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Session 2: Budgeting and Income Profiles

Updated: May 11



Session 2: 

Budgeting and Income Profiles

  • Introduction to budgets and financial planning

  • Use adult income profiles to discuss income and expenses

  • Create a simple budget based on the annual income


Icebreaker


Rock Paper Scissors Elimination:  Students eliminate each other. Each student plays O.U.T. After each “play” players must switch opponents!


 

This is exciting!  We are learning all about Real Estate and about the process of buying and selling.  Let’s discuss the buying process.   Before anyone purchases a new home or buys an investment property, they first create a budget to figure out how much they can afford for their monthly payment.   Real Estate sells between a few thousand dollars to a few million dollars.   


Assuming you are an adult and have a job, how much (as a monthly payment) can you comfortably pay and not struggle financially?  The general rule is allotting  1/4 of your monthly salary (1 week’s pay) towards your rent or mortgage.  Using only one week of pay will allow you to pay your rent/mortgage and the rest can be used for other living expenses such as utilities (electric bill, water bill, gas bill), cell phone bill, credit card, car payment, car insurance, and probably the most important expense…food.   Did you know your parents had all these expenses?  


We’re going to do an activity and YOU get to be the adult with all of these expenses.   Before you can start looking at houses to purchase, we need to do a budget so we can pre-qualify you for a home.  Most people, when looking for a home online, will do quick searches on a website called ZILLOW or REALTOR.COM and see a beautiful home that they think they can afford but after looking at a budget realize….they can’t.  


For example, let's say you visit ZILLOW.COM and perform a search for a property in your current town and find a great home that is selling for $400,000.  You absolutely love it and get super excited to go look at the house.  When you call the realtor to set up an appointment to see the house, the first question they always ask is….. “HOW MUCH ARE YOU PRE-APPROVED FOR?”  Thankfully, to get a pre-approval, it’s fairly simple.  There are tools online or you could call a bank.  But the pre-approval is ALWAYS based on how much you can afford as a MONTHLY payment.   


Let’s head back to that $400,000 house that you love so much and now let’s perform a very quick pre-approval to check f you would qualify to buy that house.   Let’s put our thinking caps on.   


For a $400,000 mortgage, a bank would loan you at a 6% interest rate, you would take .06 and multiply that by $400,000.  Do the calculation.  That comes out to $2,400 a month.  This does not include any other expenses like homeowners insurance or taxes.   So let’s add another $600 on top of that for taxes and homeowners insurance.  Your monthly payment for that house is now $3,000 (2,400 plus 600).  Can you afford to pay that each month?  Let’s find out.  Note:  In some states like New Jersey,  New York, and California, the monthly taxes may be as high as $1,000 per month for a house like this. 


NOW, let's assume you earn $70,000 a year from your job.  How much do you make monthly? Do the calculation (70,000 divided by 12).   We figured that you bring home $5,800 per month.  


Do you remember the general rule to afford rent/mortgage?  Your monthly payment should average around  ¼ of your monthly take-home pay (or 1 week’s pay).   Do the calculation (5,800 divided by 4).   ¼ of $5,800 is around $1,400 per week (Average).


The most you SHOULD pay for mortgage/rent is $1,400 to $1,800 to be able to live comfortably and pay all of your bills.   This is for your financial protection.  Sticking to this budget will allow you to donate to good causes,, save money for vacations, and to pay for financial emergencies that may arise like family expenses, home repairs, car repairs,  and medical bills. 


According to this rule, and assuming you have the same living expenses that your parents pay, you wouldn’t qualify for a $400,000 home.  Why?  Because the monthly payment on a $400,000 may be around $2,400 (look above).  And even if a bank did qualify you to purchase this home, you should reconsider and still try to stick close to the rule so you can live financially worry-free.


So instead of looking at a $400,000 house, you could look for houses in the $200,000 price range.  What would the monthly payment be on a $200,000 house?  With estimated taxes and insurance, the payment would be around $1,600 per month (remember, we added in $600 for taxes and insurance).  This is much more affordable for someone who earns $70,000 per year.  


