Let’s create our budget

Key topic

The important take away from this lesson is the process of preparing a budget for your personal finances. We saw a simple budget in the financial planning process lesson, but now we will go into more detail. This lesson explains why having a budget is very important as well as provides practical tips on how to create and sustain a budget. We will provide examples of budgets and get you to try and create one for yourselves.

Learning objectives

• Understand what a budget is
• Understand the benefits of having a budget
• Understand what you need to create a budget
• Learn how to create a budget

What is a budget and why do you need it?

Let’s start with a short clip about the importance of budgeting:

The importance of budgeting

A budget is an estimation of revenue (earnings) and expenses over a specified period of time and is usually created and then reevaluated on a periodic basis. Budgets can be made for a person, a business, a government and anyone else that makes and spends money. Keeping track of how much you earn and spend doesn’t have to be difficult, it doesn’t require you to be good at math or even with numbers, and it also does not mean you cannot buy the things you want. All it means, is that you’ll know where your money goes, and therefore, you’ll have greater control over your finances. To manage your monthly expenses, prepare for life’s twists and turns, and be able to afford large purchases without going into debt, budgeting is essential.

There are numerous benefits for having a budget, such as:

• Budgeting helps you save more– When you budget, you can see which of your expenses are unnecessary and eliminate them easily. That is on top of what you initially choose to save. You’ll therefore be able to save more.
• It helps you prepare for emergencies– Life is filled with unexpected surprises; unfortunately, many of them unpleasant. This is where the emergency fund that we discussed in a previous lesson comes in. As we stressed then, your savings and budget should include an emergency fund that consists of at least three months’ worth of living expenses. Moreover, your budget will help you figure out how to build that emergency fund and how much you can afford throwing in it.
• It helps you avoid overspending– Far too many people live on credit and when the month is over, they end up with more expenditure than earnings. When you see your finances written down and realize that you spend more than you have, you are able to understand how damaging that is. It therefore becomes easier to reduce your spending.
• It makes bad spending habits obvious– Remember our previous lesson on spending habits? Having a budget will highlight them further, since it can help you identify your bad spending habits.
• It shows you where the money goes– This is important for different reasons, but it is also important in itself. Knowing where your money goes can enable you to efficiently adjust your spending to meet goals; either for saving purposes or for other things.
• It helps you keep up with your financial goals– This must have become clear from our previous lessons. Remember how we juggled the different numbers that we found in our imaginary budget to achieve our financial goals when we were going through the financial planning process? (Buying the iPhone and paying for that soccer camp).  It was all possible because everything was written down in detail and we could move things around and adjust our spending based on our goals and the timeframe we had in front of us.
• It reduces money-related stress and anxiety– You might not be able to tell, but many grown ups go through a lot of stress due to their finances. Having a budget reduces that stress and anxiety which may even end up to mental health issues. Since you have everything written down, the burden feels lighter and the element of uncertainty is greatly reduced. Otherwise, you might end up doing calculations in your head which can just worsen the anxiety and the stress.

As you can tell by now, the advantages of having a budget are several and the best part is that there is no downside.  We will now turn to the practical aspect of this class, which is to show you what you need to prepare your budget and how to go about doing it.

Creating a simple budget

Regardless of your financial situation and capabilities, you should always have a budget in place. Budgeting is an important tool because it helps you understand the bigger picture and it helps you control your financial situation at any given point in your life as it makes you take a long- term approach in life. As already discussed, a budget is a summary of your expected income and expenses for a period of time, usually a month or a year. While the word budget may have been falsely connected with restricted spending, you should remember that actually a budget translates into efficient spending.

You should remember that creating a budget is one of the best solutions to creating long term financial sustainability and success, as well as being prepared for any financial situation in your life and having control of your financials. The most important thing to remember for now is that a budget is essential in your life and that you should be equally disciplined, as in your sports and academics, in the process of following your budget and sticking to it. If you think you need help with creating your budget you can start working on it with your parents, so that you better understand the concept. Later in life, you may utilize the services of a financial advisor (especially if you can afford one), who will guide you and boost your accountability towards the budgeting exercise, making it easier for you to stick to your budget.

