Hands on Banking Money Management Tools 1 Budgeting and Savings The Hands on Banking program is a free public service provided by Wells Fargo. You may also access the program anytime at www.handsonbanking.org & www.elfuturoentusmanos.org
Contents Be a Better Saver...1 The Basics...1 The Power of Interest...1 How to Build Your Saving Account...3 Control Your Finances with a Budget...4 The Basics...4 Key Concepts of a Budget...4 Personal Budget Exercise...6 How to make sure monthly income can cover your monthly expenses!...7 How to Use Your Transaction Register...8 Glossary... 10
Page #1 MONEY MANAGEMENT TOOLS Be a Better Saver The Basics A. Savings is the first step of good money management. B. Reserve savings every time you get paid or receive extra money from tax returns, bonuses or gifts. C. The amount of interest you earn depends on the interest rate, how long you keep the money in the account, and how the financial institution pays interest D. Compounding is a powerful way to make your money grow faster. E. The higher the APY, the more interest you receive. F. Savings is an investment in yourself and your future. The Power of Interest A. If you start saving your money in an interest-earning account, like a savings account at a bank, the amount of interest you ll earn depends on three factors. o Interest rate the higher the interest rate, the more your money grows. o Time = Term how long you keep the money in the account will affect how your money grows. The more time your money has to grow, the better! o Interest payments how your bank pays you interest is very important. When you re out shopping for a savings account, here s a quick way to determine which account will pay you the most. Simple interest Your money only earns interest on the principal o The amount of money you originally deposited. Compound interest Compound interest allows you to earn interest on the principland on the amount of interest earned over time. Depending on the account, the interest may be compounded daily, monthly, or quarterly (every 3 months). Each time you re paid interest on the new, total amount you have in your account. If you remove money from your account prior to the posting date, you will not receive the interest accrued. Almost all banks compound interest.
Page #2 Annual Percentage Yield (APY) The rate of return on an investment, such as a deposit in an interest-bearing savings account, for a one year period. The higher the APY percentage, the more interest you ll receive. Is Earned Interest taxable? o Yes. The interest you earn in your bank accounts is considered income, so it is taxable. o The bank will send you a 1099 INT form at the end of the year if the interest amount earned is $10 or more. 1. Some financial institutions will only send a 1099 INT if a person earns $150 or more. o You must report this income with your taxes if you receive this form. My Bank U.S.A. 10300 49 th Street North Clearwater, FL 33762 xx-xxxxx 200.00 John Smith 0.00 123 Main Street Any Town, Florida 33762 xx-xxxxx
A.Make savings automatic. Project Prosper Budgeting and Savings Page #3 How to Build Your Saving Account 1. Put a portion of every paycheck you receive into your savings account (for example 2%-10% of your paycheck). 2. Reserve money for savings at the beginning of each month, rather than waiting to see what s left at the end. 3. If you receive any extra money, put it into savings. This extra money could be from: Tax refund A raise or bonus A gift If you have paid off a loan, keep making the monthly payments to yourself, in your own savings account! B. Pay your bills on time. 1. When you pay your bills on time, you avoid: Late fees Disconnection of (and re-connection fees for) phone, electricity, or other services The cost of eviction Repossession of cars or other items Bill collectors C. Avoid check-cashing stores. 1. At a cost of $10 or more for each check you cash, this can add up to several hundred dollars per year. Consider opening a checking account at a bank instead. D. Save for retirement. 1. If you work for a company that has a retirement savings plan, like a 401k, participate! 2. If you re self-employed, set up a retirement savings account of your own. Talk to a customer service representative at your financial institution about your options. IRA Account Roth IRA Account
Page #4 Control Your Finances with a Budget A. The Basics 1. A budget can help you maintain control of your money! 2. A budget is like a map. If you wanted to drive to California you would need a good map. Our budget maps help us make good choices of what roads to take towards our financial success and independence. 3. A budget can help you live within your means by helping you set aside enough to pay your bills, have some savings for emergencies, and some money left over in your pocket every month. B. Key Concepts of a Budget As you begin to create your budget, the main thing to remember is: Budget = Income vs. Expenses You write down, on average, how much money comes in (income) during a month and then decide how to spend it. 1. What is the difference between Gross Income and Net Income? o Gross income is the total amount you earn and Net income is the amount you take-home after taxes have been deducted. o Always base your budget on your Net Income (take-home pay). 2. Expenses o Expenses are your monthly bills and whatever you spend money on throughout the month or year.
