Household Budgets & Personal Financial Management

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  • 0:02 What Is a Budget?
  • 0:58 Household Income
  • 2:10 Household Expenses
  • 2:32 Discretionary Income
  • 3:45 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll explain and define the components of a budget: income, expenses, and discretionary income. You'll also learn how to categorize income and expenses as fixed or variable.

What Is a Budget?

Cooper accessed his online bank account and saw his account was negative $125.00. He drove to the bank to speak with a personal banker, who reviewed Cooper's account and told him it had been negative, or overdrawn, every month since it was opened. Overdrawn means Cooper had spent more money than what was in his account.

The banker asked Cooper if he ever made a monthly budget and explained that a budget is a written approximation of how much money you have coming in and how much money you have going out. Cooper told the banker he's never made a budget but would be interested in learning. The banker told Cooper that the bank has a tutorial on personal financial management, which encompasses assessing an individual's budgeting, spending, saving, and investing. The banker took Cooper to the conference room to access the tutorial online and told him to start with the budgeting section first.

Household Income

There are several types of household income: wages or salary, interest, bonus, tips, and commission.

Wages are income from hourly workers. For example, if you work 40 hours per week at $10 per hour, your weekly wage is $400 (40 * $10). Oppositely, salaried workers are compensated a fixed amount regardless of the number of hours they work. Interest is monies received from investments. A bonus represents income received for a special circumstance or incentive. Tips are income received for services. Lastly, commissions are paid based on how much is sold or a percentage of sales.

The tutorial asks Cooper to enter all of his monthly household income. The system separates the income based on fixed and variable. Fixed income, such as salaries, do not change. However, variable income, such as wages, interest, bonuses, tips, and commission, changes. It's imperative to understand your fixed and variable income. Fixed income you can rely on, but variable income must be carefully estimated to ensure you can meet your monthly obligations.

Household Expenses

Expenses are defined as the cost of running a household. Expenses are also separated by fixed and variable. Examples of fixed expenses are rent, car payment, credit card payments, insurance, and student loan payments. Variable expenses can include gas for your car, utilities, food, and cell phone service.

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