How to Budget

An important skill to use to master life

Financial Institutions

SSEPF2 Explain that banks and other financial institutions are businesses that channel funds from savers to investors. 

Why this matters...

Understanding financial institutions is one part of the bigger picture of learning about how to take care of and manage your money

Why do financial institutions exist? In short, to make money.

How do they make money?

interest charged > interest earned

Banks and other finanical institutions loan the money that we give them to other people at a higher rate other people

Financial Institutions

• Bank- provides a safe means to store earnings. Typically, banks also offer direct deposit (where a person’s paycheck goes directly into his or her account), check-writing services, debit and credit cards, loans (personal, home equity, business),and other services. 

• Credit Union- similar to a bank; the difference is that a credit union only provides these services to its members. Members own and control the institution. Credit unions often offer higher interest rates on deposits and lower interest rates on loans than banks.

Financial Institutions

• Payday Loan Company- a payday loan company gives out small loans in return for a portion of the upcoming paycheck. Payday loan companies generally charge much higher interest on loans than other institutions. 

• Title Pawn Lender- provide short-term loans to individuals. Usually, those accessing loans through title pawn lenders lack access to other types of short-term loans like credit cards. Loans are based on an individual’s collateral. Lenders can sell the collateral to cover the value of an outstanding loan if the borrower cannot repay. Fees usually much higher than a bank

Risk vs Return

The higher the potential return offered by a savings or investment opportunity, the more risky the savings or investment usually are. WIth lower risk is lower return.

Risk- The likelihood that you lose your investment

Return- The money earned off of the investment

Types of Investments

• Savings Accounts- Savings accounts are bank accounts in which people put savings to which they need easy access. The Federal Deposit Insurance Corporation (FDIC) most types of bank deposits up to $250,000. Money held in a very low interest savings account is likely to erode in value over time. Most bank pay less than 1% interest on savings. 

• Certificates of Deposit- (CDs) are products offered by banks. Buying a CD means you will earn a higher rate of return than on a regular savings account. The higher rate of return results from the saver agreeing to keep the funds in the CD for a specified period, usually between 1 months to 10 years. The longer the period, the higher the interest rate. People who save in CDs and need to withdraw their funds early will pay a fee for early withdrawal. 

Types of Investment

• U.S. Treasury Bonds – You loan the U.S. government money. The government pays you a guaranteed rate of return. Since the U.S. government repays its debts, the rate of return is low. Bonds are safe but also carry an inflation risk if interest paid is not higher than the inflation rate. 

• Stock– One of the more risky ways to invest. When purchasing stock in large companies your investment could be safer, but your rate of return is likely to be lower. If you invest in new companies or companies with a new product, the potential return is high if the company succeeds, so is the risk

• Mutual Funds- Provide more protection against loss because the investment is spread across many different companies rather than just one company. You may also select funds that reflect specific levels of risk or your values. Long term investing tends to give a greater return than short-term investing. Over a 20-year period, the stock market returns on average 7-8%. However, when holding stocks for only 5 to 10 years, the average rate of return drops to 1- 2%.

Retirement Accounts

• 401K- This is provided through an employer which will sometimes offer a percentage of matching funds.

• Individual Retirement Accounts (IRA)- Roth IRAs allow contributors to pay taxes today and withdraw the funds they contributed tax-free in the future. The contributor will still have to pay taxes on any “gaines” they withdraw from their account in retirement. A traditional IRA allows contributors to put money away before taxes are paid. The taxes are paid on the money when it is withdrawn during retirement.

Income - how much money is coming in

Your job calculates how much you earned, and how much is going to be withheld.

You should ALWAYS ALWAYS review your pay-stub.

Mistakes do happen. It is up to you to tell your employer if there is a mistake. It is YOUR money after all, right?

Make sure you are getting paid correctly and that any deductions are correct.

Expenses

You need to know how much you are spending

• Write down your repeating bills

• Keep track of your spending

To create a budget you must

• know how much money you have coming it

• know how much money you have going out

• know WHERE you are spending your money

There basically two "types" of spending

• Fixed

• Variable

Fixed Expenses

These are predictable, regular costs, which tend to be large - like rent; car payments; and student loan payments.

Variable Expenses

These are expenses that can change from month to month. For example - groceries; the electric bill; and eating out.

Mandatory or optional?

Some expenses you MUST have and pay - like your rent. Some you can choose NOT to spend - like Starbucks every morning.

How do you get started?

• Does your bank have an app?

• Does their app allow you to classify transactions?

• If you answer no to either of these then ...

You need to be able to track all your spending and income

• You can download an app specifically designed for budgeting and tracking.

• These apps often can tap into all your financial accounts and combine the data

• You can also go old school - paper or a spreadsheet

• There are MANY downloadable templates for use with spreadsheets or paper

​Overtime

​Overtime is the amount of pay for employees who worked over 40 hours. By federal law, employers are required to pay employees 1.5 times their regular rate.

What is the FAFSA?

FAFSA stands for Free Application for Federal Student Aid (FAFSA^®)

1. What is the chance that a FAFSA applicant will

get some type of financial aid for college?

a) 35%
b) 55%
c) 85%
d) 100%

FAFSA FAST FACTS | OCTOBER 8, 2021 EDITION | NEXT GEN PERSONAL FINANCE

1. What is the chance that a FAFSA applicant will

get some type of financial aid for college?

a) 35%
b) 55%
c) 85%
d) 100%

FAFSA FAST FACTS | OCTOBER 8, 2021 EDITION | NEXT GEN PERSONAL FINANCE