Lesson – How to control your money.
This page is under construction, but the reason it’s been put it up is to get the method out there. Hopefully khanacademy.org or Wikipedia will take it on and just integrate it, until then the idea starts here.
The Budgeting Example
This example is something that is greatly needed in many of our schools and yet is not being taught. It should be part of the curriculum from an early age yet it is not. Here in Australia I know three people who can not do percentages, even with a calculator. This is not because they are not capable, but rather that the education system has failed. I have even had to teach a person who has a diploma in accounting how to do weekly budgeting because they were wondering why they had no money.
Ordered steps.
8. Goal – How to do a weekly budget.
7. Rounding numbers
6. Percentages
5. Rational and irrational numbers.
4. Multiplication and division
3. Addition and subtraction
2. Counting numbers
1. English
How to do a weekly budget.
Why weekly and not monthly?
The reason is that most people just spend on impulse. If the budget is set to monthly people think that at payday (which is often monthly) they can go out and have a bit of fun. They don’t even know how much they’ll need for the following weeks so they often spend their whole weeks fun money in the first week.
What we need to do is save what we need first and then spend what’s left over.
1. The first rule is put aside 10% of everything you earn as a savings for future investing first.
For a description on what a percentage is see
khanacademy.org or here :
mathsisfun.com
To understand the above you need to understand counting. See
intmath.com
or a game for teaching counting can be found here
http://www.abc.net.au/countusin/games/game1.htm
If you are still having trouble you can find math tutors here??
Also you will need to know what rational numbers are:
http://www.intmath.com/numbers/2-number-properties.php
and how to multiply:
khanacademy.org
So say you earn $300 per week and you need to save 10% of this, you’d say :
300 * 10% = 30
300 * 10/100 = 30
(Insert Calculator versions here)
(The * symbol means multiply.)
Therefore you would have to put aside $30.00 to start with.
The best way for most people is to set up a separate bank account so that it’s separate from your spending money.
2. Secondly we have our weekly costs like groceries. Weekly costs are easy to deal with as there are no calculations. We can just add these.
Let us say $80.00 pw on Groceries.
3. Next we have the thing that catches everyone out. That is the intermittent costs like haircuts or water bills.
Lets say we have a hair cut every 6 weeks at $20.00. It may not sound like much, but there are several of these costs and they do add up.
There are 52 weeks in a year.
To find the number of hair cuts are year we say:
52 / 6 = 8.66
So let’s round it up to 9.
To understand rounding up see:
http://www.intmath.com/numbers/5-approximate-numbers.php
or
khanacademy.org
So if we have 9 hair cuts per year we spend
9 haircuts * $20 = $180
9 * 20 = 180
How much does this equal per week?
Divide $180 by 52 weeks
$180 / 52weeks = $3.4615
180 / 52 = 3.4615
So rounding up to the nearest 50 cents we have $3.50 per week on haircuts.
4. Putting it all together we have a list of items we need for the year broken down into their weekly proportions
| Description | Cost $ pw |
| Investment Saving | 30.00 |
| Groceries | 80.00 |
| Haircuts | 3.45 |
| Total cost per week | 113.45 |
5. Now most of us have more costs than this every year, so here is a same table with extra items added. The yearly or quarterly costs have already been worked out per week.
| Description | Cost $ pw | ||
| Investment Saving 10% | 30.00 | ||
| Groceries | 80.00 | ||
| Haircuts | 3.45 | ||
| Mobile Phone | 9.00 | ||
| Medical Insurance | 7.00 | ||
| Bank Charges | 4.00 | ||
| PC | 10.00 | ||
| Water, Elec, Gas | 20.00 | ||
| Sports Fees | 11.00 | ||
| Spending | 100.00 | ||
| Car | |||
| Fuel | 50.00 | ||
| Registration | 8.00 | ||
| Servicing | 6.00 | ||
| Loan repayments | 0.00 | ||
| Damages | 10.00 | ||
| Traffic infringements | 6.00 | ||
| 80.00 | |||
| Rent | 140.00 | ||
| Total cost per week | 494.45 | ||
The PC line implies that we need a new personal computer every 3 years. In this case we are saying that a new computer would be $1600. The 3 year period is relative to the warranty available. This particular budget item allows us to put the computer in the bin every 3 years.
Utility costs – Water, electricity and natural gas are used in most households. Depending on how many people are in the household it works out to somewhere between $AUD15 to $AUD25 per week for these utilities. ($AUD implies Australian Dollars. To convert to your currency use xe.com)
6. Now that we have our weekly spending figured out we need to figure out how to control it. Like I said above, what happens when most of us get our pay packets. We celebrate with a night on the town or something similar. In many cultures this involves alcohol, which distorts our thinking patterns and effects our memory. We don’t even remember how we got home, let alone how much we withdrew from the automatic teller machine whilst in our altered state.
