13.1 Income and Expenses

Unit 13.1

Income vs Expenses

Income & Expenses - How do they differ?

Expenses

Income

• Income is the money that you receive in exchange for providing a good or service.
• Income is used to pay for day-to-day expenditures and, hopefully, to save for long-term purchases/investments.
• Income is often referred to as earnings and is subject to taxation.

• An expense is the cost to acquire a good or service and represents money that you pay out.
• There are two types of expenses:

- essential expenses - discretionary expenses

VS.

Consistent Income

Inconsistent Income

Your amount of income varies Your pay period can vary Difficult to make a budget

Paid the same amount Paid on a specific timeline (pay period)Making a budget is easy

Question

VS.

Net (Realized) Income

Gross Income

Amount of your actual take-home pay AFTER all deductions have been removed (approximately 70% of your gross pay) When budgeting, it is important to consider your NET income rather than GROSS.

Amount paid to an employee BEFORE any deductions are removed. Deductions include: Federal and State Income Taxes Social Security and Medicare Taxes Health Insurance Life Insurance Retirement

Question

Example

You have a consistent net income of $475 every two weeks. When your next paycheck arrives, you have the following expenses to cover: electric: $175 groceries: $100 car insurance: $100 gas for car: $30 new clothes: $50 movies: $30

Do you have enough to cover these expenses? If not, what expense(s) can you do without?

You have an inconsistent income, but based on past earnings, you know that your lowest net pay is $250 per week. Your expenses for next week are: gas: $30 groceries: $75 electric bill for $175 If you earn your lowest net pay, will you have enough to cover your expenses/ electric bill next week?

Suppose you saved $200 from your last paycheck and you will earn $350 (net income) this week. Will you have enough to cover the following expenses? rent: $500 gas: $30

Applications

You need new shoes for work which cost $70. You earn $400 net income each week, but have expenses totaling $380 each week. If you set aside the difference between your weekly income and expenses, how many weeks will it take you to save enough to buy the shoes?

Applications - Continued

Suppose you are paid every 2 weeks. Your gross income for each paycheck is $850 and your deductions for each paycheck total $180. Your expenses every 4 weeks are shown in the table. If you incur no additional expenses, how much money could you potentially save every 4 weeks?

VS.

Discretionary Expenses

Essential Expenses

Expenses that are not essential, or necessary, for you to earn a living and support yourself. This term means that it is at your discretion as to whether or not you spend money on an item

If it hinders your ability to earn money or to live, it is an essential expense. Essential means extremely important or absolutely necessary.

Examples

Examples

Define each expense as essential or discretionary:

Discretionary

Essential

Discretionary

Discretionary

Essential

Essential

An emergency fund is an easily accessible account (typically savings) in which you keep enough funds to cover your essential expenses for 3 to 6 months.

Example

Suppose you want to build up an emergency fund with enough money to cover 5 months of essential expenses, and you want the fund to be ready in 15 months. How much do you need to set aside each month if your essential expenses are $960/month?

You have $1,200 in essential expenses each month, suppose you would like to build up an 8-month emergency fund over an 18-month period of time. How much do you need to save each month to accomplish your goal?

You have $1,470 in essential expenses each month, suppose you would like to build up a 6-month emergency fund over a 21-month period of time. How much do you need to save each month to accomplish your goal?

Upcoming

Friday 4/28 - Unit 13 Budget Calculator Project Tuesday 5/2 - Flex Day (No Classes) Wednesday 5/3 - Unit 13 Review & Test