What Is Budgeting - Financial Literacy - أول ثانوي

3.2 What Is Budgeting? Learning Objective Once you have completed this lesson, you should be able to: identify the purpose of a personal budget ⚫ explain how to prepare a personal budget. Key Terms Fixed expenses Charitable giving Variable expenses Variances Mortgage Budgeting Budgeting is a critical part of managing your money. The purpose of a budget is to plan how you will spend and/or save money. A budget is used to record: income (cash inflows) expenses (cash outflows). A budget lists estimated income and expenses to help you create a fi- nancial plan. A budget should be designed to help meet financial goals, such as: . paying for current expenses, such as household bills, member- ships, and subscriptions planning medium term purchases, such as a new washing machine or car saving for the future, such as a house or a pension. وزارة التعليم 1071-1445 ssonدا لها أي بل ما Link 回我 www.len.edu.sa CHAPTER 3 Saving 85

What regular bully does a house- huld need to budget lar? To create a budget: وزارة التعليم 86 Financial Literacy STEP 1 STEP 2 % Begin by looking at the amount you have available to spend or save. % Then decide how much of that amount you will save and how much you will spend. STEP 3 You must then choose the items or services for which you plan to spend.

Remember that a budget is a plan. Your actual income, savings, and spending may not be exactly as planned. You can compare your actual spending and savings to the budget to see how well you planned. This process will help you create better budgets in the future. A budget should ideally use a ratio of 50-30-20 to split your income. The 50-30-20 rule, which is recommended by the Saudi Central Bank (SAMA), means that you should budget: وزارة التعليم 077-1445 50% NEEDS 50% of your income should be spent on needs that may consist of: shelter (rent or mortgage) ⚫ food . utility bills ⚫ transport. Budget 30% WANTS 30% of your income can be spent on wants that may consist of: trips out and vacations restaurants . branded clothing fashion accessories. 20% SAVINGS and INVESTING 20% of your income must be set aside for savings and investing that may consist of: ⚫saving into a bank account ⚫ paying off debts . ⚫ investments. CHAPTER 3 Saving 87

Needs can be estimated based on bills, etc., and will often consist of regular amounts. Needs are usually inflexible: for example, a person cannot decide whether or not they want to pay their rent or electricity bill. If your needs take up more than 50% of your income, you should compensate by reducing the amount spent on wants. Preparing a Budget To prepare a personal budget, there are four simple steps: 1. Estimate income. 2. Estimate expenses. 3. Plan savings. 4. Balance the budget. Figure 3.2.1 shows a sample budget. Look at each part of the budget as you read the steps for preparing a budget in the following sections. FIGURE 3.2.1 Personal Budget Income وزارة التعليم 88 Financial Literacy Money earned through chores Lunch money allowance Other Weekly (SAR) Monthly (SAR) Yearly (SAR) 75 300 3,600 25 100 1,200 50 200 2,400 150 600 7,200 Total Income Expenses Clothes and shoes 25 100 1,200 Lunches 25 100 1,200 Mobile phone bill 25 100 1,200 Entertainment 55 220 2,640 Total Expenses 130 520 6,240 Savings Deposit to savings 20 80 960 account Total Savings 20 80 960 Total Savings and 150 600 7,200 Expenses

Step 1: Estimate Income You may have many different sources of income. In order to budget effectively, you should keep track of where your money comes from and how often it is received. Because most budgets are prepared once a year, you should cal- culate income for an entire year. Locate the total estimated yearly in- come amount, SAR 7,200, in the budget in Figure 3.2.1. You may receive income: ⚫ weekly: could be lunch money allowance monthly: could be allowance yearly: could be Eid gifts. No matter when the income is received, it can be accounted for in terms of a monthly or yearly budget. If you receive income weekly, multiply the weekly amount by 4 to calculate how much that is per month. For example, SAR 10 received per week would be SAR 40 a month (round- ing is okay as long as your total yearly amount is accurate). If you receive income once a month, you can multiply it by 12 to get your yearly income. When you look at the big picture - how much money comes in and goes out during an entire year - it may change the way you think about money. Make a copy of the budget outline in Figure 3.2.1 in your notebook or on a computer spreadsheet and enter your estimated income for the following year. Step 2: Estimate Expenses Expenses are items for which you spend money. Expenses can include: ⚫ clothes ⚫ lunches at school ⚫ subscriptions. You may also make payments on as asset you purchase, such as a car. Other expenses are related to living Why might your spending not be exactly as planned? وزارة التعليم 123-1465 89

Final expres costs that do not change each month Variable expen costs that can go up and down each month Murtgage an agreement to borrow money with your house as security for the borrowed money costs and entertainment. Keeping track of what you spend will help you estimate expenses for the future. If you are trying to control expenses, seeing exactly how much you are currently spending for each expense can be helpful. Find the expenses amounts in the budget in Figure 3.2.1. ⚫ Are these realistic figures for you? • ⚫ Are there any others you could include? Fill in your own budget and add in any other expenses you may have. Assess whether each expense relates to a need or a want. Remember, if your expenses are too high, you may need to reduce spending on wants. Expenses There are two types of expenses: fixed and variable expenses. Regular fixed expenses can include: ⚫rent or mortgage for your family living accommodation Renters typically have a lease contract stating an annual rent amount that does not change for the term of the lease. Homeowners with a mortgage typically have a contract stating a monthly payment to the lender who owns the property until the final payment is made. If payments are missed, the homeowner can be told to leave the property and may lose all the money paid so far. insurance for your family house and car This can often be paid monthly or annually. You cannot legally drive a car in Saudi Arabia without car insurance. car payments if bought using money borrowed from a lender. Monthly car payments are usually fixed for the term of the loan. The loan may or may not be secured against the vehicle. Fixed expenses remain constant each month and must be paid even when income is less than expected. If income continues to be less than planned, a fixed expense may have to be eliminated. For example, if your income goes down because you lose your allowance, you may have to sell your smart phone or change to a cheaper plan to elimi nate the payments you can no longer afford. وزارة التعليم 90 Financial Literacy

