maths.free › Arithmetic › 6. Money Management › Making a Personal Budget
Making a Personal Budget
Create a personal budget with the categories of expenses and income.
Learning Objectives
After completing this section, you should be able to:
- Create a personal budget with the categories of expenses and income.
- Apply general guidelines for a budget.
Creating a Budget
You should view creating a budget as a financial tool that will help you achieve your long-term goals. A budget is an estimation of income and expenses over some period of time. You will be able to track your progress, which will help you to prepare for the future by making smart investment decisions.
There are several budget-creating tools available, such as the apps Good budget and Mint, and Google Sheets. Getting started, though, begins well before you find an app. The following are steps that can be used to create your monthly budget.
- Track your income and expenses Review your income and expenses for the past 6 months to a year. This will give you an idea of your current habits.
- Set your income baseline Determine all the sources of income you will have. This income may from paychecks, investments, or freelance work. It even includes child support and gifts. Be sure to use income after taxes. This allows you to determine your maximum expenditures per month.
- Determine your expenses Review your bills from the past 6 months. You should include mortgage payments or rent, insurance, car payments, utilities, groceries, transportation expenses, personal care, entertainment, and savings. Using your credit card statements and bank statements will help you determine these amounts. Be aware that some of the expenses will not change over time. These are referred to as fixed expenses, like rent, car payments, insurance, internet service, and the like. Other expenses may vary widely from month to month and are appropriately called variable expenses, and include such expenses as gasoline, groceries.
In this section, we will focus on income and expenses. One of the easiest ways to manage a budget is to create a table, with one column containing income sources, another with income values, a third with expense categories, and a last containing expenses. An example is shown in .
| Income Source | Amount | Expense | Amount |
| Full-time job | $3,565 | Rent | $975 |
| Uber | $185 | Car Payment | $355 |
| TOTAL | $3,750 | Student Loan | $418 |
| Electric | $76 | ||
| Food | $400 | ||
| Gasoline | $250 | ||
| Car Insurance | $165 | ||
| Clothing | $100 | ||
| Entertainment | $100 | ||
| TOTAL | $2,839 |
Condensed — the full section is in OpenStax Contemporary Mathematics.
Key Concepts
- A budget is a set of guidelines for how to allocate your income.
- Budgeting helps to plan for many of life’s expenses
- Budgets are used to compare income to expenses. When expenses exceed income, changes have to be made.
- Budgets can help evaluate the affordability of life changes.
- One guideline for setting a budget is the 50-30-20 budget philosophy. The guidelines suggest that 50% of income is allocated to necessary expenses, 30% to expenses that wants, and 20% to savings and other debt reduction.
Practice (6)
Try each one on paper first. Reveal the answer to check; verified ones can be opened in the solver for every step.
-
Heather has graduated college and currently works as a nurse for a rural medical group. Her net monthly income from that job is $3,765.40. She also works part-time on the weekends, earning another $672.00 per month. Her monthly expenses are rent at $1,050, car payments at $489, student loan payments at $728, car insurance at $139, utilities at $130, clothing at $150, entertainment (going out with friends, Netflix, Amazon Prime, movies) at $300, credit card debt at $200, food at $360, and gasoline at $275. Create her budget in a table, compare the total income to total expenses, and determine how much excess income per month she has or how much she falls short by each month.
Odhalte odpověď
Step 1: To begin, we create the table with appropriate headings.
Income Source Amount Expense Amount Step 2: Her income categories are her nursing job, with $3,765.40 per month, and her part-time job, with $672.00 per month. Entering these into the table, we have the following.
Income Source Amount Expense Amount Nursing $3,765.40 Part-time $672.00 Step 3: Her monthly expenses are listed above. Entering the categories and the amount for each of those expenses, the table is now
Income Source Amount Expense Amount Nursing $3,765.40 Rent $1,050 Part-time $672.00 Car Payment $489 Student Loan $728 Car Insurance $139 Utilities $130 Clothing $150 Entertainment $300 Credit Card $200 Food $400 Gasoline $250 Step 4: Totaling the income and expenses, we see that her total income is $4,437.40 per month, and her total expenses are $3,836 per month. Comparing these, we see that Heather has $601.40 in excess income per month. This provides a cushion in her budget.
