a college fund for your
child. Suppose you find a fund that offers an
APR of 5%. How much should you deposit
monthly to accumulate $85,000 in 15 years?
At age 20 when you graduate, you start
saving for retirement. If your investment
plan pays an APR of 4.2% and you want to
have $5 million when you retire in 45 years,
how much should you deposit monthly?
3.
This time we have the A value and want to
find PMT. We set it up the same way, but the
end is slightly different:
0.05 12 x15
)
 1)
12
85, 000  PMT
0.05
(
)
12
85, 000  PMT (267.2889438)
85, 000
 PMT  $318.01
267.2889438
((1 
If we pay $318.01 each month we can achieve our
goal.
4.
We set everything up similar to example 3:
0.042 12 x 45
((1 
)
 1)
12
5, 000, 000  PMT
 0.042 


12
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
5, 000, 000  PMT 1599.303448 
5, 000, 000
 PMT  $3126.36
1599.303448
You’re going to need a great job to put that much
into retirement each month!
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You can now complete problems 1.13 – 1.17 in
Jack Appreciates Math chapter one.