A budget is an itemized summary of likely income and expenses over a given period. As it relates to personal finance, budgets are an invaluable tool to help prioritize your spending and manage your money. No matter how much money you have, budgets provide an up-front, organized summary of income and expenses. Budgets can be made for different lengths of time and can be combined with other tools.
1. Financial Goals: Before creating a budget, you should establish some financial goals. Setting financial goals will help drive your budget. For example, perhaps you want to save for a large purchase? If so, factoring in a certain amount of money per month towards savings will help elements within your budget.
2. Track spending: The best way to understand where your money goes is to track your weekly spending. This small step will help you realize where your hard earned money is being spent. Once you understand where you're spending your money, it will become easier to take control of what you are buying and cut out any “useless” expenses. Remember: TRACK EVERYTHING! That iced coffee each morning certainly adds up over the course of a year.
Have you noticed anything after a week of tracking your spending? Are you spending more money than you have? Are there any areas for saving (i.e. cutting down on those iced coffees or utilizing your pre-paid meal plan as opposed to going out every night)?
3. Develop a Budget: Now that you know where your money is going each week, you are ready to create a monthly budget. Having a budget (and sticking to it) will allow you to spend your money more appropriately. The best part about a budget: you are the one creating it, so you chose where your money is spent. Helpful hints when creating a budget: Create a budget that fits your lifestyle. If you enjoy going out to eat, budget for that expense. Odds are if you create a budget that does not fit your lifestyle, you will not stick to it anyway. Spend less than you make. This sounds obvious, but if you create a budget in which you are spending less than you make, you avoid carrying over debt from month to month, AND you can put that extra money into savings. Keep it simple-- try and avoid a confusing budget. There are many budget templates and worksheets available; choose the one that works best for you. There are also many free websites available to track spending and create budgets online.
How does a credit card work?
Credit cards are considered to be revolving lines of credit. Lines of credit extended by the credit card issuer will vary for each individual card holder. Once a credit line is used and repaid, the portion of the funds repaid will become available again for use. Credit cards give you the option to pay a monthly minimum balance instead of the entire outstanding balance. However, keep in mind that the interest charges will accrue if balances are not paid in full. Essentially, credit cards allow you to borrow money and the cost of borrowing money is the interest you pay.
How does a debit card work?
Debit cards allow you to electronically access your bank account and withdraw cash to pay for purchases. Many financial institutions will issue debit cards to individuals that have checking accounts. Unlike most credit cards where you pay a balance monthly, when you use your debit card, the funds come out of your checking account immediately.
Which one is better?
It really depends on your preference. Below are some pros and cons of using both credit and debit cards:
| Debit Card | Pros | Cons |
|---|---|---|
| Offer a convenient way to buy things in a manner that is analogous to writing a check, but faster. The purchase amount is withdrawn almost immediately from your bank when you use your debit card | If stolen, you are responsible for up to $500 worth of unauthorized purchases if not reported within 48 hours | |
| Can be used to obtain money from ATMs | Some financial institutions will charge fees for using ATM’s outside of their network | |
| Allow you to make deposits or transfers between accounts | Some financial institutions charge a quarterly or annual fee to use your debit card |
| Credit Card | Pros | Cons |
|---|---|---|
| Personal Liability limitation. With identify theft a serious issues, the Truth in Lending law limits to $50 the amount a cardholder must pay if a credit card is stolen | They can be too convenient. You might appreciate buying what you need without going to the bank, but a credit card balance can rise quickly without proper management | |
| Offer convenient purchase method when you don’t have cash | Many credit card companies charge late payment fees | |
| Helps build a credit history | Interest rates increase if you miss a payment | |
| Many credit cards offer benefits (i.e. frequent flier miles) | Many credit cards carry an annual fee | |
| Provide a source of money for emergencies | Use “floating” annual interest rates that can go up without notice |
** Above information taken from: 2012 NEFE CashCourse, 2012 CEPF Training Manual
What is a credit score?
A credit score is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time. A credit score helps lenders (banks, credit unions, etc.) estimate your credit risk. These scores are collected by lenders and act as key driving factors for making credit decisions. The most widely used credit scores are FICO Scores, the credit scores created by FICO, which collects credit information from the three main credit reporting agencies, Equifax, Experian, and Transunion.
What is a credit report?
A credit report details your credit history reported by any lenders who have extended credit to you. Your individual credit report lists what types of credit you use, the length of time your accounts have been open, and whether you’ve paid your bills on time. A credit report gives a broad view of your credit history, as opposed to information from one particular lender. Since your FICO score is based on information within your credit report, it is important to check your credit report yearly. You have the right to obtain one free copy of your credit report per year from each of the three major credit reporting agencies.
Why are the two important?
Credit scores give lenders a quick measurement of your overall credit risk. As a result, higher credit scores can speed up the credit approval process, lower the interest rates on your credit, and help you secure better credit offers. Similarly, maintaining a clear credit report by paying your bills on time, not missing payments, and maintaining low balances on credit cards will increase the likelihood of securing favorable credit.
