The Creating a Budget - Essay Example

Journal 1. It is important to create a budget because a budget keeps you from spending money you do not have. It will help you to avoid unnecessary credit card debt and bank fees. A budget is also helpful in establishing how much money you have available for saving for something you want after you have paid for everything you need. 2. A need is something that you must have for survival. This includes food, shelter and clothing. It may also include things such as transportation if that is necessary for you to get to your job to make a living. Examples of a need are groceries and paying rent. A want is something that makes living more enjoyable. Wants are a new cell phone or new earrings. 3. One way to save money is to do services that many people pay others to do yourself. For example, you could clean your own clothes instead of paying someone to do it at a laundry. You could also change the oil in your car instead of paying someone to do it. A second way to save money is to avoid restaurants. 4. Fixed expenses are expenses that cannot be altered by your own will. You do not get to choose the terms of payment for these expenses. They are fixed because they are either needs that you must pay for to survive or they are wants that you have bought using credit. 5. An optional expense each month might be a membership at a Gym where you pay month to month. Another might be money you set aside for dining out instead of eating in. A third optional expense could be money set aside for buying gifts for friends and family. 6. I am able to budget $60.00 each month for these expenses each month and still have 10% left in my savings account. 7. This is significant and helpful to know because it gives me the freedom to spend my extra money any way I see fit, without cutting into the money that I need to meet all of my needs and fixed expenses. I know how much I can spend and still have some money put back in case there is some sort of emergency. This is what my savings is for. Following this makes me feel as though I am more in control of my money and in more control of my life. Journal #2 1. The banks balance is higher than the balance shown in my register because I have written checks that have not cleared from the bank yet. There is a delay in this process because I cannot always determine when the person or company I write a check out to will cash that check. Until they do, I need to keep track of it in my own records because the bank doesn’t even know that I have written a check. If I don’t keep track, I might write more checks than I have money. This will result in bank fees. 2. It is a bad idea to make the second $50.00 withdraw because you might overdraft your account. Some accounts have overdraft protection, but not all do. Even overdraft protection has a cost and can sometimes result in fees. If you can’t tell exactly how much is in your account based on your check register, it is better to be cautious so you don’t have to pay extra fees. 3. If I want to pay my rent, I send write a check and give it to my landlord. My landlord then puts it in his account at his bank. The bank sends it to a federal reserve bank. The Federal Reserve Bank then sends it back to you bank. You bank deletes the money out of your account and then tell the Federal Reserve Bank to put that money into the account of my landlord. My landlord has the money show up in his account and I have a place to stay for another month. 4. Bank of America, Chase Manhattan and a local credit union were compared. Each one of these banks had pro’s and cons. A pro fro all of them is they are insured by the FDIC. Bank of America and Chase Manhattan had low required checking requirements but the local credit union had free checking with no minimum account balance. Chase Manhattan had the best interest rate of all the banks, but that only was for savings accounts. None of the banks offered interest on their checking accounts. I chose to go with the local credit union so I wouldn’t need to keep a lot of money in my checking account. Journal #3 1. The differences between common and preferred stock lies in how the dividends are paid out. If you buy preferred stock, you are guaranteed to have your dividend paid out first and at a set amount. Basically, holders of preferred stock get their share of the profits first. Common stock holders must wait to see how the market acts before they get any dividend at all. They may get nothing or quite a bit, depending on the success of the stock. 2. Investing in a mutual fund is attractive because it is made up of many different stocks, often from different sectors of the economy. This way, if a part of the economy is doing poorly, other stocks in the mutual fund may offset those losses by having strong gains. This makes investing in mutual funds less risky than investing in individual firms. Unfortunately, it also can minimize the profit from investing in stocks in exchange for that safety. 3. Investing in government bonds is very safe because it is very rare for a government to not pay out their interest to their bondholders. As soon as a government does this, they are in serious financial difficulty because no one will want to buy bonds to help them with their debt. The United States has never failed to pay its investors and bond holders, so lots of people trust the United States government. 4. I do not have the information to answer this question. 5. I do not have the information to answer this question. 6. I know that in the future, I will need to save for a down payment on a house. I will need to have at least 20% of the cost of the house in cash money to put down or I will need to buy PMI insurance. This insurance is expensive, especially since so many people are defaulting on their mortgage loans. I am going to choose a mutual fund account because I stand a good chance to make more money than I would at buying bonds, but it is relatively safe. Bonds will not grow my money fast enough and investing in the stocks of individual companies is more risk than I want to have. I think that contributing to a mutual fund on a regular basis would help me to reach this financial goal. Journal #4 1. The four C’s creditors use to judge your credit worthiness is capacity, capital, collateral and character. Capacity deals with your ability to repay your debt. Capital shows how much you are worth and considers how much money you have in the bank. Character asks questions like, “Are you an honest person?” and “Do you pay your bills on time?” Collateral is things you can offer to the bank if you find you cannot pay your credit bill. 2. I have a limited capacity at this time because I only work part time. I don’t have much capital either and I really don’t have any collateral. What I do have is good character because I got to work on time and do a good job for my boss. 3. The four steps in establishing good credit are to first establish a savings and checking account. If you maintain this account well, it will show the bank that you know how to handle your money and that you can be responsible. The second step is to get a department store card that can be used only to buy items at that store. The requirements are lower for a card like this so you should be able to get one with not much of a credit history. Maintain your account well so you can build trust with the bank and the store. The third step is to use your savings a collateral for your credit card. Don’t let the maximum you can spend exceed your savings. Finally, get someone that trust you and has good credit to sign for you to get a card. 4. Credit cards can be a great financial tool because they can improve your credit rating by using them properly. If you pay them off monthly, they are a great convenience as well. They are a bad idea if you are undisciplined though. Interest rates are high and monthly minimum payments usually do nothing to pay down principal so even though you pay a little each month, the amount you owe continues to grow. 5. It is smarter because you will be paying a lot less interest. The monthly payments are higher with the three-year loan. This results in more of your budget being dedicated to fixed expenses, but in the long run you will actually save money. Read More