AY Honors/Household Budgeting/Answer Key

1. What is a household budget and what is the importance of having one?

A household budget is (hopefully) a written guide to how you plan to spend your household income. It also shows how much you plan to earn or otherwise receive as a family. Income may include employment, business, investment income and government payments to the family. Expenses will include housing (including rent or mortgage, utilities and property taxes), transportation, food, entertainment, clothing, education and other costs. You should also budget for savings and donations - ideally off the top before you spend the rest of your income.

2. Make a list of your family's expenses and classify them as necessary, useful and superfluous.

The list will be accumulated while meeting Requirement #16. The lines between necessary, useful and superfluous are not always clear. While you definitely need a place to live, most people could live in a less expensive home. Your electric bill is necessary, but everyone can take steps to reduce their electric bill. Food is required to stay alive, but takeout and prepared food is more costly than simple home cooked food. You might think you can't live without your handphone but your parents or grandparents will remember seeing their first mobile devices. Discuss these concepts.

3. Check your family's shopping list for grocery and hygiene products. Are all the items really necessary?

Consider things like:

• Is there a cheaper way to buy the item? Bulk purchasing, buying wholesale, or growing it yourself are alternatives
• Are we wasting food by letting it go bad?
• Do you really need fancy shampoo or soup?
• Do you really need that junk food in the shopping basket?

4. What is the best day and place to get vegetables, fruits and greens in your neighborhood?

In developing countries this may be a local vendor market. In the developed world the grocery stores are open daily. You may be able to buy direct from farmers in season. The answer is going to depend on where you live.

5. What can you and your family do to save on water, electricity and telephone?

Water should not be wasted. Ideas to save water include:

• Use a rain barrel to collect water for the garden\
• Put a brick, plastic bag full of water, or other device in the toilet tank
• Fix all leaks as they are detected. A leak will waste huge amounts of water over time
• Put flow reducers on shower heads
• Run dishwashers and washing machines only when full. This reduces the number of cycles, uses less water and power, and saves on wear and tear on the machines
• Turn off the water while brushing your teeth or soaping up in the shower
• Recycle water you boil pasta or corn in as dishwater or for soup.

Electricity use reduction can take many forms including:

• Turn off the lights when you leave a roo
• Install energy efficient bulbs. Incandesent bulbs are actually being banned in some places
• Don't go crazy on seasonal light displays
• Turn off lights before going to bed
• If you have a/c or electric heat, use windows to keep things cool or blankets and extra clothing to stay warm
• Use a programmable thermostat to turn off heat while you are normally out of the house
• Turn off and unplug electronics when you are not actively using them
• Replace non-energy efficient appliances and get rid of the extra fridge in the garage (its probably not energy efficient at all)

Telephone costs can be cut by:

• Use email or Skybe instead of long distance
• Get a better long distance calling plan
• Cut out calling features you don't use
• Do you need a landline? Many are using mobile phones and/or VOIP systems now

6. What is inflation?

A general increase in prices and fall in the purchasing value of money. Since the cost of living goes up over time, you need to increase your income over time as well.

Inflation eats away at the purchasing value of your saving, but inflation also increases the value of hard assets like real estate. Inflation decreases the effective cost of repaying debt over time since you can pay back the debt in less valuable dollars. This is why it is often a good idea to buy a house partly with borrowed money and pay it off over a few years.

7. What taxes does your family have to pay?

This will depend on where you live, but the main types of taxes in the world levied on consumers include:

1. Income taxes, often deducted by the employer. Often a "progressive tax" that increases in percentage at higher levels of income
2. Payroll taxes depend on the country but can cover national pension plans, workers compensation plans, unemployment insurance, and similar programs.
3. Sales Taxes, Goods and Services Tax (GST) or Value Added Taxes (VAT) collected whenever you buy various products and services. Usually a fixed percentage of the transaction value
4. "Sin Taxes" collected at point of sale or buried in the price of cigarettes and alcohol.
5. Property taxes to fund municipal government, roads, schools, protection services, and hospitals. Usually based on the value of your real estate
6. Road taxes may be collected with automobile licensing or imbedded in the price of gasoline.
7. Poll taxes are levied on every adult regardless of income or ownership of property
8. Customs and Duties are charged when you import something into the country

8. What kind of shopping should never be done with credit? why?

Generally no shopping should be done with credit. You should not be spending tomorrows income today because you don't know for sure if you have income coming tomorrow.

