Section 3-1 Budgeting

3-1 Learning Objectives

• Calculate monthly take-home pay.
• Calculate the amount spent on regular expenditures.
• Prepare a budget.
• Prorate long-term expenses to save in advance for them.

Very few people put forth the effort to track exactly what they make and spend. Learning how to budget your money is
a good first step in avoiding massive debt; the hard part is sticking to that budget!

Budgeting is the process of deciding how much money you can spend on various expenses based on your income that is,
the amount of money you’re earning. In this section, we’ll study budgeting and hopefully help you to make good
decisions in regard to your expenses.

Income
The first step in building a budget has to be identifying exactly how much money you’re making. Most people can tell
you their hourly wage or salary, but because of deductions for taxes, insurance, and retirement, a lot of people don’t
know how much money is actually left for them to spend. This amount is known as take-home pay. Since many common
expenses occur on monthly cycles, it’s useful to know exactly how much money you bring home per month.

Example 1 - Calculating Monthly Take-Home Pay

Camila works full-time as an executive assistant and has a check for $1,023.07 direct-deposited into a checking
account every other Friday. What is Camila’s monthly take-home pay?

Solution

Expenses
While there are a lot of people who don’t know how much money they bring home each month, it probably wouldn’t be
a stretch to say that few people know exactly how much they spend each month. Expenses that you think of as minor
can add up very quickly.
For example, my friend Charles noticed that one of his students came to class every day with two cups of coffee from a
well-known coffee chain that isn’t exactly famous for their low prices. He asked her if she’d ever thought about how
much she spent on that coffee over the course of a year; not surprisingly, she had not. Let’s help her out.
Example 2 - Calculating the Sum of Regular Expenditures

(a) If you buy two cups of name-brand coffee every day at $3.25 per cup, how much would you spend in one
year?
(b) If you spend $4.79 for lunch at Burger King three times per week, how much would you spend during a 16-
week semester?

Solution

We’ll call expenses like daily gourmet coffee luxuries, which are things you can live without. Everyone wants to be able
to spend money on luxuries, but you won’t know how much you can comfortably spend until you calculate your
necessary expenses. These are the basic things you have to pay for: food, shelter, insurance, transportation, clothing,
utilities, student loan payments. Some of those expenses are fixed: the amount you spend each month is consistent.
Housing, insurance, utilities, loans, and transportation usually fall into this category. Other necessary expenses are
variable, meaning they can change from month to month, like food and clothing.

The key to maintaining a sensible budget is to add up your necessary expenses and subtract them from your income.
The result will let you know how much you have to spend on entertainment and luxuries, and will also let you know if
you’re able to save any money (which should be one of your goals every month).

Example 3 - Preparing a Budget

Tremaine brings home $2,146.79 per month, and has the fixed expenses shown below. How much can he afford
to spend on food, clothing, and luxuries?

Rent: $625 Insurance: $97.50

Car Payment: $199.23 Utilities: $175
Cell Phone: $79.50 Student: $211.53
Gas: $110

Solution
Example 4 - Finding the Effect of Eating Out on a Budget

Tremaine, our friend from Example 3, goes out for happy hour drinks and dinner with friends every Friday, and
usually spends about $50. On average, what percentage of his budget after fixed expenses is eaten up by these
happy hours?

Solution

Prorating Long-Term Expenses

So far, we’ve focused on monthly expenses. But some regular expenses occur on an annual or semiannual basis: car
insurance, tuition payments, and property taxes are three examples that come to mind. If you manage your money by
spending every penny you have each month, when those occasional large expenses pop up, it can be very hard to find
the money to pay for them. The result is usually mounting debt that can take years to overcome.

One way to avoid the negative effects of these long-term expenses is to budget money every month in advance of the
due dates, maybe putting it into a separate savings account. Then when the big expense is due, the money is there
waiting.

Example 5 - Prorating Long-Term Expenses

Jin pays $337.24 every 6 months for car insurance. He also pays $2,623 for tuition at the beginning of both fall
and spring semesters, and budgets $650 for books and supplies for each semester. If he wants to plan ahead,
how much money should he put into savings every month?

Solution
 Supplemental Problems
Example 6 – What is your monthly take-home pay if your take-home pay is calculated as 40 hours per week at $16.75
per hour with 28% deducted for taxes and insurance? Round the final answer to the nearest cent; use 365 days in a year.

Example 7 – For the second week of February, John Butler worked 53.50 hours. John earns $18.40 an hour. His employer
pays overtime for all hours worked in excess of 40 hours per week and pays 1.5 times the hourly rate for overtime hours.
a. What is his regular pay amount?

b. What is his overtime pay?

c. What is his gross pay?

Example 8 – Bartlett Electronics pays all sales representatives 4% commission on the first $30,000 of their individual
sales and 6% commission on their sales in excess of $30,000. Assume that Alice Reed sold merchandise valued at
$60,500 during the month of January.
a. Find the commission on sales in the sales base.

b. Find the commission on additional sales.

c. Find the gross pay.