What is Identify Theft?
Identity theft occurs when someone uses your personal identifying information, like your name, Social Security number, or credit card number, without your permission, to commit fraud or other crimes. The Federal Trade Commission (FTC) estimates that as many as 9 million Americans have their identities stolen each year.
The crime takes many forms. Identity thieves may rent an apartment, obtain a credit card, or establish a telephone account in your name. You may not find out about the theft until you review your credit report or a credit card statement and notice charges you didn’t make - or until you’re contacted by a debt collector.
While some identity theft victims can resolve their problems quickly, others spend hundreds of dollars and many days repairing damage to their good name and credit record. Some consumers victimized by identity theft may lose out on job opportunities, or be denied loans for education, housing, or cars because of negative information on their credit reports.
How can I find out if my identity was stolen?
The best way to find out is to monitor your accounts and bank statements each month, and check your credit report on a regular basis. If you check your credit report regularly, you may be able to limit the damage caused by identity theft.
Unfortunately, many consumers learn that their identity has been stolen only after some damage has been done.
You may find out when bill collection agencies contact you for overdue debts you never incurred.
You may find out when you apply for a mortgage or car loan and learn that problems with your credit history are holding up the loan.
You may find out when you get something in the mail about an apartment you never rented, a house you never bought, or a job you never held.
What should I do if my identity is stolen?
Filing a police report, checking your credit reports, notifying creditors, and disputing any unauthorized transactions are some of the steps you must take immediately to restore your good name. To learn about these steps and more, visit the DEFEND: Recover from Identity Theft section on the FTCs website.
**Above information regarding Identify Theft is taken from “Deter. Defect. Defend. Avoid ID Theft” the Federal Trade Commission’s website dedicated to educating consumers about Identify Theft.
401(k) Plan - A retirement savings plan established by an employer in which employees set aside a percentage of pay in an account that earns interest. 403(b) Plan: A retirement savings plan similar to a 401(k), but exclusively for employees of public schools and certain tax-exempt organizations.
529 College Savings Plan - An education savings plan operated by a state or educational institution. It is designed to help families set aside funds to pay for future college costs.
Annual percentage rate (APR) - APR allows you to evaluate the cost of the loan in terms of a percentage. If your loan has a 10% rate, you'll pay $10 per $100 you borrow annually.
Annual percentage yield (APY) - The effective, or true, annual rate of return. The APY is the rate actually earned or paid in one year, taking into account the effect of compounding. The APY is calculated by taking one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate has an APY of 12.68% (1.01^12). Confused about APR vs. APY? View this article from Investopedia to help further explain these two concepts.
Annual Fee - The amount that credit card companies charge for the use of a credit card.
Asset - Any possession that has value in an exchange. For example, cash, stocks, bonds, real estate and personal possessions.
Bank - A for-profit company that is owned by its stockholders and provides saving and checking accounts and other financial services to its customers.
Bonds - Loans to corporations or to the government for a certain period of time, called a term. You earn interest on your loan investment, and at the end of the term, your bond matures and can be repaid to you by the company.
Budget - A plan for managing money, dividing up expected income and expenses among spending and saving options based on personal financial goals during a given time period.
Capitalization - When interest is capitalized, the outstanding (unpaid) interest on your student loan account is added to the principal balance. When this happens, you are essentially paying interest on top of interest.
Certificate of Deposit (CD) - An account in which you deposit funds for a set term (e.g., six months or one, two, or five years), with a financial institution, with the promise of a set interest rate. For most CDs you cannot make deposits or withdrawals to the account during this term.
Corporate bonds - Loans to corporations for a certain period of time, called a term.
Credit - Amount of money a creditor is willing to loan another to purchase goods and services, based the expectation that the money will be repaid as promised with interest.
Credit Card - Amount of money a creditor is willing to loan another to purchase goods and services, based the expectation that the money will be repaid as promised with interest.
Credit Limit - The maximum amount of credit a lender will extend to a customer.
Creditworthiness - A measure of one's ability and willingness to repay a loan.
Credit rating/score - A measure of creditworthiness based on an analysis of the consumer's financial history, often computed as a numerical score, using the FICO or other scoring systems to analyze the consumer's credit. A creditor's evaluation of a person's willingness and ability to pay debts as judged by character, capacity, and capital; a mathematical model used by lenders to predict the likelihood that bills will be paid as promised. Worried about your credit score? Learn more about the effects of credit inquiries on your credit score.
Credit Union - A financial institution owned by its members that provides savings and checking accounts and other services to its membership at low fees.
Debit Card - A card used to pay for goods and services directly from a checking account by transferring funds electronically from one's checking account to the store's account to pay for a purchase; also called check cards.
Debt - The entire amount of money owed to lenders.
