Managing Income & Expenses: Getting from here to there

Transcription

1 Journey to Financial Security Managing Income & Expenses: Getting from here to there REFERENCE GUIDE

2 Journey to Financial Security Managing Income and Expenses: Getting from here to there One of the greatest satisfactions in life is having a sense of control over your finances. Through careful planning and use of money management techniques that anyone can learn, you can feel more confident about your ability to live within your means, handle emergencies, reduce debt, and save for the future. When you gain control of your financial situation, you will find that your bills are paid on time, more money is saved than you ever thought possible, your goals are achieved, and the stress in your life is reduced. Why let your money control you, when you can make the changes and adjustments necessary to gain control of your money? 2009 Money Management International, all rights reserved. 07_1043_ MONEY MANAGEMENT INTERNATIONAL CONSUMER CREDIT COUNSELING SERVICES

3 Managing Income & Expenses: Getting from here to there REFERENCE GUIDE 4 Control Your Financial Situation 4 Calculate Net Worth 6 Create a Budget 7 Track & Document Monthly Expenses 8 How Much Money Do You Think You Spend? 9 Compare Income to Expenses 11 Manage Cash Flow 12 Monitor Your Progress 13 Comparison Shopping 15 Worksheets & Forms 16 Income Worksheet 17 Credit Card & Money Tracking Sheets 18 Record of Daily Expenditures 20 Expense Worksheet 22 Insurance: Protect your assets 26 Notes 27 Journey to Financial Security Managing Income & Expenses: Your travel log 3

4 Control Your Financial Situation The process of managing your income and expenses is a learned financial skill. While you may not have as much control over your income as you would like, you can control most of your expenses just by the choices you make. On your journey to financial security the process of controlling your money begins with calculating your net worth to help you understand your current financial situation. The next step involves creating a budget that estimates how much money is coming in and where it is being spent over a 12-month period. Whether you use personal finance software or simply use a pencil and paper, the process of creating a budget is basically the same: record monthly income, track and document monthly expenses, compare income to expenses, and, finally, make adjustments to balance the cash flow. With a budget, you can make informed choices about spending and saving your money. Calculate Net Worth A net worth statement, also called a balance sheet, collects information about what you own (assets) and what you owe (liabilities). Assets are defined as physical property (for example, a home or a car), monetary property (such as mutual funds or certificates of deposit), or intangible rights (for instance, money owed to you). Liabilities are the debts that you owe, such as a mortgage, an auto loan, credit card debt, or other types of loans. Choose one day to record the value of your assets and liabilities, and fill in that date in the space provided. On page 5, you will find a worksheet to help you calculate your net worth. A positive net worth indicates that your assets are larger than your liabilities. A negative net worth indicates that your liabilities are larger than your assets. If this is the first time you have calculated your net worth, consider it as a benchmark that can be compared to your net worth next year and in the future. Have the financial decisions you made throughout the year had a positive or negative effect on your net worth? Try to increase your net worth every year. 4 MONEY MANAGEMENT INTERNATIONAL CONSUMER CREDIT COUNSELING SERVICES

5 Calculate Your Net Worth Today's Date: Assets Liabilities Cash and equivalents Cash Checking/Savings Account Cash Value: Life Insurance and Annuities Other Real property (mkt. value) Real Estate Car Personal Property Investments Certificates of Deposit Bonds Mutual Funds Stocks Others Retirement accounts IRA Pension Fund (vested) Other Other (eg., business interests) Mortgage (principal only) Other debt Car Loans Home Improvement Loans Student Loans Other Loans Credit Cards Taxes owed Federal State and Local Contractual obligations eg., Leases, Tuition TOTAL LIABILITIES CALCULATE YOUR NET WORTH ASSETS minus ( ) LIABILITIES equals (=) TOTAL ASSETS NET WORTH The Outcome A positive net worth indicates that your assets are larger than your liabilities. A negative net worth indicates that your liabilities are larger than your assets. TIP: If this is the first time you have calculated your net worth, consider it as a benchmark that can be compared to your net worth next year, and in the future. Have the financial decisions you made throughout the year had a positive or negative effect on your net worth? Try to increase your net worth every year. Managing Income & Expenses: Your travel log 5

