Contemporary Mathematics

# 6.5Making a Personal Budget

Contemporary Mathematics6.5 Making a Personal Budget

Figure 6.7 Calculating a budget is important to your financial health. (credit: “Budget planning concept on white desk” by Marco Verch Professional Photographer/Flickr, CC BY 2.0)

## Learning Objectives

After completing this section, you should be able to:

1. Create a personal budget with the categories of expenses and income.
2. Apply general guidelines for a budget.

“That doesn’t fit in the budget.”

“We didn’t budget for that.”

“We need to figure out our budget and stick to it.”

A budget is an outline of how money and resources should be spent. Companies have them, individuals have them, your college has one. But do you have one?

Creating a realistic budget is an important step in careful stewardship of your financial health. Designing your budget will help understand the financial priorities you have, and the constraints on your life choices. You want to have enough income to pay not only for the necessities, but also for things that represent your wants, like trips or dinner out. You also may want to save money for large purchases or retirement. You do not want to just get by, and you do not want the problems associated with overdue balances, rising debt, and possibly losing something you have worked hard to obtain.

While creating a budget may seem intimidating at first, coming up with your basic budget outline is the hardest part. Over time, you will adjust not only the numbers, but the categories.

## Creating a Budget

You should view creating a budget as a financial tool that will help you achieve your long-term goals. A budget is an estimation of income and expenses over some period of time. You will be able to track your progress, which will help you to prepare for the future by making smart investment decisions.

There are several budget-creating tools available, such as the apps Good budget and Mint, and Google Sheets. Getting started, though, begins well before you find an app. The following are steps that can be used to create your monthly budget.

1. Track your income and expenses Review your income and expenses for the past 6 months to a year. This will give you an idea of your current habits.
2. Set your income baseline Determine all the sources of income you will have. This income may from paychecks, investments, or freelance work. It even includes child support and gifts. Be sure to use income after taxes. This allows you to determine your maximum expenditures per month.

## Checkpoint

For income that is not steady, such as gig work or freelance work, use the previous 6 to 12 months of income to find an average income from that gig or freelance work. Use this average in the budgeting process.

1. Determine your expenses Review your bills from the past 6 months. You should include mortgage payments or rent, insurance, car payments, utilities, groceries, transportation expenses, personal care, entertainment, and savings. Using your credit card statements and bank statements will help you determine these amounts. Be aware that some of the expenses will not change over time. These are referred to as fixed expenses, like rent, car payments, insurance, internet service, and the like. Other expenses may vary widely from month to month and are appropriately called variable expenses, and include such expenses as gasoline, groceries.

## Checkpoint

Some expenses are yearly, such as insurance or property taxes. Other expanses may be quarterly (four times per year) or semiannual (twice per year). To budget for such bills by month, divide the bill total by the number of months the bill covers.

1. Categorize your expenses These categories may be housing, transportation, or food, for broad categories, or may get more specific, where you categorize car payments, car insurance, and gasoline separately. The categories are your choices. Be sure to account for the cost of maintaining a vehicle or home. The more specific you are, the better you’ll understand your spending needs and habits.
2. Total your monthly income and monthly expenses and compare These values should be compared. If your expenses are higher than your income, then adjustments have to be made. Decisions of what to do with any extra income is part of the planning process also.
3. Make plans for unplanned expenses Ask anyone, an unexpected car repair can ruin a carefully crafted budget. Have a plan for how you can be ready for these random expenses. This often means creating a cushion in your budget.
4. Use your budget to make decisions and adjust for any changes Your budget is a changeable document. Add to it when you wish, refer to it when special purchases are to be made. Keeping your budget up to date helps accommodate changes in income and expenses.

## Video

In this section, we will focus on income and expenses. One of the easiest ways to manage a budget is to create a table, with one column containing income sources, another with income values, a third with expense categories, and a last containing expenses. An example is shown in Table 6.1.

