Financial Literacy: Budgeting Basics

Study Notes

Definition: A budget is a plan for how to allocate income towards expenses, savings, and debt repayment.
Importance:
- Helps manage finances effectively
- Enables prioritization of expenses
- Reduces financial stress
Key Steps:
1. Identify income and fixed expenses
2. Categorize expenses (needs vs. wants)
3. Set financial goals (short-term and long-term)
4. Allocate income accordingly
5. Regularly review and adjust budget

Definition: The ability to manage credit responsibly, including borrowing, repayment, and credit score management.
Key Concepts:
- Credit Score: A 3-digit number (300-850) that reflects credit history and repayment behavior.
- Credit Report: A detailed record of credit history, including loans, credit cards, and payment history.
Best Practices:
- Make on-time payments (at least minimum payment)
- Keep credit utilization ratio below 30%
- Monitor credit report for errors
- Avoid applying for multiple credit cards/loans in a short period
- Pay off high-interest debt first (debt avalanche method)

A budget is a plan to allocate income towards expenses, savings, and debt repayment.
Budgeting helps manage finances effectively, enables prioritization of expenses, and reduces financial stress.
The budgeting process involves identifying income and fixed expenses, categorizing expenses into needs and wants, setting financial goals, allocating income accordingly, and regularly reviewing and adjusting the budget.

Credit management involves borrowing, repayment, and credit score management responsibly.
A credit score is a 3-digit number (300-850) that reflects credit history and repayment behavior.
A credit report is a detailed record of credit history, including loans, credit cards, and payment history.
To manage credit responsibly, make on-time payments, keep credit utilization ratio below 30%, monitor credit report for errors, avoid applying for multiple credit cards/loans in a short period, and pay off high-interest debt first using the debt avalanche method.

A budget is a plan for how to allocate income towards expenses, savings, and debt repayment.
Budgeting helps to prioritize spending, manage debt, and achieve financial goals.

Income: Total amount of money earned.
Fixed expenses: Regular expenses that remain the same every month, such as rent, utilities.
Variable expenses: Expenses that can vary from month to month, such as groceries, entertainment.
Savings: Amount set aside for short-term and long-term goals.

50/30/20 rule: Allocate 50% of income towards fixed expenses, 30% towards discretionary spending, and 20% towards savings and debt repayment.
Zero-based budgeting: Start from a "zero balance" and allocate every dollar towards a specific expense or savings goal.

Financial goal setting helps to clarify priorities, focus efforts, and make progress towards achieving financial objectives.

Identify goals: Determine what you want to achieve, such as pay off debt, save for a down payment on a house.
Assess current situation: Evaluate income, expenses, assets, and debts.
Set SMART goals: Make goals Specific, Measurable, Achievable, Relevant, and Time-bound.
Create an action plan: Break down large goals into smaller, manageable steps.

A credit card is a type of loan that allows users to borrow money from a lender to make purchases, pay bills, or get cash advances.

Credit limit: The maximum amount that can be borrowed.
Interest rate: The percentage of the borrowed amount charged as interest.
Credit score: A numerical score that reflects creditworthiness, affecting loan approval and interest rates.

Make on-time payments to avoid late fees and penalties.
Keep credit utilization ratio below 30% to avoid negatively impacting credit score.
Avoid using credit cards for cash advances or buying things you cannot afford.