The solution? Use separate bank accounts with various levels of access.
“But banks charge us for each account we have” you say “and I’d rather spend that money on me.”
Yes, this is often true in many countries. Although it is a small price to pay if you know that you are an impulse spender or a drunken spender. Better to spend $AUD15 per month ($AUD3.46 per week) on protecting your hard earned cash from yourself, than be left waiting around for 3 weeks with no cash till pay day.
The above weekly budget table has been altered to point out where to put your cash.
| Description | Cost $ pw | Weekly account Deposits | ||
| Investment Saving 10% | 60.00 | |||
| Account 1 Investment Account | 60.00 | |||
| Spending | 175.55 | |||
| Account 2 Party Account | 175.55 | |||
| Groceries | 80.00 | |||
| Haircuts | 3.45 | |||
| Mobile Phone | 9.00 | |||
| Medical Insurance | 7.00 | |||
| Bank Charges | 4.00 | |||
| PC | 10.00 | |||
| Water, Elec, Gas | 20.00 | |||
| Sports Fees | 11.00 | |||
| Car | ||||
| Fuel | 50.00 | |||
| Registration | 8.00 | |||
| Servicing | 6.00 | |||
| Loan repayments | 0.00 | |||
| Damages | 10.00 | |||
| Traffic infringements | 6.00 | |||
| 80.00 | ||||
| Rent | 140.00 | |||
| Account 3 – Living Costs. | 364.45 | |||
| Total cost per week | 600.00 | |||
7. Go to your bank and set up the 3 accounts.
Go see the payroll clerk where you work and get them to distribute your (say $600 per week) pay into the accounts with the amounts shown in the table above.
Now when you go out on the town you just take the one party card with you. When it’s spent, you’re done till next pay day. If you still don’t trust yourself then set up a term deposit with NO withdrawals for your investment account. Make your living expenses a debit card account and just withdraw all your cash from your party account every pay day and only spend cash on party items.
8. “But I don’t get paid regularly. What do I do?”
Some weeks you’ll get paid $3000 then you may get nothing for 3 weeks and then you’ll get another pay of $1600. The following 4 weeks you may get nothing. On the 5th week you may be $5000. In this case you have to get you tax return from last year and see how much cash you brought in for the year (after tax). Divide this amount by 52 weeks to find out how much you earnt weekly on average.
Say this was exactly $600.
I have added an extra bank account called holidays. This allows me to have enough cash to take a holiday once a year if I don’t get holiday pay.
| Description | Cost $ pw | Weekly account Deposits | ||
| Investment Saving 10% | 60.00 | |||
| Account 1 – Investment Account | 60.00 | |||
| Spending | 100.00 | |||
| Account 2 – Party Account | 100.00 | |||
| Holidays | 75.55 | |||
| Account 3 – Holidays | 75.55 | |||
| Groceries | 80.00 | |||
| Haircuts | 3.45 | |||
| Mobile Phone | 9.00 | |||
| Medical Insurance | 7.00 | |||
| Bank Charges | 4.00 | |||
| PC | 10.00 | |||
| Water, Elec, Gas | 20.00 | |||
| Sports Fees | 11.00 | |||
| Car | ||||
| Fuel | 50.00 | |||
| Registration | 8.00 | |||
| Servicing | 6.00 | |||
| Loan repayments | 0.00 | |||
| Damages | 10.00 | |||
| Traffic infringements | 6.00 | |||
| 80.00 | ||||
| Rent | 140.00 | |||
| Account 4 – Living Costs. | 364.45 | |||
| Total cost per week | 600.00 | |||
We need to find out what percentage each account takes from our average weekly pay. To do this we calculate as follows.
Investment account =
Investment_amount / average_weekly_pay =
60 / 600 =
6 / 60 = 10.00%
Party Account =
Investment_amount / average_weekly_pay =
100 / 600 =
1 / 6 = 16.67%
Holiday Account =
Investment_amount / average_weekly_pay =
75.55 / 600 = 12.59%
Living Costs Account =
Investment_amount / average_weekly_pay =
364.45 / 600 = 60.74%
If you’ve done your numbers right then all the percentage totals should add up to 100%.
Check
10.00% + 16.67% + 12.59% + 60.74% = 100%
To make this work, we need to do the following calculation every time we receive a pay cheque.
Multiply the percentage of each section by the income amount.
For example this week you earn $3428.00
Investment account = 10.00% * 3428 = 342.80
Party Account = 16.67% * 3428 = 571.45
Holiday Account = 12.59% * 3428 = 431.58
Living Costs Account = 60.74% * 3428 = 2082.17
Checking this
342.80 + 571.45 + 431.58 + 2082.17 = 3428.00
Deposit these amounts in the appropriate accounts and there you have it. Done!
9. Recommended reading. For a slightly different explanation on the techniques above, read
The BareFoot Investor by Scott Pape.