Unit 11: Making a Budget PDF

# **Unit 11: Making a Budget** In this unit we will learn about: - Budgeting - Household Budgeting - Tips for preparing a Household Budget - Personal Budget - How to adhere in your Budget? - Types of Expenses ## Budgeting As we have put down the SMART Financial Goal, the next step is to create...

# **Unit 11: Making a Budget** In this unit we will learn about: - Budgeting - Household Budgeting - Tips for preparing a Household Budget - Personal Budget - How to adhere in your Budget? - Types of Expenses ## Budgeting As we have put down the SMART Financial Goal, the next step is to create the activity list to achieve the goal. One of the critical activities to achieve the financial goal is to prepare a budget as to how you propose to allocate your earnings. Making budget is a simple task, but adhering to the budget is the most difficult task. While you don't require any specific skill to prepare budget, you need extraordinary discipline to adhere to the budget you have prepared. A budget enables you to track as to how you propose to allocate the money that you have. It helps you manage your limited financial resources more efficiently so that you can achieve your goals. A household budget is a financial plan in which you allocate the family earnings towards various expenses and savings. The expenses include repayment of a loan, children education, purchase of essential commodities like milk, vegetables, fruits, medical & electricity bill etc. What is the use of having a household budget? The household budget offers many advantages as follows: - Through household budgeting you can exercise control over money. Otherwise money will exercise control over you. - Budgeting helps you to prevent reckless spending. - Above all it helps you to have peace of mind without financial worries. ## **How to prepare the household budget** Just as the Central Government gets assistance of Financial Ministry in preparing the Union Budget, we as family should sit together to prepare the family Budget. This is nothing but an Income/Expenditure statement for a month for the family. ## **2.1 Steps in preparing the family budget.** ### **Step 1. Family Monthly Income:** The various sources of income may be salary, rental income of let out property, interest on bank deposits, returns from other investments etc., All the above sources of income are to be listed separately and this constitutes total monthly income. ### **Step 2. Family Monthly Expenses** The expenses include the house rent, groceries, electricity bill, repayment of all loan(s), school and college fees, medical expenses and insurance premium etc. One should be realistic to account for all expenses. ### **Step 3.** To allocate the income towards various expenses. When the expenses are well within our income there is no deficit. When the expenses exceed the income, there is deficit. There may be some expenses which are essential. Grocery bill is an item of expenditure which cannot be avoided. Some expenses can be avoided and some can be altered. For eg, If children wants to go on a costly vacation trip that can be convinced into buying them new dress/ toys. ### **Step 4. Methods of Allocating Funds** - **Income-Expenses=Savings** - **An old method of allocating funds as per budget is to make few envelops for various heads of expenditure such as house rent, groceries, insurance premium, Repayment of loans etc. Every month, insert the allotted money in those envelops. If any money is left out, it can be used for savings or for discretionary spending. While making payment for an expense, take the money from the appropriate envelops. If money is exhausted postpone further spending to the next month. If any money is left out in an envelop it can be used for the next month.** - **Alternatively, one can prepare the budget in a paper or a notebook. We can allocate the amount for various heads of expenditure. While we spend, the appropriate heads are to be accounted and totalled. One should ensure that the expenses does not exceed the Budget allocation for respective heads.** After all, a household budget is only a document expressing family's thought into action. Its success depends upon one's willingness to adhere to it. Otherwise household budget will not be a successful one. ## **2.2 Tips for preparing a Household budget.