6 Create a Budget Begin with Income On pages 16 to 21 you will find some budgeting worksheets that use the Cash Flow Method of money management. This method requires income and expense projections over a period of time that can be compared to actual income and expenses. This method provides a detailed look at monthto-month balances and allows you to compare your actual spending to projected spending across all expense categories. Beginning with the Income Worksheet on page 16, record all sources of income. You will find spaces to record both your gross income and net income. Gross Income is the total amount you actually earn. Net Income, often referred to as take home pay, is what is left after taxes, FICA, and other withholdings have been deducted. Complete the Income Worksheet on page 16, and transfer the number from line 7, net income, to the Expense Worksheet on page 20 at the bottom of the left column. If your income varies from month to month, average the last 12 months of income and use that number as a basis for your budget. In months when your income is more than the average, save the extra money for the months when your income is less than average. 6 MONEY MANAGEMENT INTERNATIONAL CONSUMER CREDIT COUNSELING SERVICES

7 Track & Document Monthly Expenses You probably have a good idea of where most of your money goes each month housing, food, utilities, and transportation - but can you account for every dollar? The purpose of tracking and documenting your monthly expenses is to help you answer that question and at the same time ensure that you create an accurate budgeting tool. Take a look at the Expense Worksheet, and you will notice that the expenses are broken down into three broad categories: Fixed Expenses: Expenses that are typically the same each month, such as rent or mortgage, car payments, childcare, credit card payments, and savings. Fixed expenses are generally the most difficult to change. Variable Expenses: Expenses that occur each month, but the amounts you spend on them vary from month to month. Examples include food, clothing, and utilities. Variable expenses generally have the greatest degree of flexibility. Periodic Expenses: Expenses that occur annually, semi-annually, quarterly, or seasonally. Such expenses include car registration, auto or household maintenance, gifts, taxes, and insurance. Record Fixed Expenses Fixed expenses should be the easiest to document. List the amount of each of your fixed expenses on the appropriate lines. If you need a different category from those listed, cross out the ones you do not need, and fill in your category name and amount. Track Variable Expenses Variable expenses can often be more difficult to estimate accurately because they differ from month to month. The records you use to track variable expenses, such as checkbook registers and credit card statements, will reflect only a portion of your spending. It is much more difficult to account for the cash you might spend on items like vending machine snacks, gourmet coffees, lottery tickets, or ATM withdrawals. If you find you cannot account for a portion of your income, it may be helpful to track your purchases, no matter how large or small, for a month or two. Tracking expenses involves keeping a record of what you buy. Although this process may seem time-consuming in the beginning, it will make you more aware of your spending habits and perhaps help you understand why you are having trouble saving money or reaching your financial goals. For instance, you may find that you are spending $5 a day on incidentals items that you do not really need. While that may sound like an insignificant number, if you did not spend that money, you would have $1,825 at the end of a year and that is a significant amount. Listed below are various methods that are useful for recording daily spending: Get a receipt for every purchase, then categorize and file them away in envelopes. Total the receipts at the end of the week. Carry a small notebook and write down every expense, or use the Money Tracking Sheet on page 17. Record daily expenses on the Record of Daily Expenditures worksheet on pages Avoid the tendency to delay recording an expense because the actual amount you spent may be forgotten or the entire expenditure may be overlooked. All family members who share the family money and are working together toward family goals should track their expenses as well. The total of the combined expenses at the end of the first week often surprises many people. At the end of the month, you will be able to total expenditures in all categories and transfer those amounts to the Expense Worksheet. By tracking expenses, you will be able to improve the accuracy of the expense estimates and create a realistic budget. Perhaps you already have a good understanding of the amount of money you spend each month on variable expenses. Try the exercise below, How Much Money Do You Think You Spend? After a month of tracking expenses, compare these figures with your actual expenses. Managing Income & Expenses: Your travel log 7

8 How Much Money Do You Think You Spend? List how much you think you spend on the items below: 1. Savings 15. Transportation 2. Food at home 16. Child care 3. Meals on the job 17. Barber/beauty shop 4. School lunches 18. Books/newspapers/magazines 5. Dinners out 19. Movies/sporting events 6. Electricity 20. Parties/clubbing/beverages 7. Gas/heating 21. Cigarettes/tobacco/alcohol 8. Water/sewage/garbage 22. Baby sitters 9. Telephone 23. Hobbies 10. Family clothing 24. Records/book clubs 11. Uniforms 25. Doctors and hospitals 12. Cleaning and laundry 26. Dentists 13. Home cleaning supplies 27. Medicines 14. Gas/oil/lube 28. Other Total: Calculate Periodic Expenses Periodic expenses are easy to forget and may inadvertently be left out of a monthly spending plan. However, many of these expenses are very significant, and it is vital that you plan ahead and include them in your monthly budget. To plan for periodic expenses, look through last year s check registers, receipts, bills, invoices, and credit card statements to find the amount you spent on things that did not fall into fixed and variable expenses. Total all of these periodic expenses. Divide that total amount by 12 to determine an amount that should be saved or set aside each month in order to cover these expenses when they occur. 8 MONEY MANAGEMENT INTERNATIONAL CONSUMER CREDIT COUNSELING SERVICES

