Introduction: Everyone loves to have money, but how do we make it, and how do we ensure that we manage it efficiently? This section will introduce you to the importance of goal setting and budgeting, along with discussing forms of income and taxation.
Lesson 2.1 – Goal Setting
The key to managing anything, from your academics to your finances, is goal setting. By setting goals, you hold yourself accountable in the present, and work to develop towards something in the future. Lebron James, for example, wouldn’t be one of the greatest basketball players of all time if he didn’t set personal goals for himself. Lebron once told reporters, “I have a personal goal to be the greatest.”
Lebron’s goal, however, isn’t exactly a smart one. How do you measure being greater than a previous players, and what statistics or accomplishments should be factored into this consideration? When setting goals for your finances, you should use SMART goals. SMART goals are: Specific, Measurable, Attainable, Realistic, and Time-based.
Let’s look at two different goals: “I want to save $5,000 over the next three months,” and “I want to save a lot of money over the few months so that I can buy six mansions.” The first goal is a SMART goal, while the second one is not. The first goal is specific, it has an exact figure of desired savings, thus can be measured. With the second statement, the lack of specificity, wanting “a lot of money,” makes it impossible to measure. Similarly, the level of specificity plays into the attainability of the goal. You can definitely attain $5,000, it’s an exact and tangible sum, but how can you attain “a lot of money”? It’s an abstract amount. Unless you’re Bill Gates, it’s probably impossible to save enough for a six mansions in a few months, making the second goal unrealistic. Finally, the first goal can be time measured – the deadline is in three months – while the second goal has no definitive endpoint.
Think about things you’d like to accomplish in your academic, athletic, social, or FBLA life. Try setting SMART goals to achieve them.
Section 2.2 – Budgeting 101
Once you’ve set a goal, you need to think about what steps you need to take to accomplish that goal. With your financial goals, it’s crucial to partaking in budgeting to monitor your financial status and make sure that you’re on track for the future. A budget is a plan for your future income and expenses. Income is money you receive, while expenses are money that is leaving you in some form.
When you make a budget, you estimate the income that you’ll be receiving for the specified period, and the allocate portions of it to each of your estimated expenses. If you make a sound budget and follow through with it, you’ll be on track to reach your goals.
Later we’ll look at the components of a budget and how to create one, but first it’s important to look at how you make and spend money.
Section 2.3 – Employment
Everybody loves money, especially making it. Unfortunately, many people don’t feel the same way about how they make money, their employment. While you can make money from investing (we’ll discuss that in a later section), the vast majority of one’s income, money being received, comes from their job.
Typically, an employee makes a set amount of money and is paid in predefined intervals. For example, a worker making $72,000 a year may get paid $6,000 each month, or $1384.62 a week. This is called a salaried worker. There are, however, numerous variations and forms of employment.
The most common variation are hourly workers, in which one is paid a certain amount per hour. The company decides how often you work, and you are paid accordingly. Under the Fair Labor Standards Act (FLSA), the federal minimum wage is $7.25 an hour, and this applies almost all hourly workers.
Many states and cities have minimums higher than the federal minimum. Massachusetts has an $11 minimum wage, while Seattle, WA currently has a minimum wage of $15. A complete list of state minimum wages can be viewed here.
If you work in a tip-based job, for example, a restaurant server, there are different guidelines. These workers are known as tipped employees. Under the FLSA, they are required by the federal government to be paid a minimum of $2.13 by their employer, and as long as tips plus $2.13 equal at least $7.25, no further payment from the employer is required. As with traditional hourly workers, the minimum wage for tipped employees differs based on the state and locality. As complete list of state tipped minimum wages can be viewed here.
The FLSA also establishes a youth minimum wage. Under the youth minimum wage, employers can pay those under the age of 20 a wage of $4.25 per hour for up to 90 days. An employer cannot terminate your employment after these 90 days expire to avoid paying you the regular minimum wage. The concept behind the federal minimum wage is that it encourages employers to hire youth, a demographic that is typically overlooked in hiring. A fact sheet about the federal minimum wage from the US Department of Labor can be found in the resources section of this course.