** - For one month write down all your expenditure. - Do not change your spending habit. We must analyze our expenditure first and put them into various categories of Expenses. Doing this will help you to understand whether you are spending it right or not. If you are able to avoid any unnecessary expenditure, it will help you to save money. - Avoid taking Loans unless there is actual requirement. Save Electricity and thereby reduce Electricity Bills by switching off all electrical appliances at your House. Pay utility bills on time before the due date so that you can save late payment fees. If you are tempted to buy an item which is not in your mind buying, try postpone the same for 24 to 48 hours and if you still feel the urge then you may buy them - Involve all family members for analysis and compromises. All members of the family must be involved at the time of preparation of budget. If this is done, there is a commitment from the family. Children must also be involved in every manner possible. It is a good idea to engage them in discussion at the time of purchasing any goods or household articles since they get an opportunity to take part in decision making and would also help them in future. - Make budgeting a participative affair. Encourage participation & discussion among the family members. Every member's view should be analysed. Head of the family to reject any member view with reasoning. It helps the family to be cohesive and committed. - Budgeting is not confined to spending alone. Through household budgeting, you allocate your income to various expenditures. In case your expenditure exceeds your income, what will you do? In those cases you should find out ways and means to increase your income which matches your expenditure or reduce your unnecessary expenditure. - Live your life. Don't attempt to copy others. You spend your earnings by choice. You buy those things that is absolutely necessary for you and which has value for money. Don't buy something just because your neighbor or friend has bought it. - Don't try to be rigid. Budgeting provides a macro plan for your life. Instead of applying rigidity, try to be flexible. For example, the thread that is used to fly the kite does not prevent the kite from flying but the thread give the kite to fly within certain boundaries or limits. Also remember that a kite cannot fly without a thread. ## **3. Personal Budget** You may get money from number of people - Father, Mother, Grand Parents etc and you may also get these at different time periods. Your father may give on a weekly basis, and mother daily, your grand parents may give you only during special occasions like your birthday or festivals. Similarly you may spend the money in different ways, like buying, snacks or you may end up paying for stationery items, books, etc. Budget will help you plan and balance money received and money spent. Any money that is left after your expenses is the savings that you are able to create. This savings is the key element which enables you to fulfill your financial goals. There is a difference between good budgeting skills and making and keeping a budget. By creating a budget you can decide on how you will use your money. Adhereing to a budget requires lot of effort and discipline. Being a good money manager will help you achieve your goals. As mentioned earlier, it may not be easy to adhere to a budget, but by practice over a period of time we will become disciplined. To improve our budget control we must review periodically. A budget review helps us to identify deviation of any and also reaffirms the current status. ## **3.1 Analysis of Budget Deviation.** Analyse and focus on expenses which went beyond our control and where we have exceeded our budget. These expenses need to be further classified into: - Discretionary expense - Non-Discretionary expense Discretionary expense is an expense where we can have better control and Non-Discretionary is an expense which cannot be controlled by us. One example of Non-Discretionary expense is a medical emergency. We never know when we fall sick, and some times it could be serious and we may end up spending a lot of money. You have no control over this, and we cannot do anything about it. Discretionary expenses are those where we have absolute control over the expenses. For example, we have budgeted to spend only 50/- on biscuits and when we go to shop we see a huge sign board saying buy 4 for ₹60/- we get easily attracted and spend 60/- to get more biscuits. It will so happen that we may not be able to eat what we bought and we take back home to put in Freezer and forget it. We could have gone ahead and purchased one ice cream as the current needs are fulfilled. Thus, it is important we analyze every expense that exceeds our Budget, if they are discretionary in nature, we must slowly establish control over these expenses. Over period of time, we learn to control our discretionary expenses and start managing our expenses as planned. ## **Summary:** - Make budgets to achieve financial goals - Budgets help in balancing between money received and money spent - To improve budget control one must review every month - Expenses are classified into discretionary and non discretionary expense. ## **Self Test Questions** ### **I. Choose the Correct Answer.