INVESTIGATION: Creating a budget

Budgets

The best way to prevent yourself from spending more than you earn is to create a budget. A budget allows you to plan how you want to allocate your future income to cover your future expenses. Income refers to what you earn such as your wages, bonuses and any income you might earn from investments such as shares.

Expenses refer to what you spend on items or services such as rent, food and entertainment, and can be broken down into two types: essential and discretionary. Essential expenses are those necessary for living such as rent and food which you can’t easily minimise. Essential expenses can be further broken down into fixed and variable expenses, of which, variable expenses can be somewhat reduced but is a little more difficult, such as reducing the amount of water used around the home. 

 

Example

Sam earns \$1000 a week working as a miner. On top of this, he earns a bonus of \$50 on average and receives allowances for undertaking wet and dangerous work of \$80. He also earns \$200 a week on average from his share portfolio. As for his expenses, he pays \$300 a week for rent, \$20 for phone and internet, \$50 for electricity, \$20 for water, \$100 for food, \$80 for car costs, \$200 for entertainment and saves what he has left over.

Following advice from his mom, he decides to draw up with a budget. The table shows what his weekly budget looks like. This budget includes Sam’s savings as an expense, thereby balancing the budget. Some people may choose not to include savings as an expense and instead calculate the difference between income and expenses to find how much money will go into savings.

Note that budgets can be created for different time intervals such as monthly or yearly, not just weekly.

By coming up with a budget, Sam is now able to manage his money properly and to ensure that he does not spend beyond his means. However, it is important to keep in mind that just like a weather forecast may turn out to be off, so too can a budget. This is because we do not know in advance the exact amount of expenses such as electricity, water, phone, etc. They could rise in the future either from a price rise or from us using more electricity, water, etc than we initially planned.

For example, suppose that because of a drought food prices spiked and water costs increased. Moreover, suppose there was a stock market crash that wiped out Sam’s entire share portfolio.

This table shows what Sam’s new weekly budget would look like.

As you can see, Sam’s income from investments has disappeared and his water and food expenses have both doubled, leaving him with savings of only \$240 (compared to \$560 before).

 

Task 1

Chris is a Year 11 student who works part-time at the local fast food restaurant, earning \$200 a week for his efforts. On top of this, he receives \$65 a week in pocket money from his parents. He has moved out of home to live with his older brother, splitting the \$200 a month rent between the two of them.

He spends \$40 a week on food for his meals and \$10 on junk food such as lollies, chips and chocolate; and \$20 a week on games, movies, and other forms of entertainment. He also owns a car which draws annual expenses of \$300 for registration, \$1500 for insurance and \$200 for maintenance, and weekly petrol cost of \$30 for travel to and from school. For his phone and internet, he is on the \$50 a month phone and internet bundle with unlimited use.

For his electricity and water bills, Chris budgets for these by using the average figure from the previous year. His previous four quarterly electricity bills were \$150, \$120, \$140 and \$160, and his previous four quarterly water bills were \$100, \$80, \$90 and \$120. He deposits whatever money he has left over into his bank account.

Questions

1. What is Chris’s weekly income?
2. How much does he spend on rent in a week?
3. How much does he spend on food in a week?
4. How much does he pay for phone and internet in a week?
5. How much does he spend on electricity in a week? On water in a week?
6. How much does he spend on car-related expenses in a week?
7. What are his weekly savings?
8. Which expenses are fixed? Which expenses are discretionary?
9. Draw up a weekly budget for Chris.

10. What is Chris’s annual income?
11. How much does he spend on electricity in a year?
12. How much does he spend on car-related expenses in a year?
13. What are his annual savings?
14. Draw up his annual budget.

15. Chris would like to save up for a trip to Schoolies after he finishes year 12 in 18 months' time. Which expenses do you think he can cut back on in order to increase his savings?
16. In order to fund his school's trip Chris takes up a second job doing a paper run for \$50 a week. Also, he decides that the costs of having a car are too high and so decides to get rid of it. He now travels to and from destinations using public transport, which sets him back \$10 a week on average. Draw up his new annual budget.

17. How much will he be able to save up in the next 18 months?
18. School holidays run for the next month and Chris plans on spending most of this time playing World of Warcraft at home. As a result of the greater time spent at home, he suspects that his water, electricity, and internet bills will be higher than usual over this period. So he decides to allow an extra \$10 to cover the possibility of increases in these particular expenses. Draw up his new weekly budget for this period.