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Budgeting Basics

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Ready to test your knowledge? You'll have ten multiple choice questions to answer. Click on each question to reveal the question and multiple choice answers. After you've completed answering all ten questions, click "Grade Me!" at the end of the quiz to see how you did.

Question 1

What is budgeting?

(A) Having money left over at the end of the month.	Correct Incorrect
(B) A plan made in advance regarding the expenditure of money based on available income.	Correct Incorrect
(C) The ability to pay your bills on time.	Correct Incorrect
(D) Having enough money to go out to eat.	Correct Incorrect

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 to identify expenditures that are wasteful or taking 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.

Question 2

Which of the following is an example of a 'fixed expense'?

(A) Food and groceries.	Correct Incorrect
(B) Mortgage or rent payments.	Correct Incorrect
(C) Charitable contributions.	Correct Incorrect
(D) Gas for your car.	Correct Incorrect

Fixed expenses are those that remain the same every month and which you have an obligation to pay. These expenses are usually paid on a regular basis, such 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 the purposes of 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.

Question 3

What is discretionary income?

(A) Commissions or bonuses paid by your employer, or tips received for services provided.	Correct Incorrect
(B) The amount of money you have remaining to put in a savings account at the end of the month.	Correct Incorrect
(C) The money used to make your rent or mortgage payment, or other such expenses.	Correct Incorrect
(D) It is the income that remains after taxes and fixed expenses (such as rent or mortgage, utilities, insurance) are paid.	Correct Incorrect

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. It´s important, that as part of your budgeting process, 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 in order to free up income for more discretionary spending.

Question 4

The best way to start the budgeting process is to:

(A) Start tracking all of the money you spend for a period of time, usually a month, so that you have an understand of where your money goes.	Correct Incorrect
(B) Automatically deposit money into a savings account with each paycheck.	Correct Incorrect
(C) Pay your credit card balance(s) in full each month.	Correct Incorrect
(D) Curbing your spending on incidental items such as dining out or entertainment.	Correct Incorrect

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 in regards to 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.

Question 5

In regards to personal finances, "zero-based budgeting" is:

(A) Stopping all spending on incidentals such as dining out or entertainment.	Correct Incorrect
(B) The practice of budgeting every dollar of income received.	Correct Incorrect
(C) A budgeting method where you put 'zero' dollars on your credit card.	Correct Incorrect
(D) The ability to pay all of your bills each month with something left for 'whatever'.	Correct Incorrect

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 left over, 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. You must account for each dollar.

Question 6

With an 'envelope' budgeting system, you:

(A) The cash for each month's expenses is taken out and divided into envelopes for each budget category.	Correct Incorrect
(B) For each spending category, your spend only out of the designated envelope.	Correct Incorrect
(C) You stop spending for particular categories of spending once the designated envelope is empty.	Correct Incorrect
(D) All of the above.	Correct Incorrect

The envelope budgeting system is very simple. 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 you pay 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 where 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.

Question 7

Which of the following are the best tools for budgeting?

(A) Personal financial management software.	Correct Incorrect
(B) A pencil and paper.	Correct Incorrect
(C) Computer spreadsheets.	Correct Incorrect
(D) Any of above. Whatever works best for you.	Correct Incorrect

The important things for successful budgeting are having 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.

Question 8

With a "rainy day" savings fund, you:

(A) Set aside money for emergencies or essential spending in case of a loss of income.	Correct Incorrect
(B) Set aside money to use to treat yourself to something special when the weather turns bad.	Correct Incorrect
(C) Put a fixed amount of money into a savings account each time it rains.	Correct Incorrect
(D) Save up money to buy an umbrella and other types of rain gear.	Correct Incorrect

Setting up a "rainy day" or 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.

Question 9

When putting together a budget, which of the following items should you include?

(A) Fixed Expenses.	Correct Incorrect
(B) Discretionary Expenses.	Correct Incorrect
(C) Savings	Correct Incorrect
(D) All of the above.	Correct Incorrect

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 insure that you´re on track to maintain your longer term financial goals.

Question 10

What is the most likely reason for a budget to fail?

(A) Buying a pair of shoes you just couldn't resist.	Correct Incorrect
(B) Not using a personal financial planning website or software.	Correct Incorrect
(C) Failing to establish an emergency fund to account for unforeseen expenses.	Correct Incorrect
(D) Not making enough money.	Correct Incorrect

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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Budgeting Basics

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