Later in the session, you’ll be looking on ZILLOW.COM or REALTOR.COM to do a simulated VIRTUAL house-hunt for your own house.  We’re also going to provide you with a pretend job and annual income to work into your calculations.  Before we do that let’s talk about budgets to dive deep into the cost of living.


Monthly Budget:   (Income vs. Expenses)


Class Activity: Budgets:  Each student will do research on Google (Or use ChatGPT) to find the average monthly cost for each of the items listed below.  There is no wrong answer.  Compare your answers with your classmates.  COPY AND PASTE THE BUDGET BELOW INTO A WORD DOCUMENT OR GOOGLE DOC. 


We are Not YET Including a MONTHLY rent/mortgage payment.  These are strictly living expenses. 


Electric Bill $________

Gas Bill  $________

Water Bill  $__________

Car Payment  $________

Car Insurance  $________

Cell Phone Bill $________

Cable TV Bill  $________

Home Internet Bill  $________

Food/Grocery Bill  $________

Entertainment (going out with friends) $________

Clothing/Necessities)  $________

Donations/Charities $________


Add up your total monthly expenses = $__________


Class Activity:  Career and Income Profile


To figure out how much your RENT/MORTGAGE payment will be we’re going to do a little role-playing and will RANDOMLY be assigned….. A OCCUPATION and a YEARLY SALARY.


Everyone should visit this link: Here is a link to a random online dice roller:  http://tinyurl.com/3uds6avb (If the link doesn’t work, just search “roll 2 dice”)  Select 2 (6 sides dice) or click the die to erase it and then choose the 12 sided die. 


One student will roll at a time (on their computers) and then share with the class. The instructor will decide who rolls first. Students should re-roll if an occupation was already chosen. Otherwise, no re-rolls. 


Profile 1:

Occupation: Software Developer

Annual Income: $130,000


Profile 2:

Occupation: Nurse

Annual Income: $110,000


Profile 3:

Occupation: Teacher

Annual Income: $75,000


Profile 4:

Occupation: Marketing Manager

Annual Income: $90,000


Profile 5:

Occupation: Accountant

Annual Income: $85,000


Profile 6:

Occupation: Engineer

Annual Income: $80,000


Profile 7:

Occupation: Chef

Annual Income: $75,000


Profile 8:

Occupation: Sales Manager

Annual Income: $90,000


Profile 9:

Occupation: Doctor

Annual Income: $150,000


Profile 10:

Occupation: Architect

Annual Income: $110,000 

Profile 11: 

Occupation:  Store Manager

Annual Income:  $80,000


Profile 12:

Occupation: CEO of a large company

Annual Income: $200,000


Calculating YOUR Monthly Rent/Mortage Payment


Monthly Income:  Remember the rule!  Divide your new annual income by 12 months.  Add this amount to the BUDGET below as monthly INCOME.   


Monthly Budgeted rent/mortgage payment: Then divide your monthly income by 4. That will give you an affordable monthly rent/ mortgage payment.  Add this to the budget below as an EXPENSE. 




Monthly Budget 


Income (take-home pay) monthly:______________


Expenses:

Monthly Mortgage/Rent Payment:______________

Electric Bill $________

Gas Bill  $________

Water Bill  $__________

Car Payment  $________

Car Insurance  $________

Cell Phone Bill $________

Cable TV Bill  $________

Home Internet Bill  $________

Food/Grocery Bill  $________

Entertainment (going out with friends) $________

Clothing/Necessities)  $________

Donations/Charities $________

NEW Total Monthly Expenses:  $__________


(subtract your expenses from your income)

Monthly Income:  $_______________

Expenses:  $______________________

How much is left?______________


The money you have left is the money that you should SAVE in your bank for vacations, future investments, and other life expenses. And remember to set aside money to give (tithe) to churches and charities.  Let’s help others financially where we can. 


Class Activity: Saving Money Why would you save money?  Share with the class why you’re saving money.



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