Buying a home or car on credit that uses a reasonable amount of your income is considered by most financial planners to be acceptable.

9. What is interest? How should it be calculated?

Interest is the money you pay on money you borrow from someone else (bank, credit card company, finance company, friend etc) Interest is also one way you can benefit from your savings by loaning your savings to a bank or business (as in buying a bond)

10. Investigate what is the interest rate and what are the financial responsibilities in the lines of credit lines for the following:

Looking into these interest rates is an excellent free activity for Pathfinders that will teach them about money management. Don't just check yourself and feed them the answer, get them to seek out the information themselves.

Most banks welcome young clients (they want to turn kids into lifelong customers). While it goes beyond the honor requirements a little, while they are seeking out interest rate information from several different financial institutions, have them ask about "student" or "youth" accounts and what benefits the financial institution offers young people. They may be surprised to find everything from fee free accounts, to free gifts and even matching free cash when they make a deposit in a new account. Have the Pathfinders share what they find with their peers so everyone can access the best offers for youth.

a. Credit card

The answer will vary by country, and to some extent by bank or finance company. In Canada credit card rates range from about 7% to over 20% depending on the credit card features.

b. Overdraft

Check a couple banks. Overdraft interest is usually quite expensive as overdraft is basically a short term unsecured loan.

c. Personal loan

This will depend on the bank and the country, as it has some relation to prime lending rates. Personal loan rates will also depend heavily on your credit history. Check with your bank.

11. What measures should be taken when the family is in debt?

Debt results from either spending more then you bring in until all your savings are exhausted (deficit spending), or from buying assets or investing on credit.

Deficit spending debt is very serious and must be remedied quickly. The best way out of deficit spending debt is to figure out how to run a budget surplus. You either need to increase the amount of money you earn above your spending, decrease the amount you spend below the amount you earn, or preferably tackle the problem from both sides. As you run a budget surplus you can use the surplus to reduce and eliminate the debt.

Another way to get out of debt is to sell assets off to raise cash. Selling investments, real estate, furniture etc may be the only alternative if you suffer some serious unfortunate circumstances, but eventually you will run out of things to sell so running a budget surplus is a much better plan.

Debt incurred to buy income producing assets is more acceptable. You might use debt to invest in a business or farm that makes a living for you.

Similarly, student debt is sometimes required to get a good education, investing in yourself to enable you to earn a better living. However student debt is often a huge trap that takes people many years to get out of.

Most people use debt to buy a home or a car. Used wisely, this kind of debt can ok. It is impossible to save enough money to buy a home for cash, while still paying rent out. Home prices will generally rise faster then the interest on your savings account. Buying a car on credit is a common way to spread out the cost of the car over much of its effective useful life. Usually you can resell the car and pay off the loan if you have to get rid of the payments.

Don't confuse buying a necessary asset like a home or a car with an unnecessary asset like a pleasure boat or fancy bike. Unnecessary assets are actually liabilities because they tend to cost you money to maintain, store and insure them while they do nothing to provide shelter, earn income, or get you to work or school.

12. What percent of the household income should be saved?

Financial planners suggest 5-10% of household income should be saved. Learn about the idea of "paying yourself first" by putting away your savings first (right after God's portion and taxes) so that it does not get spent.

Long term savings can and should include a raining day fund, education savings (college fund), house down payment and retirement planning.

You might do extra short term saving for future spending like vacation planning, and for other special or large purchases.

13. Investigate at least two methods besides a passbook to invest money saved. What are the advantages and disadvantages of each?

Passbook saving plans usually give very little or no interest or rate of return. If you want to make your savings grow for you, you should look into options like:

Bonds: a loan to a government or company with a fixed repayment schedule and interest. Most bonds can not be redeemed on demand, but they can be sold to someone else. If interest rates go up, the value of a bond can decrease, but if interest rates go down, the value of the bond can rise. Tradable Bonds require a fairly high minimum investment and require specified investment multiples. You can't put a random amount like $353 into a bond.

Term Deposits: A usually fixed term deposit with a bank that pays a better interest rate then a savings account. Term deposits are usually fixed so your money is locked in. If they can be redeemed early, you will likely have to give up all the interest. Term deposits usually have a fairly low minimum amount, but more then many Pathfinders can afford.