** 1. A household budget is a ______ plan - a) Personal - b) Family - c) Financial 2. Budgeting helps you to prevent reckless ______ - a) Spending - b) Income - c) Saving 3. Making budget a ______ affair - a) Personal - b) Participative - c) Non-Participative 4. ______ is an expense where we can have better control - a) Non-Discretionary - b) Saving - c) Discretionary 5. By creatiy a ______ you can decide on how you will use your money - a) Budget - b) Chart - c) Diagram ### **II. Fill in the Blanks.** 1. One of the critical ______ activity to achieve the financial goal is make ______ for your expenses. 2. A ______ budget is your financial plan in which you allocate the family income towards various expenses and savings. 3. ______ is the key element which enables you to fulfill your financial goals. 4. To improve our budget control we must do ______ every month 5. Creating a budget will help you plan and balance between ______ and ______ money ### **III. Match the following.** 1. Household Budget - Income / Expenditure Statement for 2 months 2. Family Budget - Expense that cannot be controlled 3. No deficit - Review every month 4. Non-Discretionary - Exercise control over money 5. Budget Control - Expense within our income ### **IV. True or False.** 1. A budget enables you to become aware of how money comes in and where it is spent. 2. By creating a budget you can decide on how you will use your money 3. Discretionary expense is an expense where we cannot have better control 4. It is not advisable to involve all members of the family at the time of preparation of budget. 5. Savings is any money left after your Expenditure ### **V. Answer the following in one word or in a sentence.** 1. What is a Budget? 2. What is Household Budgeting? 3. Give Examples for Discretionary & Non Discretionary Expenses? 4. What is Savings? 5. What is Budget Review? When is it required? ### **VI. Answer the following briefly.** 1. Differentiate between Discretionary & Non-Discretionary Expenses? 2. What is Personal Budget? In your opinion, how one can adhere to his Budget? 3. Define: - a) Savings - b) Income - c) Expenditure 4. What are the advantages of a Household Budget? ### **VII. Answer in detail.** 1. What are the Tips for Preparing a Household Budget? 2. Being a good money manager will help you achieve your goals on time. Explain. ## **Revision – TEST PAPER I** ### **I. Answer the following briefly.** 1. Write short notes on the following - a) Barter system - b) Symbolic money 2. Write short notes on Trade. 3. "Money should not be easily reproduced by people”. Why? 4. Distinguish between direct tax and indirect tax. 5. What do you mean by rule of 72? ### **II. Answer in detail.** 1. Describe the history of money. 2. What are the steps in financial planning? Explain. 3. What type of expenses are controllable? Why? ### **III. Crossword puzzle** | | | | | | |---|---|---|---|---| | | | **1** | | | | | **7** | | | | | | | **2** | | | | | | | **4** | | | | | **5** | | | | | | | | | | | | | **3** | | | | **6** | | | **8** | **Down:** 1. Written mandate to the banker to pay money (6 alphabets) 2. The first bank started in India was Bank of (6 alphabets) 3. We deposit ______ in the bank. (4 alphabets) 4. Making two parallel lines in the top left corner of a cheque is called (8 alphabets) **Across (left to right):** 5. This kind of banking is online. (10 alphabets) 6. This type of bank account is preferred by most of the people in India. (7 alphabets) 7. This type of deposit gives more interest. (5 alphabets) 8. This card is used to withdraw money from computerized machines. (3 alphabets) ## **Revision – TEST PAPER II** ### **I. Answer the following briefly** 1. What is goal setting? 2. Write short note on implementing the plan of action. ### **II. Answer in detail.** 1. Explain modern currencies used in different countries. 2. Describe the three key roles of money? 3. What do you understand by the term “pay yourself first"? Explain. 