1) Income & Outgo.
and managing your expenses is crucial to financial readiness, and using a budget
to do so is a smart move. Learn the definitions of income and outgo below and know
how much you are contributing to each category.
Income: Your earnings from your job and interest from your savings accounts are
your income. These earnings are subject to income taxes and governmental withholdings
depending on the amount of income and regularity of pay (monthly, weekly, etc) as
well as your dependency status. Outgo: Anything you spend your income on is outgo,
Examples of outgo include:
- Home expenses: Rent, mortgage, homeowners/renters insurance, property
taxes, home repairs/maintenance/improvements
- Utilities: Electricity, Gas, Telephone & Internet, Water &
- Food: Groceries, eating out
- Family obligations: Child support, alimony, day care, babysitting
- Health and medical: Insurance, doctor’s office/Rx copays, fitness
- Transportation: Car payments, gasoline, auto insurance, car repair
and maintenance, public transportation costs
- Debt payments: Credit cards, student loans, other loans
- Entertainment & Recreation: Cable TV, videos, movies, hobbies,
subscriptions and club dues, vacation expenses
- Investments/Savings: 401K or IRA, Stocks, Bonds, Mutual Funds,
College Funds, Savings, Emergency Fund
- Miscellaneous: Toiletries, clothing, household products, gifts,
donations, haircuts, and others
2) Budgeting & Debt Management.
A budget is a document that projects future income and expenses, and may be prepared
simply using paper and pencil, or on computer using a spreadsheet program like Excel,
or with common financial software. Using the definitions above as a guide, list
all sources of monthly income and all required fixed expenses like rent/mortgage,
utilities, phone; and other possible and variable expenses.
Compare the sum you earn with the sum you spend – are they equal? Is there extra
money left over? Or are you coming up short? You may discover you have sufficient
funds left over to put towards paying off a credit card. Or, if you’re coming up
short, you may need to taper back your non-essential expenses. Either way, try to
avoid spending more than you earn!
3) Building Savings
For future investments or needs, set aside a portion of your income in an interest
bearing account to build your savings. Decide what portion or percentage of your
income will be dedicated to saving: some suggest having 6-12 months of income in
savings in case of job loss or other catastrophic event. Some advocate a split of
10/10/80%, with 10% going to savings, 10% to charity, and 80% for everyday expenses.
Whatever method you choose, choose to save!
4) Safeguarding your money
When putting your money in a financial institution, make sure your money is safe.
You may wish to buy insurance to safeguard your money against bank closures and
other dangers to your accounts:
The Federal Deposit Insurance
Corporation (FDIC): Since the FDIC was established in 1933, no
depositor has ever lost a single penny of FDIC-insured funds. The FDIC is an independent
agency of the United States government that protects the funds depositors place
in banks and savings associations. FDIC insurance is backed by the full faith and
credit of the United States government.
- Coverage includes: All deposit accounts, including checking and savings accounts,
money market deposit accounts and certificates of deposit.
- Coverage does not include: Other financial products and services that banks may
offer, such as stocks, bonds, mutual fund shares, life insurance policies, annuities
- The standard insurance amount is $250,000 per depositor, per insured bank, for each
account ownership category.
Securities Investor Protection
Corporation (SIPC): Just as the FDIC insures bank accounts, SIPC
insures brokerage accounts up to $500,000 per account, including up to $100,000
in cash. Additional funds may be secured beyond the $500,000 once the liquidation
cost of the brokerage is taken into account.
Note, however, that this insures your account against the possibility that your
brokerage may go under, causing stocks and securities to go missing from your account.
Seeing stocks and securities disappear is not a sign your stocks are losing value.
Go to Phase Three