Financial literacy: income and decisions (lesson 1)  (Page 4/9)

Step 6.- Before starting the discussion with the students about the budget topic is important to the instructor to clarify some basics concepts that will help you answer the questions of Visual 2 .

• Most people can’t afford everything they want to buy, so they have to make tradeoffs. Making tradeoffs may mean giving up things you can do without, or buying something less expensive that still meets your needs, in order to afford to afford the things that are most valuable to you. The idea of making tradeoffs may also relate to how you spend your time. For example, to make more money at your job, you may have to work longer hours.

• One of the keys to good money management is to live within your means. This means living a lifestyle that you can afford. Don’t spend money faster than you earn it.

• Avoid credit card debt. Young adults are especially at risk because they’re frequently barraged with credit card offers, even before they’re working and earning money. Once you have a credit card, it may be tempting to use it. Unless you’re careful, you may end up buying more things, and spending more for them, than you would otherwise.

• Whenever you use a credit card, you have to pay the money back! The money you’re spending when you use a credit card is not the same as the money you have in your pocket or in the bank. It’s money that you’re borrowing and have to repay. Avoid owing others more than you can repay. It’s a painful experience that can negatively affect your money situation for years.

• A personal budget is a written plan for reaching your financial goals. On a simple one page form you track the money you have coming in and what you spend in an average month. Putting it down on paper helps you see where you can improve and make better money decisions. A budget can help you set aside enough to pay your bills, have some savings for emergencies, and some money left over in your pocket.

• To create your personal budget, first, write down your income, or how much money you have coming in during an average month. Next, write down your expenses, or the money you spend each month. If you’re living within your income, your total expenses shouldn’t exceed your net income. Remember, budget to cover your expenses, but allow yourself some dollars left over for flexibility.

• To get a clear picture of how you actually spend right now, it will probably help to keep a spending diary. This means saving your receipts and writing down everything you spend – the items and amounts – for an entire month. You may want to keep a spending diary for a month or two before creating your budget.

• There are two types of expenses: fixed and variable. To spend your money smart, it’s important to know the difference among the two.

• Fixed expenses are regular amounts that generally don’t change much. They can be monthly expenses like rent or car payments. Or they can be bills you receive less often, like car registration or insurance.

• Variable expenses also happen on a regular basis and are also for necessities. But with variable expenses, you have more control over how much you spend. For example, how much you spend on food, clothes or how many long distance phone calls you make in a month. Another important discretionary expense is savings. It’s up to you to decide how much of your money you’re going to set aside for your future.