-
Carol is working in a dental lab, creating dentures and bridges. Monthly her take home pay is $2,816 (based on $22 per hour minus payroll taxes). She also receives $320 per month in child support for her one daughter. Her monthly expenses are rent at $700, car payments at $229, student loan payments at $250, car insurance at $119, health insurance at $225, utilities at $80, clothing at $75, entertainment at $200, food at $275, and gasoline at $275. Create Carol’s budget in a table, compare the total income to total expenses, and determine how much excess income per month she has or how much she falls short by each month.
Odhalte odpověď
Step 1: To begin, we create the table with appropriate headings.
Income Source Amount Expense Amount Step 2: Her income categories are from work, $2,816, and child support, $320, per month. Entering these into the table, we have the following.
Income Source Amount Expense Amount Job $2,816.00 Child support $320.00 Step 3: Her monthly expenses are listed above. Entering the categories and the amount for each of those expenses, the table is now
Income Source Amount Expense Amount Job $2,816.00 Rent $700 Child support $320.00 Car Payment $229 Student Loan $250 Car Insurance $119 Utilities $80 Health insurance $225 Clothing $75 Entertainment $200 Food $275 Gasoline $275 Step 4: Totaling the income and expenses, we see that her total income is $3,136.00 per month, and her total expenses are $2,428.00 per month. Comparing these, we see that Carol has $708.00 in excess income per month. This is the cushion in her budget.
-
In the example above, Carol had excess income of $708.00. She looks up the cost of before-school care for her daughter. She finds that, monthly, the cost would be $252.00 per month. Is this an affordable program for Carol? Add this expense to her budget table.
Odhalte odpověď
She can afford this, as the cost for the before school program is $252.00 and she had extra income of $708.00. Adding this to her budget, her budget table is now
Income Source Amount Expense Amount Job $2,816.00 Rent $700 Child support $320.00 Car Payment $229 Student Loan $250 Car Insurance $119 Utilities $80 Health insurance $225 Clothing $75 Entertainment $200 Food $275 Gasoline $275 Before-school care $252 Now, she has $456.00 in excess income per month.
-
In the example above, after Carol added before school care for her daughter to the budget, her budget was as shown below. Evaluate Carol’s budget using the 50-30-20 budget philosophy.
Income Source Amount Expense Amount Job $2,816.00 Rent $700 Child support $320.00 Car Payment $229 Student Loan $250 Car Insurance $119 Utilities $80 Health insurance $225 Clothing $75 Entertainment $200 Food $275 Gasoline $275 Before-school care $252 Odhalte odpověď
Carol’s total income is $3,136.00. Applying the 50-30-20 budget philosophy to this income requires the calculation of each of those percentages.
For the necessities, Carol should budget 50% of her income, or \(0.5\times \text{\$}3,136.00=\text{\$}1,568.00\).
For her wants, she should budget 30% of her income, or \(0.3\times \text{\$}3,136.00=\text{\$}940.80\).
For savings and extra debt service, she should budget 20% of her income, or \(0.2\times \text{\$}3,136.00=\text{\$}627.20\).
In her budget, her necessities include all expenses except for entertainment. These expenses total $2,480, which exceeds the suggested budget amount of $1568.00. To follow the guidelines, Carol would have to cut back on these necessities.
For her wants, she spends $200.00 on entertainment, which is well below the suggested budget amount of $940.80. If she modifies how much she spends on needs, she may be able to increase the spending on her wants.
Her excess income is $456.00, which is below what she should be saving and using to pay down extra debt. If she does adjust how much she spends on needs, she could increase the amount for savings.
-
Carmen is about to graduate and has been offered a job at a bank as a data scientist. She estimates her monthly take home pay to be $5,662.50. Apply the 50-30-20 philosophy to that monthly income. How should Carmen use this information?
Odhalte odpověď
Step 1. To apply the 50-30-20 budget philosophy to Carmen’s income, she needs to calculate 50%, 30%, and 20% of her income. Fifty percent of her income is \(0.5\times \text{\$}5,662.50=\text{\$}2,831.25\). Thirty percent of her income is \(0.3\times \text{\$}5,662.50=\text{\$}1,698.75\). Twenty percent of her income is \(0.2\times \text{\$}5,662.50=\text{\$}1,132.50\).
Step 2. She would then budget $2,831.25 for her needs, $1,698.75 for her wants, and $1,132.50 for savings and debt service.