Income Source Amount Expense Amount
Full-time job $3,565 Rent$975
Uber $185 Car Payment$355
TOTAL $3,750 Student Loan$418
Electric $76 Food$400
Gasoline $250 Car Insurance$165
Clothing $100 Entertainment$100

## Example 6.49

### Creating a Budget

Heather has graduated college and currently works as a nurse for a rural medical group. Her net monthly income from that job is $3,765.40. She also works part-time on the weekends, earning another$672.00 per month. Her monthly expenses are rent at $1,050, car payments at$489, student loan payments at $728, car insurance at$139, utilities at $130, clothing at$150, entertainment (going out with friends, Netflix, Amazon Prime, movies) at $300, credit card debt at$200, food at $360, and gasoline at$275. Create her budget in a table, compare the total income to total expenses, and determine how much excess income per month she has or how much she falls short by each month.

1.

1.

### The 50-30-20 Budget Philosophy

It isn’t clear, obvious, or easy to decide how much of your income to allocate to various categories of expenses. Many people pay their bills and then consider all the leftover money to be spending money. However, when developing your own budget, you may want to follow the 50-30-20 budget philosophy, which provides a basic guideline for how your income could be allocated. Fifty percent of your budget is allotted to your needs, 30% of your budget is allotted to pay for your wants, and 20% of your budget is allotted for savings and debt service (paying off your debts).

Knowing what expenses are necessary and what expenses are wants is important, since wants and needs are often confused. The following are necessary expenses that represent basic living requirements and debt services. This list isn’t complete: mortgage/rent, utilities, car, car insurance, health care, groceries, gasoline, child care (for working parents), and minimum debt payments. The 50-30-20 budget philosophy suggests that 50%, or half, your income go to these necessities.

Wants, though, are things you could live without but still wish to have, such as Amazon Prime, restaurant dinners, coffee from Starbucks, vacation trips, and hobby costs. Even a gym membership or that new laptop are wants. Creating the room to afford these wants is important to our mental health. Not budgeting for things we want will negatively impact our quality of life.

The remaining 20% should be set aside, either in retirement funds, stocks, other investments, an emergency fund (recommendations are that an emergency fund have 3 months of income), and perhaps extra spent to pay down debt. This 20% is very useful for addressing those unexpected costs, such as repairs or replacement of items that no longer work. Without budgeting this cushion, any expense that is a surprise can cause us to miss necessary payments.

The list of necessary expenses was not complete. There are other expenses that could be included.

### Necessary Expenses and Expenses that are Wants

For some people, an expense will be necessary while the same expense for someone else will be a want. A good example of this is internet service. Many people consider internet service as a need, especially those who work from home or who are not able to leave their homes. One could also call internet service a need if they have children in school. For others, internet service is a want. If a person’s job doesn’t require them to be online, if they are not in school, if they do not have kids, then internet service can be dropped. There are public options for internet service. One could even use their phone as a hot spot.

Cars often fall into the category of need, but could also fall into the want category, depending on where and how you live. Bikes, public transportation, and walking are all options that could replace a car. This would then remove the cost of gasoline and car insurance.

Another consideration when deciding if an item on your budget is a need or a want is about your choices and priorities. A car is a need for many. But the need for a car is not the same as the need for a specific car. If you choose to buy a car with payments that exceed your budgeted amount for the car, then that car is a want. The amount you exceed the budget now belongs in the want category.

The same can be said for housing. If you want an apartment that costs $1,250 per month, but your budget only allows for an apartment that costs$900, then $350 of the rent is a want. The point of that is to carefully consider if an expense is a need as opposed to a want. When your expenses exceed your income, you may want to change how you budget your income to line up with these guidelines. This may mean cutting back, finding less-expensive living arrangements, finding a less-expensive (and more fuel-efficient) car, or sacrificing some specialty groceries. Using these guidelines keeps your financial life manageable. Better still, they can guide you as you begin your life after graduation. ## Example 6.52 ### Evaluate a Budget Using 50-30-20 model In the example above, after Carol added before school care for her daughter to the budget, her budget was as shown below. Evaluate Carol’s budget using the 50-30-20 budget philosophy. Income Source Amount Expense Amount Job$2,816.00 Rent $700 Child support$320.00 Car Payment $229 Student Loan$250
Car Insurance $119 Utilities$80
Health insurance $225 Clothing$75
Entertainment $200 Food$275
Gasoline $275 Before-school care$252