9 Compare Income to Expenses Once you have documented all of your expenses, you will be ready to compare your monthly income to your monthly expenses and determine what, if any, changes are necessary to balance your budget. At the bottom of the Expense Worksheet, total all of your actual fixed, variable, and periodic expenditures. That grand total shows you how much money you spend or should set aside each month to cover your expenses. Transfer Net Monthly Income from the Income Worksheet, and subtract Total Expenses from Net Income for each month. A positive number indicates that you have a surplus, or excess income. A negative number indicates a deficit which results when your expenses exceed your income. Now that you have a clearer picture of your financial situation, it is decision-making time. Balance Income and Expenses If you have excess income, ask yourself a few questions: Have I included all my expenses, especially the periodic expenses, such as vacations, taxes, and car and home repairs? Is there money set aside in an emergency fund equal to three to six months of living expenses? Am I paying off my debts aggressively, or am I just paying minimums on my credit card accounts? Do I have money saved for financial goals I have established? Do I have adequate insurance protection? Am I protected from financial consequences in case of an emergency? If your expenses exceed your income, you have three options: increase your monthly income; decrease your monthly expenses; or combine increasing income and decreasing expenses. If increasing your income is not an appropriate solution to eliminating your shortage, then look for ways to decrease your monthly expenses without depriving yourself of things you truly need. Reduce Fixed Expenses Although there are usually fewer opportunities to decrease your fixed expenses than variable expenses, some fixed expenses such as rent/mortgage payments, car/lease payments, and insurance premiums may be reduced through comparison shopping. It may also be possible to reduce your mortgage payment by refinancing and your homeowner s or auto insurance premiums by raising the deductible. While these steps may ultimately reduce your monthly expenses, they can take time to accomplish and could result in additional fees. Therefore, these actions should be fully analyzed before making any decisions. Managing Income & Expenses: Your travel log 9

10 Compare Income to Expenses Decrease Variable Expenses Decreasing your variable expenses may be the easiest and most immediate solution. Review your variable expenses with the intent of reducing the totals of some categories, rather than eliminating entire expense categories. For example, if you need to cut $200 from your budget and you usually spend $100 a month eating out, would you be willing to decrease that to $50, thereby saving $50? Keep looking for places in which you can make similar, small adjustments until you have reduced your expenses by $200. Use these pointers as you review your monthly expenses and continue to evaluate ways to cut back on your expenses: Eat out less often. (The convenience of fast food and restaurants can cost hundreds of dollars a month, thousands of dollars a year.) Curb habits such as the daily routine of buying a $3 cup of coffee, which can add up to over $1,000 a year. Evaluate the importance (and true need) of everyday luxuries such as cable TV, entertainment, nonessential clothing, and designer hair cuts. Comparison shop for household goods and groceries check the unit price or the price per serving. For more ideas on the benefits of comparison shopping, refer to the Comparison Shopping section on pages Evaluate and scrutinize the services for which you pay. For example, do you truly need and use all the options on your telephone contract? Are you overinsured? Are you underinsured? For an in-depth look at insurance needs, refer to Insurance: Protect your assets starting on page 22. Shop with a list, and resist impulsive buying. Compare your expense totals to the recommended budget allocations listed below. There is no single budget formula that is successful for all households. The budget allocation chart below shows the average percentage that families spend on certain budget categories. Of course, your family is not average. Your household will choose to spend money in its own way, to meet its own goals. The amount you spend in each category will vary by person, by geographic region, and income level. The less you earn, the greater the percentage you will spend on basic expenditures. Housing % Food 15 30% Transportation 6 20% Utilities 4 7% Personal Debt 10 20% Clothing 3 10% Miscellaneous 1 4% Savings 5 9% Insurance 4 6% Personal 2 4% Health 2 8% As you make reductions, list them in the adjusted column of the Expense Worksheet. Once you have balanced the equation so that your income covers your monthly expenses, live within those guidelines and continue monitoring your progress monthly until you have control of your expenses. The secret to successful budgeting is to develop a realistic plan that is workable for your family and its unique circumstances, and then follow it. 10 MONEY MANAGEMENT INTERNATIONAL CONSUMER CREDIT COUNSELING SERVICES