Money Market Fund: These investment funds invest in low risk income producing investments like T-bills and short term bonds. They usually allow random amounts of money to be invested and you can put in and take out money whenever you need to. There are management fees, but nominal. Very convenient.

Mutual Funds: Different mutual funds are governed by different investment strategies, from the super safe and boring (like money markets funds) to the "hang on for a roller coaster ride" leveraged emerging market funds. Carefully consider your investment objectives before choosing a fund to invest in. Mutual funds incur commissions and management fees, so be sure you understand these before investing. An advantage of mutual funds is that most will accept a small initial investment with regular small automatic additions over time.

14. Do the following:

a. Write and endorse a check

Writing a check involves correctly filling in the :

• Payee - who the check passes money to
• Date - this could be a date in the future (a post dated check)
• Figure - the

Your info:

1. Your name and address (usually pre-printed on the checks). 2. A check number that shows the check's order in the check book. It assists tracking on your bank statement and check register.

Transaction info:

3. Date that the check is written or future date you want the check to be valid (post dated check) 4. The payee - the name of the person or organization authorized to cash the check. 5. The amount of the check, written numerically called the "figure". 6. The amount of the check, written out in words. After writing out the amount, you should draw a line through the remaining empty space as far as the word “Dollars.”

The bank's info:

7. The name and logo of your bank. 8. The bank's routing number, also called the transit number. 9. Your personal account number and the check number encoded.

Purpose of the check:

10. Writing the purpose here makes sure the receiver knows what it's for, and helps you remember later on what this check was paying for. Also called the reference line. It is optional, but might include an invoice or account number or a short note like "rent for 123 Walnut St for Feb 2016."

Signing the check:

11. Your autograph or signature, authorizing the payment. Without this the check is not valid

b. Write a receipt

The elements of a receipt usually include:

• Who paid the money
• Who received the money
• The purpose of the payment
• The amount paid
• The date paid
• Some sort of receipt number
• Often receipts are made in duplicate so that both parties can keep a copy

c. Pay for tickets and/or an invoice at an ATM

Increasingly bills can be paid via ATMs, so go try it. If you don't have a bank card, work with a parent.

15. Keep a personal budget and a log of money coming in and out for six months.

This exercise will really teach how to control spending, for it puts all spending down in black and white (and perhaps red!). This and the following requirement are why earning this honor requires a long term commitment for the Pathfinder.

An easy way to track spending is to get a receipt for every amount of money you spend and then categorize the receipts occasionally.

Another way is to write down what you spend in a notebook or on your phone. You might check out personal budgeting apps for your smart phone to assist in this task.

Some find a jar system works well. Income is recorded and placed in labeled jars or envelopes by how it should be spent. When you need to buy food you pull money from the food jar. If you find you need to move money between jars or categories, record that. You might choose to modify the system by keeping a small float of cash in you wallet or purse, then each night top up the float with money from the correct jars based on how you spent part of the float that day (we can usually remember how we spent money that day). This avoids having to carry all your cash around in jars in case you need to spend some money.

16. Make a family budget and keep an accurate record of inputs and outputs for six months (Pathfinders and youths can do this together with parents); those who live on farms can make records of farming, dairy and livestock.

Your family operates as an economic unit. You can only control what you can measure and understanding how you spend money as a family will help you control spending. The need to write down what you spend will give you a moment to pause and reflect on the need to spend the money, so just the process of tracking spending will usually reduce spending.

17. Read Malachi 3:8-12 and write a minimum of 250 words about the meaning of being a faithful steward.

Malachi 3:8-12

Do Not Rob God 8 “Will a man rob God? Yet you have robbed Me! But you say, ‘In what way have we robbed You?’ In tithes and offerings. 9 You are cursed with a curse, For you have robbed Me, Even this whole nation. 10 Bring all the tithes into the storehouse, That there may be food in My house, And try Me now in this,” Says the Lord of hosts, “If I will not open for you the windows of heaven And pour out for you such blessing That there will not be room enough to receive it. 11 “And I will rebuke the devourer for your sakes, So that he will not destroy the fruit of your ground, Nor shall the vine fail to bear fruit for you in the field,” Says the Lord of hosts; 12 “And all nations will call you blessed, For you will be a delightful land,” Says the Lord of hosts.