Use the sample monthly budget below to answer the questions.
Sample Monthly Budget
Monthly Net Income
Income (1st job)............................................................................................................................................................................$1,105
Income (2nd job)..............................................................................................................................................................................$955
Other Income.......................................................................................................................................................................................$0
Monthly Net Income Total..............................................................................................................................................................$2,060
Monthly Expenses
Savings..............................................................................................................................................................................................$50
Mortgage/Rent.................................................................................................................................................................................$600
Car Payment....................................................................................................................................................................................$150
Car/Home Insurance........................................................................................................................................................................$100
Health Insurance................................................................................................................................................................................$20
Heating...............................................................................................................................................................................................$50
Cable/Phone....................................................................................................................................................................................$100
Electric...............................................................................................................................................................................................$90
Other................................................................................................................................................................................................$100
Monthly Expenses Total................................................................................................................................................................$1,310
Monthly Spending Money.................................................................................................................................................................$750 (Monthly Net Income Total minus Monthly Expenses Total)
Daily Spending Money Goal...............................................................................................................................................................$25
(Monthly Spending Goal divided by 30)*
*the average of 30 days in a month is used to simplify your budget
Using the information above in the sample budget, analyze the monthly spending and saving habits shown. In your answer you must include the following with your analysis: (1) Do you see any potential variable expenses that could change the budget each month? If so, what are they? If not, why do you think this? (2) With the leftover spending money each month, should this individual consider investing? If so, which investment option would be the best and why? If not, why do you think this? (3) Consider the amount going to savings, what type of interest would provide the greatest benefit and why? How long would it take to earn $5.00 in interest if the rate is 1% monthly? Provide calculations to support your answer.
1) Potential variable expenses that could change the budget each month include the "Other" category, which could include expenses such as entertainment, dining out, shopping, etc. These expenses can vary from month to month and may impact the amount of leftover spending money. Additionally, health insurance costs could fluctuate if there are any changes in coverage or premiums.
2) With the leftover spending money each month, considering investing would be a wise decision. One investment option that could be considered is a low-cost index fund. Index funds provide diversification and tend to have lower fees compared to other investment options. They also offer the potential for long-term growth as they track the performance of a specific market index.
3) To determine the type of interest that would provide the greatest benefit for the savings, it would be ideal to consider a high-yield savings account or a certificate of deposit (CD). These accounts typically offer higher interest rates compared to traditional savings accounts.
If the savings account offers a 1% monthly interest rate, the formula to calculate the interest earned in a month would be Principal x Rate.
Assuming the individual has $50 in savings, the calculation would be:
$50 x 0.01 = $0.50 in interest earned per month
To earn $5.00 in interest at a 1% monthly rate, the individual would need to have $500 in their savings account. The calculation would be:
$500 x 0.01 = $5.00
Therefore, it would take 10 months to earn $5.00 in interest with a 1% monthly interest rate.