11 Manage Cash Flow Once you have enough money to cover your expenses, you may still find it difficult to pay your bills on time if due dates do not coincide with paydays. However, there are several tools available in addition to the cash flow method discussed earlier. These methods help you to manage the flow of income and expenses in different ways, including: the envelope method, which allows you to set cash aside for your various expenses in labeled envelopes; the calendar method, which allows you to record when income arrives and when bills are due; and personal financial software, which provides electronic tools to manage your finances. Envelope Method This tool is useful if you pay your bills with cash each month. Make an envelope for each expense category (rent, utilities, food, etc.). Label the envelope with the purpose, amount needed, and date due. When you receive income, divide it into amounts to cover the expenses listed on the envelope. Pay bills as soon as you receive them so you will not be tempted to spend the money on something else. If you prefer using a check to pay larger expenses, such as rent, house, or car payments, you can write the check and place it in the appropriate envelope until the payment is due. Any excess income can be applied toward next month s expenses, other expenditures, or placed into a savings/emergency fund. Calendar Method This method utilizes a monthly calendar. Record the income receipt dates and expense due dates on a calendar. It is helpful to use two different color pens when recording this information. This method gives you a visual representation of when you get paid versus when the bills are due. Any excess income can be applied toward the next month s expenses, other expenditures, or placed into a savings/emergency fund. Personal Financial Management Software This method helps you organize income and expenses electronically, produce reports and graphs that compare and analyze data over any time period, and categorize spending to assist with tax preparation. There are many personal finance software products available on the market. Read the Personal Finance Software Review online for product comparisons. Before purchasing, try to sample several software programs to find one that meets the needs of your household. For example, does the software program allow you to access online banking, pay bills online, split bills and expenses when recording data, or meet other criteria important to you? Evaluate whether you have the time and expertise to use the features of the software program. Managing Income & Expenses: Your travel log 11

12 Monitor Your Progress It can take six months to a year to develop a realistic budget. At least once a week, record and document your income and expenses for the current month. Then, evaluate the results. If you constantly overspend in one expense category, you need to change the projected amount for that line. Keep in mind that a budget is designed to help you recognize what you can afford. If you find that you never have money at the end of the month, you may need to consider making some bigger changes. Refer to the budget allocation guideline again, comparing what you spend in these categories with the suggested percentages. For example, if you are spending 35% of your income on transportation, could you consider trading your existing vehicle for a less expensive and more efficient model? It may be time to consider increasing your income with an additional job, overtime on a current job, or a salary increase. Each family member should be included in the budget adjustment process. Take time to discuss individual needs and wants so everyone feels that they are working together and contributing to the solution. Each family member should also be prepared to make a commitment to the established budget without too much focus on the temporary budget adjustments. If you follow a realistic budget, it will become a working tool that will help you take control of your money. A realistic budget will help you: live within your income; spend your money wisely; reach your financial goals; prepare for financial emergencies; and develop intelligent money management habits. Creating a workable budget takes time, but the results are worth the effort. Keep in mind that the method you use to manage your income and expenses is less important than choosing a method and using it consistently. There is no right or wrong method. Find one or combine several methods that are easy to use and provide you with the kind of information you need to make good financial decisions. You will find making your money work for you will give you control of your financial future. 12 MONEY MANAGEMENT INTERNATIONAL CONSUMER CREDIT COUNSELING SERVICES

13 Comparison Shopping Research shows that prices can vary for all types of products; therefore it makes good sense to comparison shop before buying. Comparison shopping is especially beneficial when buying expensive items, items you purchase often, or items where the product quality or prices vary greatly. Through the use of advertisements, catalogs, telephone inquiries, or the Internet, comparison shopping is easy and can save you money. For household goods and groceries: Compare the unit price (the cost per ounce, pound or other unit of measurement that stores are required to post for every product). That s the best way to compare cost, but there s more to the equation than price. For example, by reading the labels of two cartoons of orange juice, you might find that the more expensive brand has 120% of the daily requirement of vitamin C, while the cheaper brand has no added vitamins. If nutrition is a consideration, the more expensive brand may be a better buy. Buying large sizes can often save money. Usually, the unit price is less for larger containers, but not always. Analyze the price each time before purchasing. Look for generic brands or store brands of items where it really doesn t make a difference. For example, most over-the-counter drugs have the same active ingredient and dosage levels, regardless of whether it s a name brand or the store brand. The difference in price, however, can amount to as much as a 50 percent discount. Paper products, dairy products, and canned goods are also good examples of products that are practically identical, whether you buy generic or name brands. If you use coupons, it is important to only use them for items you would ordinarily buy. Also, make sure you compare the price of a product including the discount with the coupon to the brand you normally buy or a generic brand. You might be surprised to find out that the name brand product is still more expensive, even with the coupon. Stock up on items you need when they are on sale. Do not assume that all supermarkets have the same prices. If you have a few chains in your area and you do not know which ones are least expensive, check them all out. Make a list of the ten or so products you buy most often, and do some comparison shopping. Often you will find a huge difference between chains, and, if you can save just five percent, it adds up to hundreds of dollars over the long run. Try to limit or eliminate shopping at the corner convenience store for items that could be purchased less expensively on your weekly supermarket trips. Managing Income & Expenses: Your travel log 13