To prepare your monthly budget you can follow the simple steps listed below:

• Identify the different types of expenses and income you may have on a monthly basis.  Write down all your sources of income and record the total as a monthly amount.  In your current situation, your income will consist of your allowance and any other money you may receive as gifts from family on special occasions, but you could also include money you earn in the weekend. For example, if you are helping someone with a business, or mowing the neighbor’s lawn, or having a yard sale, or washing cars etc.
• Repeat the same process for all your expenses, but make sure you separate them into fixed and variable expenses.  Your expenses will probably include the money you spend in school, in your social life with friends and any purchases you make for your personal life, i.e., shoes, clothes, accessories etc.  Fixed expenses will be relatively the same each month (i.e., your monthly school bus fee) while variable expenses are the ones that change according to your needs and wants (going to the movies, buying a new pair of shoes and so on). Remember that variable expenses are the ones which you will be able to adjust, meaning that it will be the money you will have to cut-down from, when you need to balance your budget, if you are in a tight spot.
• Calculate the total of your monthly income and monthly expenses and if you have more income than expenses, you are off to a good start. You can use this excess for savings. If your expenses are more than your income, you will need to start making some cuts on your expenses, or find ways to make more money, because it means that you are living above your means which is neither sustainable nor desirable.
• Try to adjust your spending, so that your income is always greater or at least equal to your expenses. This means all of your income is accounted for and budgeted for a specific expense, savings goal or investment.
• Review your budget on a regular basis in order to stay on track. At the end of the first month take some time to compare the actual expenses you made against the ones you wrote down in the budget as expected expenses. This way you can see where you did well and where you need improvement. Do that for the second and third month if you need to.

Now let’s watch a short video on budgeting for teens which pretty much sums up what we have talked about so far in this lesson.

Budgeting For Teens

Example of a monthly budget for your age

At your age, a budget is basically an allowance and spending plan and it is very simple and very easy to do. It goes without saying that if you earn some extra money doing chores or through a part-time job, you treat that money the same way as your allowance for the purposes of your budget. We set below a fairly simple example which if you follow and just insert your own numbers, will give you your first official budget. The amounts set below are not necessarily realistic!

Expense Budget

Income Budget

Your Income minus Expenses will result to either a (+) Surplus or a (-) Deficit. 

In the above case it has resulted to a Surplus:  $630-$600=$30 (Surplus)

Based on the above example, your expenses total $600 and they include all the money you spend, but also an amount that you save each month. Your income totals $630, which is more than your expenses, therefore you are in good shape, having a $30 surplus on top of your $60 monthly savings (Surplus is the official term that is used when your income is more than your expenses). This surplus can be used for whatever you desire, or you can create a separate saving for the monthly surplus, which can go towards fulfilling your wants instead of your needs, or to fund a special expense when this surplus builds up, such as a summer soccer camp or a trip with the team.

Let’s learn how to budget

We will now learn how to budget with an in-class activity.

Action Steps – Exercise 1 (20 minutes)

• All students should prepare a list of their monthly income and expenses, total it up and see whether they are over/under budget. Students should be allowed about 10 minutes for this activity.
• Two students will be selected to present their monthly personal budgets in class and the instructor will help them adjust their budget as needed to:

• • Increase Income (Focus on ways to do that)
  • Decrease expenses (Focus on overspending on wants rather than needs)

Lesson wrap-up

We began today’s lesson with defining budgeting and pointing out many of the numerous benefits of having one. We then detailed what you need – documents and other information – to create your budget before moving to explaining our budget example. The most important part of the lesson is to actually learn to prepare a budget for yourselves.

At this point we will wrap up today’s lesson.  First, we will go over the learning objectives of this lesson and we want your feedback as to whether they have been achieved and then we will address any questions you may have.  Please feel free to ask anything you’d like in relation to today’s lesson and we would love to hear how the concepts we discussed today relate to you and your life!