Page #5 3. There are three types of expenses. o Fixed expenses: 1. Regular amounts that generally don t change much. 2. Monthly expenses like rent or car payments. 3. Bills you receive less often, like car registration or insurance. o Flexible expenses: 4. Occur on a regular basis and are also for necessities. 5. You have more control over how much you spend. 6. For example, you can control how much you spend on groceries or how many long distance phone calls you make in a month. o Discretionary expenses: 7. Money you choose to spend, but don t necessarily have to spend. 8. Could include clothes, movies, and dining out. 9. Savings is a discretionary expense it's your responsibility to decide how much of your money you re going to set aside for your future. 4. How should you track your spending? Many consumers hear the word Budget and think it is a bad word that means they are not allowed to spend money. However budget is a good word and a good habit to start. By budgeting you always know how much money you have to spend and how much money you have to save. Create a budget: o To get a clear picture of your budget, create a spending diary for a month or two. o Save your receipts and write down the items and amounts for everything you spend. o Consider your needs vs. your wants Determine whether you re buying products or services you really need. Give some thought to budget items on which you could spend less. Be Honest with your Spending!
Page #6 Personal Budget Exercise Project Prosper Personal Budget Worksheet Monthly Income (Net) $ Rent/Mortgage $ Electricity/Utilities $ Groceries/Food $ Cell Phone $ Car Loan $ Car Insurance $ Gas/Transportation (public) $ Savings $ Other $ Other $ Other $ Other $ Remainder of income $
Page #7 5. How to make sure monthly income can cover your monthly expenses! It's important to make your monthly income last as long as possible, so you'll need to pay things in a specific order. Remember, paying bills late can seriously damage your future ability to borrow. If you begin to earn more, increase the amount you save as much as you can. What Should I Pay First? 1. Pay your monthly bills. Always pay your monthly bills first! There are many potential penalties if you pay late, such as late fees, losing possession of things you ve bought on credit, even being evicted from your home! 2. Set aside the money you ll need for your weekly and day-to-day expenses. Planning for these expenses, like groceries, bus fare, gasoline, can help you track where your money is being spent. 3. Put money into savings. Try to build two months of take-home pay for an unexpected financial emergency. 4. Set aside money for larger expenses you know are coming. Reserve money for larger expenses you know are coming, such as car repairs or appliances. This emergency fund can protect you when you have a large unexpected expense. 5. Reserve money for your major future goals. These goals could include a house, a car, college for your kids, or even world travel. When you use a budget, you can dream big, because anything is possible! Paying bills late can seriously damage your future ability to borrow. If you begin to earn more, increase the amount you save as much as you can.