14 Comparison Shopping (continued) For other types of products and high ticket items: Research before you purchase. Consumer publications give evaluations and comparisons of almost everything you buy. In addition, guarantees, U.S. grades and inspection stamps, government bulletins, magazines and books, and advertising provide information on quality and price. Decide what features are important to you and if they are worth the price. Consider the durability of the product and multiple uses of the product. The best bargain is not always the cheapest item available. Compare prices at three places before buying. The Internet is a good place to begin. Comparison shop by phone. Whether you are looking at a large ticket item or your child s favorite toy, comparison shopping by phone can save time, money and gasoline. Read the labels of items you plan to purchase. Labels provide information required by law for your protection, can give you the facts you need to compare quality and price, and can help you know how to take care of the items you buy. Comparison shopping is not just limited to products that you purchase. Research and compare companies that provide services, such as utilities, telephone, cable, and Internet. Research and compare companies, coverage, and costs for all forms of insurance. Websites for comparison shopping for Consumer Report articles for information on various consumer topics and for comparing brands, prices, and features for information related to food, health, money, product safely and transportation and for new and used-car prices for auto leasing information 14 MONEY MANAGEMENT INTERNATIONAL CONSUMER CREDIT COUNSELING SERVICES

15 Worksheets & Forms Income Worksheet Credit Card & Money Tracking Sheets Record of Daily Expenditures Expense Worksheet To keep a blank master copy of the following worksheets, use photocopies of the forms or download them from and create your own personal financial statements. Managing Income & Expenses: Your travel log 15

16 INCOME WORKSHEET Sources of Paychecks Monthly Gross Earned Income Deductions Federal Income Tax FICA/Retirement Medical Insurance Life Insurance Dental Insurance Co. Stock Purchase Payroll Deduction Saving Union Dues Child Support Other Monthly Net Earned Income Other Monthly Income Additional Periodic Income Total All Monthly Net Income Paycheck 1 Paycheck 2 Paycheck 3 Paycheck 4 Total Notes STEP STEP STEP STEP STEP STEP STEP Sources of Paychecks List all sources of regular earned monthly income of all individuals living in the household involved in the family budget. This should include full-time, part-time, and self-employment income. Monthly Gross Earned Income List the amount of monthly income received before deductions for each earner. If you are paid weekly, figure monthly income by dividing total annual income by 52, and multiplying by If you are paid every other week, figure monthly income by dividing total annual income by 26, and multiplying by This amount will equal an average monthly income. Deductions List all monthly deductions from each source of income. Monthly Net Earned Income Subtract all deductions from the monthly gross earned income to arrive at the monthly net earned income. Other Monthly Income List monthly income from other sources. Remember, this is income that is received on a regular basis even though it may not be from employment. Examples: Temporary Assistance to Needy Families, Alimony, Social Security, Disability Compensation, Industrial Compensations, Annuities, Stock Dividends, Child Support, Rentals, Royalties, Allotments, Boarders, etc. Additional Periodic Income List extra paychecks, bonuses, income tax returns, etc., (divided into monthly amount). Total All Monthly Net Income From All Sources Add Steps 4, 5, and 6 together for the total monthly net income. If total net income from all sources is NOT SUFFICIENT to accomplish your goals, look for ways of revising income and/or the expenses which are deducted from your pay. (examples: federal income tax exemptions, insurance coverage, savings, etc.). 16 MONEY MANAGEMENT INTERNATIONAL CONSUMER CREDIT COUNSELING SERVICES