1.
Recall Heather’s budget from Example 6.49, before she thought of moving. That budget is below. Evaluate Heather’s budget using the 50-30-20 budget philosophy.
Income Source Amount Expense Amount
Nursing $3,765.40 Rent$1,050
Part-time $672.00 Car Payment$489
Student Loan $728 Car Insurance$139
Utilities $130 Clothing$150
Entertainment $300 Credit Card$200
Food $400 Gasoline$250

## Example 6.54

### Using the 50-30-20 Budget Philosophy to Analyze Affordability

Steve is thinking of moving out of his family’s home. He currently works at a full-time job making $18 per hour, which will give him, approximately, a net annual income of$29,180 (working 40 hours per week for 52 weeks per year). He has student debt that he pays off at $218.00 per month, and already owns a car that he pays$162.00 per month for.

1. Apply the 50-30-20 budget philosophy to Steve’s income.
2. If he follows the budget, how much does he have, after paying his car payment and student loan, to spend on necessities.
3. If he follows the budget, how much will he set aside for wants? For savings?
4. Discuss the affordability of moving out, based on Steve’s budget.

Fran wants to take a new job but will have to move to an area with a higher cost of living. With her current income, she can use the 50-30-20 budget philosophy. The new job will have a net pay of $43,700 annually. She will still have to pay her car payment of$295.00, her student loans that cost $264.00 per month, and her outstanding credit card debt, on which she pays$200 per month.
1.
Apply the 50-30-20 budget philosophy to Fran’s new income.
2.
If she follows the budget, how much does she have, after paying her credit card debt, car payment and student loan, to spend on necessities.
3.
If she follows the budget, how much will she set aside for wants? For savings?
4.
Discuss the affordability of changing jobs and moving, based on Fran’s budget.

## Video

26.
What is a budget?
27.
What are necessary expenses?
28.
David gathers his paystubs and bills from the past 6 months. His income, after taxes, is $3,450 per month. His rent, utilities included, is$925. His car payments are $178.54 per month, his car insurance is$129.49 per month, his credit cards cost him $117.00 per month, he spends$195 per month on gas, his food costs are $290 per month. He also spends$21.99 on Amazon prime, $49.99 on his internet bill, and$400 per month going out. Create David’s monthly budget, including totals, based on that information.
29.
Using David’s Budget from Exercise 28, how much income does he have per month after accounting for his expenses?
30.
Apply the 50-30-20 budget philosophy to David’s budget.
31.
Evaluate David’s budget with respect to the 50-30-20 budget philosophy.

