Managing Your Money LESSON FROM THE COUNCIL FOR ECONOMIC EDUCATION FINANCIAL FITNESS FOR LIFE PUBLICATION Exercise 8.1 • Five students volunteer to participate in a call-in show activity. • Roles : • Budget Bob • Dr. Penny Saver • Connie • Calvin • Minnie Questions from script • What is disposable income? • What does Dr. Saver recommend as the three parts of a family budget? • What are fixed and variable expenses? Use examples. • What does “pay yourself first” mean? • What is net worth? Exercise 8.2 A • Read the background information about John and Marcia • Questions: 1. Who are John and Marcia? 2. What is their lifestyle? 3. What is their immediate financial goal? Exercise 8.2 A: Budget • Fixed Expenses: Expenses that continue at relatively stable levels, month after month or year after year • Variable Expenses: A cost to a person or business that varies over time according to a number of factors. • What are some examples of John and Marcia’s fixed expenses? • What are some examples of John and Marcia’s variable expenses? • Housing, life and disability insurance, renters insurance, auto insurance, student loan, etc… • Meals, utilities, fuel, medical care, child care, clothing, etc… Exercise 8.2 A: Budget • John and Marcia have decided to practice the "pay yourself first" approach to saving for a second car. How do they pay themselves first? • Examine John and Marcia’s monthly spending plan. What sacrifices do you think John and Marcia should make in their variable expenses to meet their goal? Note: at-home food expenses can’t be reduced below $220. • Complete the “After Column” with ways that you believe they can adjust their budget. • What are the benefits and costs of your recommended decisions for John and Marcia? Assessment Activity • John and Marcia want to buy a house! • Down Payment: $10,000 • Home Price: $150,000 • Step 1: • Calculate mortgage payment for a 30 year, fixed rate mortgage at 6% interest. • Payment = $840 PI (Principal and interest) • Step 2: • Calculate costs that include mortgage payment plus insurance and real estate taxes of $210/ month • $840+$210= $1050 PITI ( Principal, interest, taxes, and insurance) John and Marcia Buy a House cont… • John and Marcia’s Fixed Expenses: • John and Marcia’s Variable Expenses • Notes: Add the additional $65 utilities cost to the total variable. John and Marcia Buy a House cont… 1. Do John and Marcia have enough flexibility in their budget to accommodate the additional costs of homeownership (mortgage payment, taxes, insurance, and higher utilities)? • Not right now. Their expenses will be $5500, representing fixed expenses of $3240 and variable expenses of $2260 (with the added $65 in utilities). 2. If not, what are some expenses they may need to reduce in order to afford the home they want? • Enter suggestions for variable expenses in the Homeowner column in budget form from exercise 8.2B) John and Marcia Buy a House cont… 3. Calculate if John and Marcia qualify…. • $5400 x .28= $1,512; the PITI is expected to be $1,050 • $5400 x .36 = $1,944; Monthly PITI plus other consumer debt such (car, loan, and credit card payment) is $1480. 4. Do you think John and Marcia can afford to pay 28 percent of their monthly gross income as a monthly house payment? Why or why not?