17 CREDIT CARD TRACKING SHEET MONEY TRACKING SHEET How much do I owe? Using this tracking sheet is the first step in taking control of your money. Make a photocopy of this page and carry it with you to record every credit card charge for the next few weeks. Where did all the money go? This tracking sheet is a handy tool at the beginning of the budgeting process to identify where money is being spent and after you have developed a budget to help monitor expenses. Make a photocopy of this page and carry it with you to record out-of-pocket expenses. Item Charge Item Cost Lunch money for kids $ 5 Soda at work $.75 Managing Income & Expenses: Your travel log 17

18 RECORD OF DAILY EXPENDITURES MONTH YEAR Date st Half Total Variable Fixed Savings Food at Home Meals on Job School Lunches Dinner Out Electricity Gas/Heating Water/Sewage/Garbage Telephone Clothing Uniforms Cleaning and Laundry Home Cleaning Supplies Gas/Oil/Lube Transportation Child Care Grooming Books/Newspaper/ Magazines Movies/Sporting Events Parties/Clubbing/ Beverages Cigarettes/Tobacco/ Alcohol Baby Sitter Hobbies Books/Music/Video Doctor & Hospital Dentist Medicine Periodic Expenses Total DIRECTIONS 1 Gather information about how your money was spent during the past month from your checkbook register, receipts, credit card bills, online statements, and any other financial records you have. This will help you get the most accurate information. 2 If you do not have complete financial records for the past month, begin recording all expenditures for the next several weeks on the Money Tracking Sheet and the Credit Card Tracking Sheet. 18 MONEY MANAGEMENT INTERNATIONAL CONSUMER CREDIT COUNSELING SERVICES

19 RECORD OF DAILY EXPENDITURES MONTH YEAR Date Total for Month Variable Fixed Savings Food at Home Meals on Job School Lunches Dinner Out Electricity Gas/Heating Water/Sewage/Garbage Telephone Clothing Uniforms Cleaning and Laundry Home Cleaning Supplies Gas/Oil/Lube Transportation Child Care Grooming Books/Newspaper/ Magazines Movies/Sporting Events Parties/Clubbing/ Beverages Cigarettes/Tobacco/ Alcohol Baby Sitter Hobbies Books/Music/Video Doctor & Hospital Dentist Medicine Periodic Expenses Total 3 4 Transfer these daily totals to the Record of Daily Expenditures (DE). Complete the Expense Worksheet after you have at least 30 days of expenditure information. Managing Income & Expenses: Your travel log 19

20 EXPENSE WORKSHEET FIXED Rent or Mortgage Payment Home Equity/2nd Mortgage Life/Health Home/Renter's Insurance Auto Insurance Child Support Charitable/Worship Donations Monthly Debt Payments Emergency Fund Savings Savings for Goals Total Fixed Expenses From Record of DE Adjusted 1st Month 2nd Month 3rd Month 4th Month 5th Month Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual VARIABLE Food at Home (Groceries) Meals & Snacks on Job School Lunches Meals Out Electricity Gas/Heating Water/Sewer/Garbage Phone/Long Distance/Cellular Cable/Satellite Internet Charges Gasoline Bus Fares/Parking/Tolls Clothing Uniforms Dry Cleaning/Laundromat Cleaning Supplies Grooming & Personal Items Children's Allowance Baby Sitter School/Tuition/Activities Cigarettes/Tobacco/Alcohol Recreation Newspapers/Magazines Video/Book Hobbies/Lessons Doctor Visits Dentist Medicine Bank Charge/ATM Postage Total Variable Expenses PERIODIC Back to School Car Repairs/Tires Tags/Inspection Gifts - Holiday Appliance Repair Home Maintenance/Repair Total Periodic Expenses TOTAL MONTHLY EXPENSES MONTHLY NET INCOME SURPLUS/DEFICIT INSTRUCTIONS 1 Examine the first column, From Record of DE (Daily Expenditures), and decide if the amounts in each category are the same as the amounts you plan to spend during the next 12 months. 2 Adjust expenses that you think may increase or decrease during this year. Try to anticipate the actual month when purchases will occur. Fill in the appropriate amount each month in the Budget column of the Expense Worksheet. 3 Cross out categories that do not apply, and add new category names if you need additional lines. 4 Purchases that you are planning to make by credit card should be entered by category name. 20 MONEY MANAGEMENT INTERNATIONAL CONSUMER CREDIT COUNSELING SERVICES

