Budgeting Basics

Budgeting Basics

Are you ready to test your knowledge about budgeting basics? This ten-question multiple-choice quiz will explore some fundamentals of budgeting, how it works, and various methods. After completing all ten questions, click "What's my grade?" at the end of the quiz to see how you did.

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What is budgeting?
A budget is an itemized summary of income and expenses for any given period. Spending time putting together a budget can help you prioritize your spending and manage your money. It is typically created using a spreadsheet (although pencil and paper can work just as effectively) and provides a breakdown of how much money you have coming in and how much you have going out. Planning and managing your budget will help you identify wasteful expenditures or take up too much of your income, adapt quickly as your financial situation changes, and achieve your financial goals. To build a strong financial future, you should also be including savings as a key item in your cash outflows. Making plans to save a portion of your income should be part of every budget.

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Which of the following is an example of a 'fixed expense'?
Fixed expenses are those that remain the same every month and which you have an obligation to pay. These expenses are usually paid regularly, such as monthly, quarterly, or annually. This consistency makes fixed expenses easy to budget for in comparison to variable or discretionary expenses. Typical household fixed expenses are mortgage or rent payments, car payments, real estate taxes, and insurance premiums. For budgeting, savings can also fall into a fixed expense or budget category when you plan to set aside a set amount of money each month, as you might do for an automated monthly 401(k) contribution.

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What is discretionary income?
Discretionary income is the amount of your income that is available for spending, investing, or saving after taxes and fixed expenses (such as rent/mortgage payments, car payments, and basic food costs) have been paid. Discretionary income includes money spent on luxury items, vacations, and non-essential goods and services. As part of your budgeting process, it's important that you routinely look for ways to decrease what you might think of as fixed expenses on things like cable television, utilities, or mobile phone bills. While you're likely paying the same each month, you often have the option to decrease usage or change plans to free up income for more discretionary spending.

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The best way to start the budgeting process is to:
It's fairly easy to understand your incoming funds when establishing a household budget. They usually come from your paycheck and perhaps a few other sources of income. The real challenge in starting a budget is in identifying where your outgoing money is being spent. A good start is to break your spending into categories and tracking how much you spend each month on each of those items. Fixed expenses are usually pretty easy to identify. They include things like your rent/mortgage payment or your car payment. A key component to whether you're able to put in place an effective budget will be discretionary spending. So it's important to review where you spend every dollar over the course of a budgeting period and adjust your spending habits accordingly.

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In regards to personal finances, 'zero-based budgeting' is:
A zero-sum budget forces you to account for every dollar you make, either in terms of spending or saving. This type of budget was popularized by personal finance author Dave Ramsey, with the basic premise that you must “give each dollar a job,” with the ultimate goal of reaching zero at the end of each month. For example, if you cover all of your expenses for the month and still have $300 leftover, your budget is incomplete. You must determine where that additional $300 is allocated, either by budgeting it for emergency savings, paying down debt, investing it, or putting it towards a vacation fund. It would be best if you accounted for each dollar.

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With an 'envelope' budgeting system, you:
The envelope budgeting system is straightforward. You use cash to control your spending, and when you're out of cash, you stop spending. To set up an envelope system, you'll need to know how much you have available after paying your fixed expenses such as rent, car payments, or insurance. Once you know how much money you have left, decide how best to allocate it between the different budget categories you spend the most. Common categories include groceries, gas money, dining out and entertainment, clothing, etc. Once you've allocated amounts, get an envelope for each category and place the appropriate amount of cash inside of each. The hard part is that as the month progresses and you're emptying an envelope, you stop spending in that category once you run out of cash. You've hit your budget limit until the next pay period.

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Which of the following are the best tools for budgeting?
The important things for successful budgeting are to have a budget, accurately tracking how much you bring in and how much you spend and save, and sticking to that budget plan each month. Different people can have success with different tools so long as they stick to the key steps.

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With a 'rainy day' savings fund, you:
Setting up a 'rainy day' or an emergency fund is one of the most important things you can do to keep yourself on budget even when you hit a bump in the road. Having money set aside for emergencies or in the case of loss of income will help you avoid the things that most frequently derail good budgeting intentions.

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When putting together a budget, which of the following items should you include?
Good budgeting practices account for all of your cash inflow (including salary, investment income, and any other sources you might have) and outflows, including both fixed and discretionary spending. Including savings in your budget plans will ensure you're on track to maintain your longer-term financial goals.

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What is the most likely reason for a budget to fail?
Despite your best planning efforts, the unforeseen financial issues that you´ll face, such as a loss of income or a household emergency, will do the most damage to even the most budget-conscious. Having an emergency fund in place will provide the financial cushion to help you absorb many of these items and keep you on track towards long-term financial success.

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