BUDGET (SPENDING PLAN) - Part I

Having a budget relates to BRAC -- because a budget enables you to effectively manage your money.  And if you are managing your money well and don't have a lot of debt, then you are more likely to have a good credit score.  Employers often use resources like your credit score to determine if they will hire you.  The rationale is that if you make good personal decisions, then you are more likely to make good decisions at work and be a valuable employee. 

A budget is simply a way to create a plan to reach your financial goals. Some people find it overwhelming to look at their finances, but by looking at all your financial obligations, you can gain insight as to how you should use your money. Along the way, you may have to adjust your plan until it works to help you reach your goals.  And when your goals are achieved, you can then create a new plan for new goals. To develop a spending plan, follow these steps:

Identify & Write Down Short vs. Long Term Goals

Short-term goals are typically objectives you are trying to reach within a 6-12 month time period. Examples of these are going on a family vacation, replacing a water heater, or buying a car.

Long terms goals are often big ticket items and may be related to certain life-events, such as saving for a college education for yourself or your children, a wedding or retirement. 

• Write down your financial goals on the Goals Worksheet (PDF) under Printable Guides on the right.

Review Monthly Income Sources

To determine your monthly income, calculate the total the amount of money you receive from various sources, which could include salary (wages, bonuses), dividends and interest, cash gifts, and other income - such as unemployment or social security income.

The total amount of money you have before taxes and other deductions are taken out is called gross income.  If your income changes from month to month, use an average of your income over at least six months to estimate your monthly gross income, which should be allocated accordingly:

• Foundation (every day living) expenses = 45%
• Future expenses = 15%
• Entertainment expenses = 15%
• Income tax = 25%

Source: Thakor, M., & Kedar, S. (1997). A modern girl's guide to personal finance. Avon, MA: Adams Media.

Taxes & Deductions

If you earn wages, your gross income is not always the same amount of money you receive in your paycheck.  This is because there may be deductions, such as Insurance (medical, dental, vision, prescription, long-term disability), and health care and child care spending accounts.  Some of these are pre-tax and others are taxable. 

Mandatory deductions are deducted from your net income, such as federal, state local, and FICA (Social Security & Medicare) tax. If you must pay these taxes on your own as an independent contractor or business owner, it's best to remove them from your paycheck immediately so you are not tempted to spend this money and then possibly owe the money to the federal or state tax agencies. For more on taxes, see the Tax module.

Next: Spending Plan Continued

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Source: Thakor, M., & Kedar, S. (1997). A modern girl's guide to personal finance. Avon, MA: Adams Media.

This site is brought to you by Towson University's Financial Services, DECO EEOL and the Maryland Coalition for Financial Literacy with a grant from the BRAC Higher Education Investment Fund, administered by the Maryland Higher Education Commission.