21 6th Month 7th Month 8th Month 9th Month 10th Month 11th Month 12th Month Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual Annual Totals For example, clothing to be purchased on a credit card should be listed as Clothing. 5 Total all expenses for one month at the bottom of the worksheet on the Total Monthly Expenses line. 6 Transfer Monthly Net Income amounts from the Income Worksheet. 7 Subtract Expenses from Income, and write down the amount of surplus or deficit for each month. This will give you a picture of how you plan your cash to flow during the next 12 months. Some months may be negative. You may want to revise the plan by shifting spending to another month so that spending will not be greater than income. Managing Income & Expenses: Your travel log 21

22 Insurance: Protect your assets With your net worth statement, you have a clear picture of the value of your assets. Consider the risks you face as you develop a plan to protect your assets. In general, there are three types of risk: loss of personal and real property, income, and monetary assets. For example, loss of property might be due to theft, negligence, or damage from fire or wind. Loss of income might be due to premature death, accident, or illness. The loss of significant monetary assets might be due to liability claims or the cost of health care. To manage risk, people use a variety of techniques. One way is to self-insure by having substantial savings and investments to cover potential losses. Other people avoid or eliminate some risks by being careful about their choices and not engaging in risky behaviors. Still others transfer their risk to an insurance company. Buying insurance is a common way for many families to minimize the severe financial consequences of the potential losses they face. Insurance is a product you buy that you cannot see and hopefully will never use. Unless you are wealthy enough to cover unforeseeable expenses that could result from loss or damage to auto, home, health, or life, you need the protection of insurance. Auto Insurance Auto insurance pays for damages, injuries, and other losses specifically covered by your policy. Today, most states require car owners to purchase auto liability insurance, which covers bodily injury and property damage. If you cause an accident, you may be liable for some or all of the damages. When you finance a car, your lender may require that you also carry collision and comprehensive coverage. Collision, as the name implies, covers your auto when it strikes an object (e.g., a tree or a telephone pole). Comprehensive covers your vehicle against other physical damage that is not covered by collision (e.g., fire or theft). Read your policy carefully to know exactly what it covers. Pay special attention to the exclusions section, which lists the things your policy does not cover. 22 MONEY MANAGEMENT INTERNATIONAL CONSUMER CREDIT COUNSELING SERVICES

23 Homeowner s Insurance Homeowner s insurance may not be mandatory in all situations, but it certainly is important. If you are financing your home, your mortgage lender will require you to have homeowner s insurance. If your house is completely paid for, you still need the protection homeowner s insurance provides you and your family. Replacement cost coverage provides greater protection and costs more than actual cash value coverage. In addition to protecting your home, the typical homeowner s policy covers your personal property, both on and off premises, and liability protection for damage caused by your negligence. Medical payments to third parties and your legal costs incurred as a result of any lawsuits brought against you are also covered. If you lease a house or an apartment, consider renter s insurance. Your landlord probably has coverage, but his insurance covers only the building, not the contents. In the event of a fire or burglary, renter s insurance will cover your personal possessions. It also covers you against liability claims. Health Insurance With the cost of medical care rising every year, health insurance has become a necessity. Having adequate health care coverage not only helps ensure that you will get the care you need, but also helps protect you from the financial devastation a serious illness or injury can cause. Many people obtain health coverage as part of a group, for example, through an employer, professional association, or other organization that offers health coverage to its employees or members. Others may buy individual health coverage directly from an agent or carrier. The type of plan you have and how you obtain it usually determines the benefits that are included, how you access and receive medical care, and what you ll have to pay out of pocket. Health care coverage is especially important for children, helping to pay for routine checkups and immunizations, prescription medicines, hospital stays, and other health services. Many parents are able to add their children as dependents to a group health plan offered through their work or some other association. For some parents, however, group coverage is not an option because it is too expensive or their employer does not offer a health plan. Parents do have other options: No cost or low cost health insurance for children and teens may be available through your state. Medicaid for children is available in all states. Managing Income & Expenses: Your travel log 23