Step 3. When choosing where to live, what to eat, and what to drive, she should make choices that keep those costs, combined with her debt service costs, gasoline, and utilities, below $2,831.25. This means she will have to make decisions about what her priorities are.
Step 4. She should then figure out what she wants to do with her money, and stay within the limits, that is, keep those costs below $1,698.75.
Step 5. Finally, she can begin building her savings with the remaining $1,132.50.
-
Steve is thinking of moving out of his family’s home. He currently works at a full-time job making $18 per hour, which will give him, approximately, a net annual income of $29,180 (working 40 hours per week for 52 weeks per year). He has student debt that he pays off at $218.00 per month, and already owns a car that he pays $162.00 per month for.
- Apply the 50-30-20 budget philosophy to Steve’s income.
- If he follows the budget, how much does he have, after paying his car payment and student loan, to spend on necessities.
- If he follows the budget, how much will he set aside for wants? For savings?
- Discuss the affordability of moving out, based on Steve’s budget.
Odhalte odpověď
Before the 50-30-20 philosophy can be applied, Steve’s monthly income needs to be determined. This is found by dividing his annual income by 12. This gives \(\text{\$}29,180/12=\text{\$}2,431.67\). This will be used for his monthly budget.
- To apply the 50-30-20 philosophy to Steve’s income, find 50%, 30%, and 20% of his monthly income.
Needs (50%): 50% of his income is \(0.50\times \text{\$}2,431.67=\text{\$}1,215.83\).
Wants (30%): \(0.30\times \text{\$}2,431.67=\text{\$}729.50\)
Savings (20%): \(0.20\times \text{\$}2,431.67=\text{\$}486.33\)
- The total for Steve’s needs is $1,215.83. From this, he already pays $218.00 for his student loans, and $162.00 for his car payment. Together that is $380.00. Subtracting from the amount he should budget for his needs, he can spend $835.83 on other needs.
- Steve budgeted $729.50 for wants, and $486.33 for savings and other debt servicing.
- Steve will have other needs to pay for, including rent, utilities, food, heath care, gasoline, and car insurance. It is difficult to imagine Steve being able to afford to move out, unless he reallocates money that he would want to save, or use for entertainment and other wants, or takes on another job. Even if Steve uses all the money that the 50-30-20 budget sets aside for savings, he still only has $1,322.16 to spend on those necessities. It does not appear he can afford to move out.
Symbols used here
Both signs at once: x = 3 ± 2 means 5 and 1.
The two sides are different.
Inequalities that allow equality; < and > exclude it.
Equal to the precision shown, not exactly.
The non-negative number whose square (n-th power) is x.
What is left after dividing a by n.
Per hundred: 15% = 15/100.
a for every b; a divided by b.
How to: Making a Personal Budget
- Create a personal budget with the categories of expenses and income.
- Apply general guidelines for a budget.
- Apply the 50-30-20 budget philosophy to Steve’s income.
- If he follows the budget, how much does he have, after paying his car payment and student loan, to spend on necessities.
- If he follows the budget, how much will he set aside for wants? For savings?
- Discuss the affordability of moving out, based on Steve’s budget.
- To apply the 50-30-20 philosophy to Steve’s income, find 50%, 30%, and 20% of his monthly income.
- The total for Steve’s needs is $1,215.83. From this, he already pays $218.00 for his student loans, and $162.00 for his car payment. Together that is $380.00. Subtracting from the amount he should budget for his needs, he can spend $835.83 on other needs.
Questions people ask
Why does the order of operations matter?
Because 2 + 3 × 4 would otherwise be two different numbers. The convention (brackets, exponents, multiplication and division, addition and subtraction) exists so every reader gets the same value from the same expression.
How do I check an arithmetic answer?
Estimate first (round every number and compute roughly), then compare. If the estimate and the exact answer disagree by more than a little, one of them is wrong. The solver shows every operation, so you can find which line went astray.
Why are fractions harder than decimals?
They are not harder, they are more exact: 1/3 is a precise number, 0.333 is an approximation. Fractions need a common denominator to add, which is the one extra step people trip on.
Zkuste si vlastní.
Parts of this page are adapted from OpenStax Contemporary Mathematics (CC BY-NC-SA 4.0). Condensed and re-explained here; errors are ours.