## Section 6.5 Exercises

In the following exercises, categorize each expense as a necessary expense or an expense that is a want.
1 .
Rent
2 .
Dinner at a restaurant.
3 .
Car payment
4 .
New game system
5 .
Gym membership
6 .
Electric bill
7 .
Heating bill
8 .
Phone bill
9 .
Netflix
10 .
Student Loan Payment
11 .
Explain how a necessary expense for one person could be a want expense for another person.
12 .
Explain how a necessary expense may be partly a necessary expense and partially a want expense.
In the following exercises, create the budget, including totals and how much the income exceeds or falls short of the expenses, based on the information given.
13 .
Per month: paychecks = $3,680, consulting =$900, Mortgage = $1,198.00, Utilities =$376, Cell phone = $67.50, Car payments =$627.85, Car insurance = $183.50, Student loans =$833, Food = $450, Gasoline =$275, Internet = $69, Dining out =$250, Credit cards = $375, entertainment =$300
14 .
Per month: paychecks = $2,750, child support =$500, Mortgage = $945.50, Utilities =$195, Cell phone = $37.50, Car payments =$298.23, Car insurance = $163.50, Student loans =$438, Food = $250, Gasoline =$175, Internet = $49, Netflix =$15, After school care = $711, Credit cards =$150, entertainment = $150 15 . Per month: paychecks =$4,385, Rent = $1095, Utilities =$165, Cell phone = $67.50, Car payments =$467.35, Car insurance = $243.75, Student loans =$1,150, Food = $325, Gasoline =$260, Internet = $99, Netflix =$15, Amazon = $23, Gym membership =$49, entertainment = $650 16 . Per month: paychecks =$3,460, Gig job = $173, Rent =$895, Utilities = $165, Car payments =$195.80, Car insurance = $123.30, Food =$265, Gasoline = $185, Internet =$39, Hulu = $15, Amazon =$23, Credit cards $97.60, Entertainment =$600
In the following exercises, determine the amount of money that should be allocated to each of the three categories of the 50-30-20 budget philosophy guidelines.
17 .
Referring to Exercise 13: Monthly income = $4,580.00 18 . Referring to Exercise 14: Monthly income =$3,250.00
19 .
Referring to Exercise 15: Monthly income = $4,385.00 20 . Referring to Exercise 16: Monthly income =$3,633.00
In the following exercises, evaluate the given budget with respect to the 50-30-20 budget philosophy guidelines.
21 .
The budget and 50-30-20 rule from exercises 13 and 17.
22 .
The budget and 50-30-20 rule from exercises 14 and 18.
23 .
The budget and 50-30-20 rule from exercises 15 and 19.
24 .
The budget and 50-30-20 rule from exercises 16 and 20.
For the following exercises, Kiera and Logan sit down to make their budget. Kiera works full time as a mental health counselor and sells kids toys on her own. Logan works as a branch manager at a local bank and works part-time at the nearby bar. They collect their financial document to work out their budget. Kiera’s paychecks from her job as a mental health counselor, after taxes and per month, total $3,021. Logan’s paychecks from the bank, after taxes and per month, total$3,827. Kiera’s income from toy sales for the last 3 months were $140,$87, and $475. Logan’s take-home pay from the bartending job for the last 3 months were$540, $310, and$449.
25 .
Determine how much income Kiera and Logan have per month.
26 .
Apply the 50-30-20 budget philosophy to their income.
For the following exercises, Kiera and Logan gather their bills from the last 6 months. Their fixed expenses, with costs, are rent for $1,350, Kiera’s car payment for$275, Logan’s car payment of $380, student loans (they each have students loans) for$934, car insurance for $289, internet service for$39, Netflix for $15, Amazon Prime for$24, gym membership for $99, and cell phones for$250. The variable cost expenses, and their average costs for the last 6 months, are utilities for $370, gasoline for$500, food for $475, clothing for$225, and miscellaneous entertainment expenses for $535. They always pay off their credit card bill and carry no balance. 27 . Create their budget, using the income from Exercise 25. 28 . Categorize each expense as a need or a want. Find the total for each, along with remaining income. 29 . Compare their budget to the guidelines from the 50-30-20 budget from Exercise 27. 30 . Determine if Kiera and Logan can afford to buy a new computer, which would cost$330 per month for the next 6 months.
In the following exercises, the Federal Paycheck Calculator was used to estimate monthly take-home pay. The annual salary, before taxes and deductions, is provided. Then, the monthly take-home pay after taxes and deductions is given (which means the monthly take-home pay is not just the annual salary divided by 12!). In each case, apply the 50-30-20 budget philosophy to the monthly take-home income. Note: These are based on living in Indianapolis, Indianapolis, unmarried and with no dependents.
31 .
Annual salary: $30,000. Monthly take home:$1,938
32 .
Annual salary: $40,000.00. Monthly take home:$2,564
33 .
Annual salary: $50,000. Monthly take home:$3,144
34 .
Annual salary: $70,000. Monthly take home:$4,229
35 .
Annual salary: $100,000. Monthly take home:$5,840
36 .
Annual salary: 150,000. Monthly take home: $8,506 In the following exercises, the Federal Paycheck Calculator was used to estimate monthly take-home pay. The hourly pay, before taxes and deductions, is provided. Then, the monthly take-home pay after taxes and deductions is given (which means the monthly take-home pay is not just the hourly pay times 174 hours!). In each case, apply the 50-30-20 budget philosophy to the monthly take-home income. Note: These are based on living in Tempe, Arizona, unmarried and with no dependents. 37 . Hourly pay:$12.15 (minimum wage in Tempe, Arizona as of September 2022). Monthly take home: $1,698 38 . Hourly pay:$15.00. Monthly take home: $2,083 39 . Hourly pay:$17.50. Monthly take home: $2,421 40 . Hourly pay:$19.75. Monthly take home: $2,725 41 . Hourly pay:$25.00. Monthly take home: $3,369 42 . Hourly pay:$35.00. Monthly take home: \$4,547
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