The level of debt among teenagers is rising at an alarming rate. One of the ways to help ensure you are always cashed up is to create a budget. A budget is a spending plan for a particular time period, whether it be a weekly budget or a monthly budget, that helps you keep track of your money and create realistic savings goals.
Once you subtract your expenses from your income, you know how much money you have left over. This is called your disposable income and it can be safely spent on optional things you like, put aside as savings for something expensive like a new laptop, or invested.
Terminology
Income: Money that you earn such as your wages, bonuses and any income you might earn from investments such as shares.
Expenses: Money that is spent. Expenses can be divided into three categories:
- Fixed expenses: expenses where the amount does not increase or decrease. For example, if Serena pays $\$280$$280 per week rent, she will pay $\$280$$280 every week. This amount is fixed.
- Variable expenses: expenses where the amount may change. For example, Liam may pay $\$125$$125 for electricity one month and $\$98$$98 another month depending on how much he uses.
-
Discretionary expenses: expenses that are optional - they are spent at the discretion of the buyer. For example movie tickets or eating out.
If the total expenses exceed the total income, we say the budget is in deficit. If the total income exceeds the total expenses, then the budget is in surplus. Surplus money can be put aside as savings. If the total income is equal to the expenses, then the budget is balanced.
People often use tables or spreadsheets to present their budgets in an easily readable format. Generally, a budget has two columns:
- The first one shows any income you receive. This may include pocket money or money you earn from a job.
- The second column lists your expenses. This could include food, rent or a magazine subscription.
Worked example
Example 1
A weekly budget is shown in the table below:
| Income | Expenses | ||
|---|---|---|---|
| Earnings | $\$505$$505 | Mortgage | $\$147$$147 |
| Electricity | $\$23$$23 | ||
| Food | $\$64$$64 | ||
| Council Rates | $\$22$$22 | ||
| Insurance | $\$20$$20 | ||
| Water | $\$64$$64 | ||
| Clothing | $\$46$$46 | ||
| Entertainment | $\$56$$56 | ||
| Total | $\$505$$505 | Total | _____ |
a) Calculate the weekly expenses.
Think: What is the total cost of the expenses?
Do:
| Total expenses | $=$= | $\$\left(147+23+64+22+20+64+46+56\right)$$(147+23+64+22+20+64+46+56) |
| $=$= | $\$442$$442 |
b) Calculate weekly savings.
Think: The savings will be whatever is remaining after we subtract the expenses from the income.
Do:
| Savings | $=$= | $\text{income}-\text{expenses}$income−expenses |
| $=$= | $\$505-\$442$$505−$442 | |
| $=$= | $\$63$$63 |
c) Calculate the percentage of income saved, correct to two decimal places.
Think: We want to express the savings as a percentage of the income.
Do:
| Percentage savings of income | $=$= | $\frac{63}{505}\times100%$63505×100% |
| $=$= | $12.48%$12.48% ($2$2 d.p.) |
d) Calculate the percentage of income spent on mortgage payments, correct to two decimal places.
Think: We want to express the mortgage as a percentage of the income.
Do:
| Percentage mortgage of income | $=$= | $\frac{147}{505}\times100%$147505×100% |
| $=$= | $29.11%$29.11% ($2$2 d.p.) |
e) Calculate the amount paid on the mortgage in one year.
Think: How many weeks are there in a year?
Do:
| Annual cost of mortgage | $=$= | $\$147\times52$$147×52 |
| $=$= | $\$7644$$7644 |
Time frames
Sometimes budgets are done weekly, fortnightly or for larger businesses even annually (yearly). The following terms may help with questions relating to budgeting and finance.
| $1$1 year | $=$= | $12$12 months |
| $=$= | $52$52 weeks | |
| $=$= | $26$26 fortnights | |
| $=$= | $4$4 quarters (of $3$3 months each) | |
| $=$= | $365$365 days |
A month is at least $4$4 weeks, but nearly all months have more than $4$4 weeks. The exact number of days depends on which month it is - a calendar can be helpful if you can't remember. To change from a weekly budget to a monthly budget or vice versa, first change the amount to an annual amount and then change to the appropriate time frame.
A year is made up of $365$365 days, except for leap years which have $366$366 days. Unless otherwise stated, we will ignore leap years.
Practice questions
question 1
Paul's budget includes expenses for rent, school uniforms, essential food, snacks, electricity, water, internet and a video streaming site.
Which of these are best described as fixed expenses?
Which of these are best described as variable expenses?
Which of these are best described as discretionary expenses?
Question 2
Here is Fiona’s weekly budget.
Fill in the blanks in the table.
Income Expenses Wages $\$80.00$$80.00 Phone $\$8.50$$8.50 Umpiring $\$25.00$$25.00 Bus ticket $\$13.00$$13.00 Entertainment $\$$$$\editable{}$ Food $\$45.25$$45.25 Total $\$$$$\editable{}$ Total $\$91.15$$91.15 Fiona saves any money that she has not spent. How much does Fiona save each week?
Question 3
Amerie pays rent of $\$239$$239 per week, and must budget for electricity and water costs of $\$533$$533 per quarter. How much should she put aside each week to cover these expenses?