24 Insurance: Protect your assets (continued) Life Insurance The primary purpose of life insurance is to help the people who depend on you financially to maintain their standard of living after you die. When purchasing life insurance, be sure to consider your individual circumstances and the standard of living you want to leave for your dependents. Life insurance is commonly used to pay any debts that you may leave behind such as mortgages, car loans, and credit card debts. Life insurance can create an estate for your heirs. Life insurance is usually a long-term purchase that can cost thousands of dollars. Some types of life insurance have an investment feature while others offer just insurance, and no investment, for a specified term. Term life insurance generally costs less than other types of life insurance. If you do not have anyone depending on you for financial support, you may not need any life insurance, or you may need only enough to cover funeral expenses or financial obligations. Decisions about whether life insurance is needed, the amount of life insurance, and the type of policy are complex and need to be considered carefully. Disability Income Insurance Long-term disability income insurance provides partial income replacement if illness or injury prevents you from working. Many workers fail to calculate the impact of losing their income and do not realize that the likelihood of being disabled is far greater than the chance of premature death. Disability income insurance policies can be evaluated by comparing the amount of coverage, the length of time before benefits begin, the length of time benefits are paid, and other criteria. 24 MONEY MANAGEMENT INTERNATIONAL CONSUMER CREDIT COUNSELING SERVICES

25 Purchasing Insurance Whether you are looking to purchase auto, life, health, or another type of insurance, the buying process is essentially the same. It is important to shop around and make sure that you are getting the right coverage for your needs and the most coverage for your money. You can get a preliminary quote by contacting the insurer or an agent by telephone or online. When it is time to purchase a policy, you may have to fill out an application and, depending on the type of insurance, answer a series of questions. If you are purchasing life or health insurance, you may be asked to take a medical exam. Rates vary widely among companies, so it pays to shop around. The following are some useful tips to help you find the best deal for your money: Decide before shopping what coverages you need. Consider choosing a higher deductible the amount you must pay before the insurance company will pay. Higher deductibles will lower your premium, but remember that you will pay more out of your own pocket if you have a claim. Because rates vary, ask several companies and agents for price quotes. Make sure the comparison quotes you get are for the same coverages. When getting a price quote or applying for insurance, answer questions truthfully. Wrong information could cause you to get an incorrect price quote or could lead to a denial or cancellation of coverage. Ask your agent whether you qualify for any discounts the company may offer. Taking time to shop for insurance can reward you with better prices and better service. One insurance company s rates could be hundreds of dollars lower than another company s for policies with similar coverages. Do not let cost be your only consideration. You should choose companies that provide good customer service and are financially stable. It is also important to buy from licensed insurance agents and companies. Contact your state insurance board to learn more information about insurance companies. Managing Income & Expenses: Your travel log 25

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27 Journey to Financial Security The road to financial security presents numerous turning points, and you will learn that there may be a few detours along the way. Working toward financial security will provide peace of mind and help you handle the inevitable financial bumps in the road. In addition, you will gain confidence in managing your finances. Staying on track takes planning and persistence. Journey to Financial Security is a series of programs to help you improve your financial management skills. MMI recognizes the importance of sound financial management skills and has developed this series of programs to serve as your road map to financial security. Setting Goals and Priorities: Choose your financial destination Goals provide direction as you travel toward your financial destination. Without goals to point you in the right direction, any route is suitable for going nowhere. Managing Income and Expenses: Getting from here to there Wise financial management requires a series of daily choices. With a spending plan, your choices are prioritized to help you stay on track and follow the plan. Writing down a spending plan that forecasts income and expenses is the single most important activity that can help you reach your destination. Building Savings: Ready for the road ahead Every financial journey has some unexpected bumps along the way. To prepare for these bumps, you need to be ready with savings in an emergency cash reserve account. In addition, savings is needed for specific goals. With a saving state of mind, most people can find ways to reach their goals. Creating Wealth: Stocking up for the long haul Few people have the resources to accomplish major goals, such as a down payment for a home, college education, and retirement, without long-term investments. By investing, you will be able to put the power of compounding to work for you and achieve higher rates of return than you can with savings. Risk, diversification, and asset allocation are important concepts to understand for successful investing. Important Papers Reference Guide: Your travel log A key part of managing your financial journey is knowing where you have been. This guide provides you with a comprehensive record detailing the value of your assets and where to find important documents when you need them. Using Credit Wisely: Curves ahead One of the essential tools that can help you reach your financial goals is your credit management. When credit is used wisely, it can be a part of your plan to reach major long-term goals. Used unwisely, overwhelming debt can affect long-term plans. Credit Reports and Credit Scores: Getting the most mileage from credit Your credit report and credit score, when used together, provide an inspection report of your past use of credit. Accurate information in your credit report is the key to obtaining the best credit terms and rates. Keeping Debt Under Control: Avoid detours When your debt is out of control, the road to your financial security may take a detour. Know the warning signs of a credit crisis to avoid overwhelming debt. If you have already been derailed by debt, there are several options available to repay creditors and bypass the debt detour. Managing Income & Expenses: Your travel log 27

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