102 savings expenses and budgeting estimated

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10.2Savings, Expenses, and BudgetingEstimated completion time: 19 minutes.Questions to consider:How is the flow of money best measured?How do I keep things balanced?“Do not save what is left after spending; instead spend what is left after saving.”—Warren Buffett[6]What is the best way to get to the Mississippi River from here? Do you know? To answer the question, evenwith a map app, you would need to know where you are starting from and exactly where on the river you wantto arrive before you can map the best route. Our financial lives need maps, too. You need to know where youare now and where you want to end up in order to map a course to meet the goal.You map your financial path using a spending and savings plan, or budget, which tracks your income, savings,and spending. You check on your progress using a balance sheet that lists yourassets, or what you own, andyourliabilities, or what you owe. A balance sheet is like a snapshot, a moment in time, that we use to check ourprogress.6Buffett, Warren. The Essays of Warren Buffett: Lessons for Corporate America. 1991. Cardozo Law Review.Chapter 10 Understanding Financial literacy327
BudgetsThe termbudgetis unpleasant to some people because it just looks like work. But who will care more aboutyour money than you? We all want to know if we have enough money to pay our bills, travel, get an education,buy a car, etc. Technically, a budget is a specific financial plan for a specified time. Budgets have threeelements: income, saving and investing, and expenses.Figure 10.7A budget is a specific financial plan for a finite amount of time. For example, you can set abudget for your family for a year.IncomeIncome most often comes from our jobs in the form of a paper or electronic paycheck. When listing yourincome for your monthly budget, you should use yournet pay, also called your disposable income. It is the onlymoney you can use to pay bills. If you currently have a job, look at the pay stub or statement. You will findgross pay, then some money deducted for a variety of taxes, leaving a smaller amount—your net pay.Sometimes you have the opportunity to have some other, optional deductions taken from your paycheckbefore you get your net pay. Examples of optional deductions include 401(k) or health insurance payments.You can change these amounts, but you should still use your net pay when considering your budget.Some individuals receive disability income, social security income, investment income, alimony, child support,and other forms of payment on a regular basis. All of these go under income. During school, you may receivesupport from family that could be considered income. You may also receive scholarships, grants, or studentloan money.Saving and InvestingThe first bill you should pay is to yourself. You owe yourself today and tomorrow. That means you should setaside a certain amount of money for savings and investments, before paying bills and making discretionary, oroptional, purchases. Savings can be for an emergency fund or for short-term goals such as education, awedding, travel, or a car. Investing, such as putting your money into stocks, bonds, or real estate, offers higherreturns at a higher risk than money saved in a bank. Investments include retirement accounts that can be328Chapter 10 Understanding Financial literacyThis OpenStax book is available for free at

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