Investigation: Budgeting

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: fixed and discretionary. Fixed expenses are the essential ones such as rent and food which you can’t easily minimize. On the other hand, discretionary expenses are those that are non-essential and that you can minimize your spending on e.g. movies, games and luxury goods.

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 \$30 a week on average from his share portfolio. As for his expenses, he pays \$400 a week for rent, \$20 for phone and internet, \$15 for electricity, \$20 for water, \$100 for food, \$80 for car costs, \$40 for entertainment and saves what he has left over.

Following advice from his partner, he decides to draw up with a budget. The following table shows what his weekly budget looks like. 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 has another tool to manage his money properly and to ensure that he doesn’t spend beyond his means. However, a budget is generally a guideline and won't be perfect. This is because we do not know in advance the exact amount of expenses such as electricity, water, food, etc. They could rise in the future either from a price rise or from using more water than we initially planned. For example, suppose that because of a pandemic food prices spiked, but entertainment cost when down. Moreover, suppose there was stock market crash that had an impact on Sam’s entire share portfolio. The following 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 \$365 (compared to \$485 before).

Exercise

Chris is a high school student who works part-time at the local fast food restaurant, earning \$200 a week. On top of this, he receives an allowance of \$65 a week from his parents. He has moved out of home to live with his older brother, splitting the \$1800 a month rent between the two of them. He spends \$50 a week on food for his meals and \$20 on eating out; and \$20 a week for 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 gas 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.

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 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 week?
12. How much does he spend on car-related expenses in a week?
13. What are his annual savings?
14. Draw up his annual budget.

15. Chris would like to save up for a trip after he finishes high school 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 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 great and so decides to get rid of it. He now travels to and from destinations using public transport, which costs \$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 computer games 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.