Creating a Hypothetical Budget – Portfolio Activity

Question

Expense Amount
Rent (monthly) $657.00
Telephone (monthly) $56.34
Groceries (weekly) $56.00
Clothing (monthly with ½ job related) $106.00
Water & Electric (monthly) $98.87
Weekly Dinner & Movie $40.00

You are paid $11.75/hr. You work 40 hr/wk. Your deductions are FICA (7.65%), Federal tax withholding (10.75%), and state tax withholding (7.5%)
1) Assuming you budget a month as 4 weeks, how much is your total realized income, fixed expenses, and discretionary expenses.
2) If you are able to work 20 hours of overtime the next month and are paid 1.5 times your regular rate, how does this change your budget for that month?
3) How much can you put towards savings each month if you eliminated your discretionary expenses?

Be sure to include in your response:
• A detailed budget showing income and expenses for the two different months.
• Answers to the original questions.
• An explanation for how you calculated the first 40 hours of income and then the additional 20 hours of overtime.

Answer 1

To create a detailed budget, we should first calculate the total monthly income, fixed expenses, discretionary expenses, and then analyze the impact of overtime.

1. Total Realized Income, Fixed Expenses, and Discretionary Expenses:

Income Calculation:

• Hourly Rate: $11.75
• Regular Hours per Week: 40 hours
• Weeks in a Month: 4 weeks

Regular Monthly Income: \[ \text{Regular Monthly Income} = \text{Hourly Rate} \times \text{Hours per Week} \times \text{Weeks per Month} \] \[ = 11.75 \times 40 \times 4 = 1,880.00 \]

Deductions Calculation: To find the take-home pay after deductions, we will first calculate total payroll deductions:

1. FICA (7.65%) \[ \text{FICA} = 1,880.00 \times 0.0765 = 143.22 \]
2. Federal Tax (10.75%) \[ \text{Federal Tax} = 1,880.00 \times 0.1075 = 202.10 \]
3. State Tax (7.5%) \[ \text{State Tax} = 1,880.00 \times 0.075 = 141.00 \]

Total Deductions: \[ \text{Total Deductions} = 143.22 + 202.10 + 141.00 = 486.32 \]

Net Monthly Income: \[ \text{Net Monthly Income} = 1,880.00 - 486.32 = 1,393.68 \]

Fixed Expenses Calculation:

1. Rent: $657.00
2. Telephone: $56.34
3. Water & Electric: $98.87
4. Clothing: $106.00

Total Fixed Expenses: \[ \text{Total Fixed Expenses} = 657.00 + 56.34 + 98.87 + 106.00 = 918.21 \]

Discretionary Expenses Calculation:

1. Groceries (weekly): $56.00 * 4 = $224.00
2. Weekly Dinner & Movie: $40.00 * 4 = $160.00

Total Discretionary Expenses: \[ \text{Total Discretionary Expenses} = 224.00 + 160.00 = 384.00 \]

Final Budget Overview:

• Total Realized Income: $1,393.68
• Fixed Expenses: $918.21
• Discretionary Expenses: $384.00

2. Overtime Calculation:

Overtime Pay Calculation:

• Overtime Hours: 20 hours
• Overtime Rate: 1.5 * Regular Hourly Rate = 1.5 * $11.75 = $17.625

Total Overtime Earnings: \[ \text{Overtime Income} = \text{Overtime Rate} \times \text{Overtime Hours} \] \[ = 17.625 \times 20 = 352.50 \]

Total Monthly Income with Overtime: \[ \text{New Total Income} = \text{Net Monthly Income} + \text{Overtime Income} = 1,393.68 + 352.50 = 1,746.18 \]

Deductions for Overtime: Let’s calculate deductions on the overtime pay:

1. FICA = 7.65% \[ \text{FICA Overtime} = 352.50 \times 0.0765 = 26.95 \]
2. Federal Tax = 10.75% \[ \text{Federal Tax Overtime} = 352.50 \times 0.1075 = 37.87 \]
3. State Tax = 7.5% \[ \text{State Tax Overtime} = 352.50 \times 0.075 = 26.44 \]

Total Overtime Deductions: \[ \text{Total Overtime Deductions} = 26.95 + 37.87 + 26.44 = 91.26 \]

Net Income After Overtime Deductions: \[ \text{New Net Income} = 1,746.18 - 91.26 = 1,654.92 \]

Updated Budget Overview with Overtime:

• Total Realized Income: $1,654.92
• Fixed Expenses: $918.21
• Discretionary Expenses: $384.00

3. Savings Calculation:

If Discretionary Expenses are Eliminated: \[ \text{New Income after Fixed Expenses only} = 1,654.92 - 918.21 = 736.71 \] \[ \text{Amount towards Savings} = 736.71 \]

Summary of Answers:

1. Total Realized Income: $1,393.68 (or $1,654.92 with overtime)
   • Fixed Expenses: $918.21
   • Discretionary Expenses: $384.00
2. Budget Change with Overtime: Total Income becomes $1,654.92, while savings increase significantly.
3. Savings with Eliminated Discretionary Expenses: $736.71 can be saved each month.

These calculations illustrate the impact of working overtime on both income and potential savings.