A common form of payment is a commission. A commission is a fee or percentage of a purchase that goes to a worker when they sell something. For example, a worker at store that sells TVs may make a commission off of each purchase. This can be a set fee, say $20 per TV, or a percentage, say 2% of the total cost of the purchase. From a consumer standpoint, it’s important to be cautious when dealing with salespeople or financial service providers that are working with a commission. They are incentivized to sell you the most expensive product, maximizing their commission, rather than sell you the best option.
Section 2.4 – Income and Expenses
As mentioned previously, income is money that goes inwards, and is earned in some form. While income can come from a variety of sources, your job, your investments etc, are two types of income: fixed income and variable income. Fixed income is income that remains the same, while variable is income that changes. For example, if you get paid $20 every week, you have $20 per week in fixed income. If you sell scarves on the side, you probably aren’t sure of exactly how much you’ll earn each week, as it’s dependent on how many scarves you sell. This would be variable income.
Likewise, there are two types of expenses: fixed expenses and variable expenses. Fixed expenses include things that you may the same amount for on a consistent basis. If you pay $100 per month for electricity, you would have e fixed expense of $100 per month. Variable expenses are things you spend on, but not regularly at a set amount. The price of going to the movies would be a variable expense.
For more information about types of income and expenses, check out this great guide from the Oklahoma State Department of Education.
Lesson 2.6 – Taxation
Benjamin Franklin famously said “in this world nothing can be said to be certain, except death and taxes.” While taxes are often loathed, they play an important role in the development of our nation, helping provide funding for government programs such as infrastructure and education.
Both the federal and state governments have an income tax. As the name explains, this is a tax on the income one makes. While some nations use a flat tax, in which everyone is taxed at the same rate, the United States’ federal income tax is a progressive tax. This means that as one’s income goes up, their tax rate goes up as well. As the states are free to set their own income tax, some states have flat taxes while others have progressive taxes. You can view detailed state income tax info here.
State (and sometimes local) governments also collect sales tax. As the name describes, this is a tax on items purchased, and are taxed at the point of purchase. Often, a state or city will increase sales tax for the purpose of a major project, for example, funding a sports stadium.
Like with income tax, both federal and state governments collect a payroll tax. Created under the Federal Insurance Contributions Act, or FICA, these taxes are taken directly out of a employee’s pay by their employer, and are used to fund Social Security and Medicare.
Finally, local governments enact taxes on property. A property tax is based on the value of one’s property as valued by the local government.
Investopedia has a superb guide to types of taxes, which can be viewed here. For an in-depth look, check out Yusuf Fattah of Florida FBLA’s guide to taxes.
The federal government agency in charge of collecting and enforcing the federal taxation system is the Internal Revenue System, or IRS. The IRS is under the Department of Treasury, and was established by President Lincoln. The IRS administers the collecting of taxes, meaning you’ll pay federal taxes to the IRS.
The IRS has a myriad of different forms for taxation, but for federal income tax, there are three primary forms, all of which include the number “1040.” The 1040 form is what Investopedia calls the “standard” form for filing federal income tax. Depending on your financial status, you may qualify for a different variation of the 1040 form. The 1040EZ form is, as the name suggests, the easiest to fill out. According to the IRS, you can use the 1040EZ form if you meet a series of requirements, including filing a joint form if you’re married, having no dependents, be under 65, and a taxable income of under $100,000 among other factors. If you don’t meet some requirements, such as the joint filing and dependent and age status, but have a taxable income of under $100,000, you could be eligible for the 1040A form, which is longer than the 1040EZ form, but still shorter than the standard 1040. A full list of differences and form qualifiers can be found on the IRS website.
Lesson 2.7 – Making a Budget
Making a budget is an essential life tool, and helps ensure that you keep your finances on track. Check out this PowerPoint guide from Matt Hird of Maine FBLA.
Lesson 2.8 – Budgeting Tactics
You may have noticed in Matt’s PowerPoint that “savings” was the first and most important category in the budget. This is a tactic called “paying yourself first.” You should set aside a certain amount each month and put it into your savings before allocating the rest of your income for your expenses. This will help ensure that you have a sturdy long-term financial status, having funds tucked away for an emergency or retirement.
With new technologies, making a budget and keeping track of it is easier than ever. There are apps and websites that help you create a budget, track your spending, and monitor your finances. Services like these are great for helping you stay on track even when on the go.
Conclusion: Understanding your income and expenses are the foundation of healthy finances. It’s important to budget so that you’re aware of your current, and future, financial status.
Resources and External Links