4. What are the different types of bank accounts which are available? ### **III. Crossword puzzle** | | | | | | |---|---|---|---|---| | | | **1** | | | | | **6** | | | | | | | **2** | | | | | | | **3** | | | | | **5** | | | | | | | | | | | **7** | | | | **Down:** 1. Currency of Argentina is Argentine ______ (4 letters) 2. Currency of India (5 letters) 3. Fraction of Rupees (5 letters) 4. Paper currency reappeared in (6 letters) **Across (left to right):** 5. Money is the medium of (8 letters) 6. Currency of France (4 letters) 7. This type of currency is popular nowadays (5 letters) ## **IV. Activities** Your friend Mr. Ajay wishes to throw a party for his friends on his Birthday which falls six months later. He has saved Rs.500 from his pocket money every month, so that he can celebrate his birthday grandly with Rs.3000, Have a look at the Budget to achieve his goal. **Budget for the party:** | | | |---|---| | **Cake** | **700 (Cake bought at Hot Breads)** | | **Snacks** | **650 (Lays, Chips, Bingo, Kurkure, etc)** | | **Cool drinks** | **400 (1Ltr, 2Ltr Pepsi, Coke,7UP, Frooti, etc)** | | **Decorations** | **500 (Decorations bought + Self made)** | | **Arrangements for games** | | | **& Prices** | **250** | | **Return gifts**| **600** | | **Total** | **3100** | He wishes to buy a video game for himself, if he can save some money. Ajay come to you for help to save some money for to purchase video game you lend your expertise advising him to analyze his plan. Create another Economical plan. Redraft the Budget for Ajay's Birthday Party. ## **ANSWER KEY** | **Unit**| **I** | **II** | **III** | **IV** | **V** | |---|---|---|---|---|---| | **Unit 1** | 1. Barter system 2. China 3. Lydians 4. Precious metals<br>5.Medium of exchange | 1. Money 2. Salt 3. Bronze Age 4. Symbolic 5. Minting<br>6. Swedish Stockholm Bank | 1. Butter 2. Snails 3. Wampum 4. Precious metal<br>5. Bronze in the shape of tools and shells. | 1. Barter system 2. Coins 3. Paper Money 4. Bank Notes<br>5. Bronze 2. Wampum 3. China 4. Barter 5. Money 6.1ndia 7. Minting 8. Rice | | | **Unit2** | 1. Survival 2. More skilled 3. Limited 4. Hard to carry 5. 5000 BC | 1. Money 2. Medium of exchange 3. Furs 4. Currency | Unit of exchange 5. Euro | 1. Division of labour 2. Good at hunting 3. A basic item used by everyone in the past 4. Paise 5. Surplus beyond the personal need | 1. True 2. True 3. False 4. True 5. False | | **Unit3** | 1. It must be readily acceptable 2. Decrease over time <br>3. Relatively scarce 4. Divisible into usable quantities | 1. Durable 2. Stored 3. Divisible 4.Trading | 1. Standard of value 2. Readily acceptable 3. Long lasting <br>4. Difficult to produce in abundance 5. Usable quantities | 1. False 2. True 3. True 4. True | | | **Unit4** | 1. Plan 2. Money 3. An ongoing process 4.Want 5. Needs | 1. Financial planning 2. Time and Money 3. Quality 4. Destination 5. Analysing | 1. Direction to plan of action 2. Basics of life 3. Increases the quality of life 4. Telling the truth 5. Matching resources with goals | 1. True 2. True 3. True 4. False 5. False | 1. Setting goals 2. Analyse information 3. Create a plan 4.1mplementing the plan 5. Monitor and modify the plan | | **Unit5** | 1. Cash 2. Increase 3. Net Pay 4. Taxes 5. Specific 6. Wants 7. Money | 1. Three 2. Modify 3. Value 4. Needs 5. Specific 6. Wants 7. Money | 1. Gross 2. Income 3. Direct tax and Indirect tax 4. Deductions allowed 5.1ncome | 1. True 2. False 3. True | 1. Expenses 2. Fixed expenses 3. Pay yourself first 4. Variable expenses 5. Savings | | **Unit6** | 1. Increase in wealth 2. Fees charged on income by the government. 3. Take home pay 4. Subtraction from income 5. Life blood of business | 1. Fixed and Variable 2. Savings 3. Incomes and Expenses 4. Pay yourself first | 1. Money going out 2. No change in total amount 3. Change in amount 4. Handling money coming in and going out 5. Setting aside money | 1. True 2. True 3. False 4. True 5. False | | | **Unit7** | 1. Interest 2. Loan 3. Borrower 4. Account 5. Both cash and cheque | 1. Deposit and withdraw 2. Interest 3. Cash 4. Internet banking 5. Investment 6. Fixed 7. Money | 1. Internet banking 2. Cash withdrawal 3. Investments at periodic intervals 4. Written mandate to make payments 5. Cash deposits in banks | 1. True 2. False 3. True 4. True 5. False | | | **Unit8** | 1. Rs. 8575 2.12 years 3. Principal amount and interest 4. Interest on principal and interest earned already | 1. Disposable 2. Simple and Compound 3. 1,21,000 4.12% | 1. Doubling period 2. Interest on principal only 3. Interest on principal and interest earned already 4. Savings before spending 5. Savings after consumptions | 1. False 2. False 3. False 4. True 5. True | 1. Future 2. Savings 3. Simple 4. Doubling 5. Interest | ## **Revision - Test Paper I** | | | | |---|---|---| | **III** | 1. Cheque 2. Bengal 3. Cash 4. Crossing 5. Electronic 6. Savings 7. Fixed 8. ATM | | ## **Revision - Test Paper II** | | | | |---|---|---| | **III** | 1. Peso 2. Rupee 3. Paise 4. Europe 5. Exchange 6. Euro 7. Paper | |