Variable expenses change depending on a number of factors as described below. Examples of variable expenses are: gas and electricity bills: When the weather is very hot, the cost of cooling your house will go up as you use more energy. gasoline prices: Expenses can also vary due to changing prices; for example, as the price of gasoline rises, your transportation expenses will also rise. food, clothing, and entertainment: If you have less income or higher expenses than expected one month, you may need to alter your variable expenses; you may choose to spend less on entertainment. Zakat is a form of charitable giving which is one of the five pillars of Islam. Eligible Muslims pay Zakat of 2.5% of their income once a year and this is part of a person's monthly expenses. In Saudi Arabia, all chari- table giving is carried out through official agencies, in line with national regulations. Step 3: Plan Savings Remember that 20% should be allocated to savings first, as people often inflate their wants and needs, leaving too little for saving unless this is factored in first. It can be difficult to reduce spending on wants, but by saving, you will have money to pay for future needs, both expected and unexpected. Find the yearly savings amount, SAR 960, in the budget in Figure 3.2.1. What might you be able to spend this money on at the end of the year? Would you continue saving for a larger purchase? Is this enough to save each year, or would you want to increase your weeklyly savings? Phether you waited rather retire spending limches or on entertainment. 123-1445 Charitable giving the act of donating to a nonprofit organization to help it accomplish its goals (carmed out through official agencies in Saudi Arabia in line with national regulations! 91

Valances the differences between planned amounts and actual amounts Step 4: Balance the Budget Find the total of savings and expenses in Figure 3.2.1. This amount should be the same as your total income amount. When these amounts are the same, the budget is in balance. If your savings plus your expenses exceed your income, adjust your budget to make them balance. To do this, you will have to lower your expenses, save a little less, or increase your income. If your savings plus your expenses are less than your income, you should again adjust your budget to make them balance. However, in this case, you can increase your expenses or save a little more depend- ing on what your priorities are. Preparing a Budget Analysis You should not expect income, savings, and expenses to be exactly as you planned in a budget. Looking at the variances in your income and spending amounts can help you plan better when creating budgets in the future. Budget variances can be favorable or unfavorable. ⚫ A favorable variance is a positive or desirable change. It occurs when you earn or save more than you estimated or spend less than you planned. An unfavorable variance is a negative or undesirable change. It occurs when you earn or save less than you estimated or spend more than you planned. Figure 3.2.2 shows budget variances - both in SAR amounts and in percentages. To calculate the variances in Figure 3.2.2, complete the following calculation: وزارة التعليم 92 Financial Literacy Percentage variance for income, savings and expenses (Actual - Budgeted amount) x 100 Budgeted amount The percentage variance calculates the variances for the individual rows. Therefore, the Total Income percentage variance (7%) is calculating the difference between the actual (SAR 750) and budgeted (SAR 700) total

figures. It is not calculated by using the previous allowance (+25%) and other (-25%) variances, as these would cancel each other out. When the variance is calculated, it will either be a negative figure or a positive figure. It is important to understand the variance being calculated. If the income and savings variance is calculated and they are posi- tive figures, this means that more income and more savings are being generated. This is a favorable response as more income and savings is better. If the income and savings variance is negative, this is unfavora- ble as less income and savings is worse. Budgeted Actual Income Amount Amount SAR Variance Percentage Variance Allowance SAR 400 SAR 500 + SAR 100 +25% (F)* Lunch money 100 100 0 0% allowance Other 200 150 -SAR 50 -25% (U)** Total Income 700 750 + SAR 50 +7% (F) Savings Deposit to savings 80 130 30 account Total Savings 090 + SAR 50 + 53% (F) 80 130 + SAR 50 +63% (F) Expenses Clothes and shoes 140 126 - SAR 14 -10% (F) Lunches 100 100 0 0% Mobile phone bill 100 100 0 0% Entertainment 280 294 + SAR 14 +5% (U) Total Expenses 620 620 0 0% Total Savings 700 750 + SAR 50 +7% (F) and Expenses "(F): Favorable variance ** (U) Unfavorable variance وزارة التعليم (125-1465 FIGURE 3.2.2 Personal Budget Variances for a Month CHAPTER 3 Saving 93

وزارة التعليم 94 Financial Literacy However, if the expenses figure is calculated and the result is a positive figure, this is an unfavorable variance as the expenses have increased, which reduces the amount of money you have available. A negative variance in the expenses is therefore favorable as your outgoings have reduced. LOOKING AREAD How would a budget help you to be more financially responsible? Review Questions Choose the correct answer. 1. Which of the following is NOT relevant when planning a budget? a. listing estimated income b. listing estimated expenditure c. creating a financial plan d. recording actual figures 2. A financial plan guarantees you cannot overspend. a. true b. false 3. Which of the following is NOT an example of a variable expense? a. rent b. electricity bills c. food d. entertainment 4. If your savings plus your expenses exceed your income, you can spend more money on variable expenses. a. true b. false 5. Which of the following approaches should NOT be used when creating a budget? a. Decide what luxury item you want b. Look at the amount available to spend or save. c. Decide what percentage will be saved. d. Choose the item you can afford.