Financial Literacy: Budgeting Basics
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Questions and Answers

What is the main purpose of creating a budget?

To manage finances effectively and prioritize expenses

What are the two types of expenses to categorize when creating a budget?

Needs and wants

What is a credit score, and what does it reflect?

A 3-digit number (300-850) that reflects credit history and repayment behavior

What is the recommended credit utilization ratio?

<p>Below 30%</p> Signup and view all the answers

What is the debt avalanche method?

<p>Paying off high-interest debt first</p> Signup and view all the answers

Why is it essential to regularly review and adjust a budget?

<p>To ensure it remains relevant and effective</p> Signup and view all the answers

A budget is a plan for how to allocate income towards ______, savings, and debt repayment.

<p>expenses</p> Signup and view all the answers

The 50/30/20 rule allocates ______ % of income towards fixed expenses.

<p>50</p> Signup and view all the answers

Zero-based ______ starts from a 'zero balance' and allocates every dollar towards a specific expense or savings goal.

<p>budgeting</p> Signup and view all the answers

Setting ______ goals helps to clarify priorities, focus efforts, and make progress towards achieving financial objectives.

<p>financial</p> Signup and view all the answers

The ______ step in setting financial goals is to identify what you want to achieve.

<p>first</p> Signup and view all the answers

A ______ card is a type of loan that allows users to borrow money from a lender.

<p>credit</p> Signup and view all the answers

The ______ rate is the percentage of the borrowed amount charged as interest.

<p>interest</p> Signup and view all the answers

To avoid negatively impacting credit score, keep credit utilization ratio below ______ %.

<p>30</p> Signup and view all the answers

Make ______ payments to avoid late fees and penalties when using credit cards.

<p>on-time</p> Signup and view all the answers

Avoid using credit cards for ______ advances or buying things you cannot afford.

<p>cash</p> Signup and view all the answers

Study Notes

Financial Literacy

Budgeting

  • 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

Credit Management

  • 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)

Financial Literacy

Budgeting

  • 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

  • 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.

Budgeting

  • 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.

Key Components

  • 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.

Budgeting Methods

  • 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

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

Key Steps

  • 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.

Credit Cards

  • 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.

Key Concepts

  • 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.

Responsible Credit Card Use

  • 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.

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Description

Learn the fundamentals of budgeting, including its definition, importance, and key steps to create a budget that helps manage finances effectively and reduces financial stress.

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