Deferment - A temporary postponement on federal student loan payment, deferments are granted if you meet the specific criteria (for example, unemployment or economic hardship).
Diversification - When you spread the risk of loss over a variety of savings and investment options.
Earned Interest - The payment you receive for allowing a financial institution or corporation to use your money.
EE Bond - EE is a type of bond that is normally purchased at half its face value and must be held for at least one year before being cashed.
Employee benefits - Additional benefits, beyond a paycheck, offered by employers (e.g., health insurance or pension plan).
Electronic Transfer Account (ETA) - A low-cost savings account that provides federal payment recipients with the opportunity to receive their federal payments through direct deposit.
Equity - The difference between how much your house is worth and how much you owe on your mortgage.
Federal Student Loans - Loans that are guaranteed by the federal government, including Direct, Parent PLUS, and Grad PLUS loans. These loans have a fixed interest rate, as well as deferment and forbearance options.
Fixed Expenses - Expenses that cost the same amount every time.
Grace Period - The length of time you have before you start accumulating interest on an unpaid balance.
Gross Income - The total amount of income from wages before any payroll deductions.
I Bond - A type of bond purchased at face value, which is the amount printed on the bond and must be held for at least one year before being cashed.
Individual Development Account (IDA) - A matched savings account in which another organization (e.g., a foundation, corporation, or government entity) agrees to add money to your account to match the money you save in it.
Identity Theft - When someone uses your name, Social Security number, credit card number, and other personal information without your permission.
Income - Any money an individual receives.
Interest - Interest is the additional amount you will pay to a lending institution to borrow money. In terms of savings, interest is the additional amount you will earn for having your money in a bank account or other savings vehicle. Simple interest is interest paid only on the "principal" or the amount originally borrowed, and not on the interest owed on the loan. Compound interest is interest credited daily, monthly, quarterly, semi-annually, or annually on both principal and previously credited interest.
Investment - Setting aside money for future income, benefit, or profit to meet long-term goal; using savings to earn a financial return.
Late Fee - A penalty on all types of credit for making a payment after its due date.
Loan Term - The length of time you have to pay off a loan.
Money Market Account - An account that usually pays a higher rate of interest, and it usually requires a higher minimum balance to earn interest than a regular savings account does. You can make deposits and withdrawals.
Mutual Fund - A professionally managed collection of money from a group of investors. A mutual fund manager invests your money in some combination of various stocks, bonds, and other products.
Needs - Essentials or basics necessary for maintaining physical life, including food, clothing, water, and shelter, sometimes called material well-being
Net Income - Also called "take-home pay"; it's the amount of income left after payroll deductions
Origination Fee - A charge for setting up a loan that is typically associated with home and student loans.
Payroll deductions - Amounts subtracted from gross income that are withheld by an employer for items such as taxes and employee benefits.
Promissory Note - A legally binding document signed when you take out a student or parent loan. The promissory note (sometimes referred to as a "prom note") lists the conditions under which you're borrowing and the terms under which you agree to pay back the loan. It will include information on how interest is calculated and what deferment and cancellation provisions are available to the borrower.
Retirement Investments - Money you invest over a long period of time so that you will have money to live on when you are no longer working.
Roth Individual Retirement Arrangements (IRAs) - Contributions to a Roth IRA are not tax deductible while contributions to a traditional IRA may be deductible. The distributions (including earnings) from a Roth IRA are not included in income.
Statement Savings Account - An account that earns interest. You will usually receive a quarterly statement that lists all your transactions–withdrawals, deposits, fees, and interest earned.
Stocks - Parts of a company, called shares. If the company does well, you might receive periodic dividends based on the number of shares you own. Dividends are part of a company’s profits that it gives back to you, the shareholder.
Subsidized Loan - A loan in which the interest that accrues on the subsidized portion of federal loans during the in school period, grace period, and periods of deferment is covered by the lender.
Saving - The process of setting income aside for future spending. Saving provides ready cash for emergencies and short-term goals, and funds for investing.
Traditional Individual Retirement Arrangements (IRAs) - Contributions to a traditional IRA may be tax deductible, based on the amount of your contribution and your income. The earnings on the amounts in your IRA are not taxed until they are distributed.
Treasury Inflation-Protected Securities (TIPS) - Provides protection against inflation, and the interest rate is tied to the Consumer Price Index.
Unsubsidized - A loan in which the borrower is responsible for interest that accrues on any unsubsidized loan.
U.S. Savings Bonds - A long-term investment option backed by the full faith and credit of the U.S. Government. Savings bonds can be purchased at a financial institution for as little as $25 or through payroll deductions.
U.S. Treasury Securities - Loans to the U.S. Government for a certain period of time, called a term. Treasury securities are backed by the full faith and credit of the U.S. Government and include Treasury bills (T-bills), notes (T-notes), and bonds (T-bonds).
Variable Annuity - An insurance contract that invests your premium in various mutual fund-like investments.