How to Use Your Transaction Register Project Prosper Budgeting and Savings Page #8 Here is a sample transaction register: A. This column is used to calculate the current balance in the account by adding each deposit and subtracting each withdrawal. B. This is the number of the check. C. This column is used to record the date the check was written or the transaction was. D. This is the name of the payee, that is the person or company who was paid. E. Once a month, you ll use this column to mark each transaction that appears on your monthly account statement. This will help you to ensure that your records and the bank s records match. F. This is the amount of the check or transaction G. Use this line to briefly describe the transaction. This can be a helpful reminder of what you purchased or why you received funds. H. This is the amount of your deposit. Key Points:
Page #9 To record a check you ve written, fill in the check number and date. Fill in the payee and, on the line below, what the payment is for, like rent or clothing. Then subtract the amount of the check from your current balance. Now enter a check deposit. Fill in the date and the amount of the deposit, the name of the person or business that wrote the check, and, on the line below, what it was for. Then add the check amount to your balance. To record a direct deposit of a paycheck, just enter the date of the direct deposit, and the amount, and add it to your balance. When you record a withdrawal made at an ATM, record the date and the amount of the withdrawal. Be sure to double-check the date and amount on the receipt you saved. To record a debit card withdrawal, follow the same steps as you would for an ATM withdrawal. Make a habit of writing your debit card purchases in your register right away so you don t forget. Don t forget to record all of your transactions, not just checks. Be sure to include: Deposits ATM withdrawals Debit card purchases Electronic funds transfers Interest payments Bank fees What should you do if find there's not enough income to cover expenses? 1. After writing your budget, you may find that there s not enough money to go around. Since your fixed expenses may be difficult to change, look for ways to decrease your flexible and discretionary expenses and/or, increase your income. 2. Always call your account representatives of your bills, and to request extensions and/or negotiate payments. 3. Most people can t afford everything they want to buy, so they have to make tradeoffs. a. Making tradeoffs may mean sacrificing things or buying something less expensive, so you can afford things that are valuable to you. b. Tradeoffs may also relate to how you spend your time. To make more money at your job, you may have to work more hours.
Page #10 1099 INT Form Glossary Tax form from your financial institution that explains the amount of the earned interest income that must be filed for tax purposes. Annual Percentage Yield (APY) The rate of return on an investment, such as a deposit in an interest-bearing savings account, for a one year period. Compound interest When a financial institution pays you interest not only on your initial principal (the amount you originally deposited) but also on the interest your deposit has earned over time. Discretionary expenses The purchase of goods or services which are not essential to the buyer, or are more expensive than necessary. Examples include entertainment and restaurant meals. Earning power The amount of money a person is able to make from his or her work. Fixed expenses For an individual, a fixed cost is an expense that stays the same each month, such as rent or a car payment. For a business, a fixed cost is an expense that does not vary depending on production or sales levels, such as an equipment lease or property tax. Flexible expenses An expense that you can control or adjust, for example, how much you spend on groceries, clothes, or long distance phone calls.
Page #11 Income For an individual, income means the amount of money received during a period of time, including money received in exchange for labor or services, from the sale of goods or property, or as profit from financial investments. For a business, income is revenues (all the money brought in) minus cost of sales, operating expenses, and taxes, over a given period of time. Interest The amount of money paid by a borrower to a lender in exchange for the use of the lender's money for a certain period of time. For example, you earn interest from a bank if you have a savings account and you pay interest to a lender if you have a loan. Interest rate The amount of interest paid per year divided by the principal amount (that is, the amount loaned, deposited, or invested). For example, if you paid $500 in interest per year for a loan of $10,000, the interest rate is 500 divided by 10,000, or five percent (5%). Net income For a business, the amount of money earned after all expenses and taxes. For an individual, total take-home pay after all deductions (taxes, social security, etc.). Also called after tax income or net salary. Principal The original amount of money that was deposited into a bank account, or loaned by a financial institution. Reconcile The process used to determine if the balance in your account register matches the balance reported by the bank on your account statement. Also called balancing your account. Repossess When a lender or seller takes back property or collateral from the borrower or buyer, usually because the buyer has failed to make required debt payments on time, or has failed to meet other conditions of the loan agreement.
Page #12 Simple interest Interest that is calculated only on the principal sum, that is, the amount of money that was originally deposited. (By contrast, compound interest is when a financial institution pays you interest not only on your initial principal but also on the interest your deposit has earned over time.) Budget Also known as a budget, a method of tracking your monthly income and expenses. Take-home pay For a business, the amount of money earned after all expenses and taxes. For an individual, total take-home pay after all deductions (taxes, social security, etc.). Also called after tax income or net salary. Transaction register A register that allows you to keep accurate records of your deposits and withdrawals. Use your check and/or savings register to record every deposit and withdrawal you make.