Financial Plan:
ACTIVITY AND ASSIGNMENT SCENARIO
Imagine that you’re a single parent raising a child. You live in a small town where you grew up and went to school. You’ve worked at a local bank for 4 years, starting as a teller and advancing to the position of loan officer. You earn $50,000 a year. After you pay taxes and deposit a portion of your earnings into your 401(K) retirement account, your take-home pay is $40,375 a year.
You feel like you have great job security and enough income, so you’ve decided that now is the time to begin saving for a financial goal. You’re creating a budget to help you do that. You also happen to be in a situation where you need to move. You plan to choose a new housing option that will help you achieve your financial goal.
CREATE A BUDGET
STEP 1: SELECT A GOAL, TIME FRAME, AND HOUSING OPTION
You will begin by selecting a financial goal, estimating how long it will take to reach that goal, and deciding on a housing option. Financial goals and decisions are personal. They involve an understanding of what is important to you, which will help you prioritize how to spend your money. It’s up to you to develop a unique path that makes financial sense for each goal.
SELECT A GOAL
Recall from the scenario that you are a single parent raising a child and earning $40,375 a year after taxes. The assignment template below has five options for you to consider for your financial goal. Which one seems best to you?
My financial goal:
Save $20,000 for a down payment to buy a house.
SELECT A TIME FRAME
Now that you’ve chosen a financial goal, you need to estimate how long it will take to reach that goal. This is just an estimate. You will be able to change it later when you’re developing your budget and analyzing your expenses. (Once you’ve estimated your living expenses, you may need to lengthen the time it will take to reach your savings goal. Or, you may find out that you can reach your goal sooner than you thought! It all depends on the choices you make about housing and other living expenses.)
My financial goal is to save $20,000 for a down payment to buy a house over a time frame of three years.
SELECT A HOUSING OPTION
According to the scenario, you need to find a new place to live. This choice will have a big impact on your budget. Additional research reveals three good housing options to consider:
Option 1 is a small two-bedroom house located near your friends. It has a backyard that would be nice for playing outdoors with your child. However, rent is $15,000 a year ($1,250 per month), making this the most expensive option.
Option 2 is a two-bedroom apartment in an established apartment complex. The apartment playground needs to be updated, but there are lots of children around for your child to play with. Rent is $12,000 a year ($1,000 per month).
Option 3 is sharing a large two-bedroom apartment with a friend who also has a child about the same age as yours. Rent is $9,000 a year ($750 per month), making this the least expensive option.
As you know, financial planning is all about making choices. Each housing option reveals an important tradeoff. Selecting the most expensive option may be the most comfortable for you now, but it may take longer to reach your financial goal. Which housing option seems best for your situation?
Now that you’ve chosen your goal, time frame, and housing option, you’re ready to take the next step in your assignment. On the following page, you’ll enter your expenses and use Excel formulas and functions to create your annual budget in a spreadsheet template.
My housing option: two-bedroom house with $15,000 yearly rent ($1,250 monthly
STEP 2: CREATE YOUR ANNUAL BUDGET
To create your budget, you will consider how much to spend in each expense category while keeping your overall income and financial goal in mind. You will also use Excel formulas and functions to make calculations.
EVALUATE YOUR ANNUAL BUDGET
After entering all of your expenses, you likely had a surplus or deficit amount. If your expenses are less than your income, you’ll have a surplus on your bottom line. If your expenses exceed your income, you’ll have a deficit. A deficit will be a negative number. For example, a bottom line of -$3,650 means that budgeted expenses exceed income by $3,650, and you’ll need to figure out how to spend less money in some categories. If you need help determining a reasonable amount for each category, refer to the 50/20/30 guideline on the Personal Financial Planningpage.
In the template below, you need to balance your budget so that your income exactly covers your expenses.
If you have a surplus, review your expenses and make sure you have budgeted enough to cover all of your basic needs such as food, utilities, phone, car loan, car maintenance and gas, etc. Increase any amounts that are too low. Once you’ve determined that your budgeted expenses reflect your actual spending needs, if you still have a surplus, consider increasing your savings goal.
If you have a deficit (a negative number on the bottom line), look over your expenses to see if there are any amounts you can reduce. Variable expenses like personal care, entertainment, and miscellaneous are good categories to start with. Also, consider reducing your financial goal or extending your time frame to reduce the amount you are saving toward your goal.
Once you have $0 for your surplus/deficit amount, you’ve balanced your budget!
