Ron Larson
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2.4 Budgeting

2.4 Budgeting
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  • 15. Where Does My Money Go?

    Your entire monthly income is represented in the doughnut graph. Find your gross annual income. (See Example 5 and Example 6.)

    • Worked-Out Solution

      An easy way to find your total monthly income is to enter each category in a spreadsheet and then total the column.

      With a total monthly income of $4500, your total annual income is

      As it happens, this annual income is close to the median annual income for a household in the United States.

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     __   _     _____    ______     ______   _    _   
| || | ||  |  ___|| |      \\  /_   _// | \  / || 
| '--' ||  | ||__   |  --  //   -| ||-  |  \/  || 
| .--. ||  | ||__   |  --  \\   _| ||_  | .  . || 
|_|| |_||  |_____|| |______//  /_____// |_|\/|_|| 
`-`  `-`   `-----`  `------`   `-----`  `-`  `-`
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  • 16. Budget Percent for Food

    What percent of your expenses are budgeted for food? (See Example 5 and Example 6.)

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                _____    _____       ___     __   __  
    ___    |  ___|| |  __ \\    / _ \\   \ \\/ // 
   /   ||  | ||__   | |  \ ||  | / \ ||   \   //  
  | [] ||  | ||__   | |__/ ||  | \_/ ||   / . \\  
   \__ ||  |_____|| |_____//    \___//   /_//\_\\ 
    -|_||  `-----`   -----`     `---`    `-`  --` 
     `-`
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  • 17. Budget Percent for Entertainment

    What percent of your expenses are budgeted for entertainment? (See Example 5 and Example 6.)

    • Worked-Out Solution

      Graphical Estimation: In the doughnut graph, you know that a quarter of the doughnut represents 25% of the monthly total. The red part (entertainment) is roughly one-fifth of a quarter of the graph. So, you can estimate that entertainment represents about 5% of your monthly budget.

      Calculation: To calculate the percent for any category, you can use the spreadsheet that you created in Exercise 15. In the column for percent, divide each budgeted amount by $4500 (your total monthly income).

      So, you are budgeting about 6% of your monthly income for entertainment. This agrees with the graphical estimation of 5%.

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     _    _    __   __    ______     ___      _  __  
| \  / ||  \ \\/ //  /_   _//   / _ \\   | |/ // 
|  \/  ||   \ ` //     | ||    / //\ \\  | ' //  
| .  . ||    | ||     _| ||   |  ___  || | . \\  
|_|\/|_||    |_||    /__//    |_||  |_|| |_|\_\\ 
`-`  `-`     `-`'    `--`     `-`   `-`  `-` --`
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  • 18. Eliminating Expenses

    What percent of your expenses could you eliminate if needed? (See Example 5 and Example 6.)

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     _    _     _____     ____     _    _    _____    
| || | ||  |  ___||  |  _ \\  | || | || |  __ \\  
| || | ||  | ||__    | |_| || | || | || | |  \ || 
| \\_/ ||  | ||__    | .  //  | \\_/ || | |__/ || 
 \____//   |_____||  |_|\_\\   \____//  |_____//  
  `---`    `-----`   `-` --`    `---`    -----`
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  • 19. The 28/36 Rules for Home Mortgage Payments

    You are interested in buying a house. Your realtor determines that the monthly mortgage (including property taxes and insurance) for the house is $1350.00. Of the $594 budgeted for transportation expenses, $384 is your car payment. According to the 28/36 rules, do you qualify for the home mortgage? (See Example 5 and Example 6.)

    • Worked-Out Solution

      The 28% Rule states that the ratio of your monthly mortgage (including loan payment, property taxes, and insurance) to your gross monthly income should not exceed 28%.

      The 36% Rule states that the ratio of your total monthly debt payments (mortgage, credit card minimum payments, loans, and all other debts) to your gross monthly income should not exceed 36%.

      So, using the 28/36 rules, you fail to qualify for the home mortgage.

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                _____      _____     ___      _  _   
    ___    |  ___||   / ___//   / _ \\   | \| || 
   /   ||  | ||__     \___ \\  | / \ ||  |  ' || 
  | [] ||  | ||__     /    //  | \_/ ||  | .  || 
   \__ ||  |_____||  /____//    \___//   |_|\_|| 
    -|_||  `-----`  `-----`     `---`    `-` -`  
     `-`
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  • 20. Mortgage Payment 10 Years from Now

    Using the 28/36 rules, how much do you think you will be able to spend on a monthly mortgage payment 10 years from now? Explain your reasoning. (See Example 5 and Example 6.)

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       _____     ___    __    __   __   __   _    _   
  / ___//   / _ \\  \ \\ / //  \ \\/ // | || | || 
  \___ \\  | / \ ||  \ \/ //    \ ` //  | || | || 
  /    //  | \_/ ||   \  //      | ||   | \\_/ || 
 /____//    \___//     \//       |_||    \____//  
`-----`     `---`       `        `-`'     `---`
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  • 21. Comparing Your Budget to a Financial Adviser

    You go to a financial adviser to get advice about household budgets. The financial adviser gives you the general percent guidelines shown. How does your budget compare with the guidelines? (See Example 5 and Example 6.)

    • Worked-Out Solution

      According to the Household Budget Guidelines, your budget is looking good. You are keeping your expenses under the guideline percents.

      Here are your areas of concern.

      • You only set aside 5% for retirement. This is half the recommended amount.
      • If you combine 1.1% for clothing with 5.4% for miscellaneous, you get a total of 6.5%. Comparing this to the miscellaneous recommendation of 2-4%, your budget is about double the recommended amount.

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     ______    _    _     _  _      ___       _____  
|      \\ | || | ||  | \| ||   / _ \\    / ___// 
|  --  // | || | ||  |  ' ||  | / \ ||   \___ \\ 
|  --  \\ | \\_/ ||  | .  ||  | \_/ ||   /    // 
|______//  \____//   |_|\_||   \___//   /____//  
`------`    `---`    `-` -`    `---`   `-----`
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  • 22. Analyzing a Budget

    Describe other ways you could analyze your budget. (See Example 5 and Example 6.)

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     _    _     ______   __   _    __   __    _____   
| || | ||  /_   _// | || | ||  \ \\/ //  /  ___|| 
| || | ||   -| ||-  | '--' ||   \ ` //  | // __   
| \\_/ ||   _| ||_  | .--. ||    | ||   | \\_\ || 
 \____//   /_____// |_|| |_||    |_||    \____//  
  `---`    `-----`  `-`  `-`     `-`'     `---`
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