Setting Your Financial Goals

One of the first steps to financial security is planning and following through on a personal spending plan or budget.

Budgeting is about choices—choosing how to make money and choosing how to spend money. This course is designed to introduce you to managing your money wisely and to help prepare a personal spending plan while identifying ways to decrease spending and increase income.

Financial Goals Objectives

Track daily spending habits.
Prepare a personal spending plan or budget to estimate monthly income and expenses.
Identify ways to decrease spending and increase income.
Identify budgeting tools that will help you manage your money.

Why Should you Budget?

A good way to start taking control of your financial situation is to develop a budget or personal spending plan. At the end of the month many people often wonder where all their money went. Sure they have a general idea but you would be surprised how much is spent on impulse that could be put to better use.

A budget is a step-by-step plan for meeting expenses in a given period of time.

Preparing a Budget

Knowing what your income and expenses are every month will help you take control of your financial situation. Then you’ll be able to meet some financial goals you might set for yourself such as buying a new car, saving for a home purchase - you get the idea.

There are four steps to preparing a budget. They are:

Step 1: Keep track of your daily spending.

Do you know where your money goes each month? It is common for people to spend all the money they make and not have anything left over to save for their goals. Have you ever had any money and then spent it? Do you remember exactly what you bought? If you want to be in control of your money, you have to know where your money goes. One way to do this is to keep a personal spending diary to record everything you spend.

ledger sheet Getting an idea of what you spend your money on is as simple as putting together a daily spending diary. It will help you determine what spending you can cut out or cut back on in order to have money to pay bills and expenses or to save for goals.

Step 2: Determine income and expenses.

The next step to perform in preparing a personal spending plan is to determine your monthly income and expenses. Income is money that comes to you from:

Various jobs or work, like cutting grass or babysitting wages
Allowances
Odd jobs
Interest and dividends
Other sources, such as tips

Expenses are the items you spend money on each month. They might be from:

Cell phone bill
Car payment
Movies, CDs or music downloads, or other entertainment
Clothes
Eating out
Personal items (makeup, cologne, etc.)
Savings for college or other future purchases

Types of Expenses

Fixed expenses - These expenses don’t change from month to month and typically include expenses such as mortgage payment, insurance payments, etc.
Flexible expenses - These expenses might change from month to month, like a heating bill that is lower in May than in December.

Putting together a monthly income and expense worksheet is a great idea for tracking your income and expenses. You will easily be able to see if you are going to be ahead or behind on your expenses. It is a good idea to start with your fixed expenses when doing your budget because they don’t change. With the flexible expenses you will need to use your best judgment either based on history or maybe what your goal for that expense is.

Step 3: Finding ways to decrease spending.

After you have your list of income and expenses it is important to take a good look at it and determine if that is really where you want your money going. Is it worth that $5 cup of coffee a day? As long as you are meeting your financial obligations you may choose not to make any changes at this time, however if you are finding it difficult to pay your bills or you have a set of financial goals then it may be necessary to find ways to decrease your spending.

Setting Financial Goals

Setting financial goals helps you plan a budget. If you know what you want to do with your money in the future, it will help you spend wisely now and save where you can. Consider your goals when planning a budget. If you want to save for a car, consider reducing your cell phone bill and using the extra to put in savings. If you want to buy a new outfit for the prom, you might be able to work an extra hour or two at your job.

No matter what goals you have for your money, they should:

Be realistic: If you work part-time, you probably won’t be able to afford a new car every couple of years.
Be specific; “I plan/want to save $5,000 for a down payment to buy a new Honda Civic.”
Have a time frame; “I plan/want to pay off my credit card within the next 16 months.”
Say what you want to do; “I plan/want to start an automatic deposit savings account with monthly withdrawals from my checking account.”
Have milestones: For example, “My goal is to purchase a mountain bike that costs $600 by paying for it without having to borrow money. To do so, I have set up with my employer, or bank, an automatic transfer of $50 into a savings account for that purpose. Every quarter, I plan to check to see how much money I have.”

What if Your Expenses Exceed Your Income

Pay your rent or mortgage first, to ensure that you do not get evicted or have your property foreclosed on. You should always call your mortgage lender first if you are having trouble paying your mortgage. They can help you work out a plan to keep a roof over your head.
It is probably most important to pay your necessary household expenses next, such as utilities and food. Many utility companies, such as the telephone, electric, and gas companies, have programs to lower your bill if you qualify.
Pay off the loan with the highest interest rate first to save on interest. If you have several credit cards with outstanding balances, focus on paying off the one with the highest interest rate first.
Talk to your creditors. They may be willing to reduce your payments or change the terms to help. Some creditors might offer extensions, accept smaller payments over a longer period of time, accept partial payments, or perhaps even lower your interest rate.

Everyone’s circumstances are different so if you find yourself having trouble meeting your debt obligations it is always better to confront the problem head on and contact your creditors before it gets to far out of control. There are agencies available that can help you with your debt management and provide sound advice for getting your bill caught up

Step 4: Find ways to increase income.

Other than finding a job that pays more, there are other ways to increase your income. You can get a second job, or become a successful entrepreneur! Most Americans wish they could increase their income in order to obtain new toys, yet these days the main goal of obtaining more income is to get out of debt. Before going into any kind of debt it should be considered carefully and not be allowed to get out of control.

Gross Income vs. Net Income

When planning a budget, remember that your employer has to subtract certain taxes from your paycheck. The time it takes to meet goals for saving may increase.

Gross income: Gross income is your total income without deductions.
Net income: Net income is gross income minus deductions such as Social Security and other taxes.

Gross income – Deductions = Net income

Deductions usually include federal and state taxes. Social Security taxes are also deducted. But why is so much money taken out for Social Security?

Social Security - Social Security is like an insurance plan. On some pay stubs, it is called FICA, which stands for Federal Insurance Contributions Act. Social Security benefits include:

Retirement –paid every month to eligible retired workers, as early as age 62.
Disability –paid every month to eligible workers of all ages who have a severe disability.

If you are 25 or older and are not already receiving Social Security benefits, you will receive a Social Security statement just before your birthday every year. This tells how much you’ve earned and the Social Security taxes you have paid during your working years. The statement provides estimates of the monthly Social Security retirement, disability, and survivors’ benefits you and your family could be eligible to receive.

Glossary

Budget - A budget is a step-by-step plan for meeting expenses in a given period of time.

Expenses - Items that you must pay for, like housing, food, transportation, utilities, loans, or other bills are considered expenses.

Fixed expenses - Expenses that do not change from month to month are fixed.

Flexible expenses - Expenses that may change from month to month are flexible.

Gross income - The total amount of money you earn, before anything is taken out, is called gross income.

Income - Money that comes to you from wages, interest, Social Security, tips, or other sources is considered income.

Net income - The amount of money you have left after taxes, insurance, social security, or other expenses are deducted from your gross pay is net income.

Spending - Using money to pay bills, or to pay for entertainment, goods, or services is called spending.