MAT 245 Module 2 Budgeting and Money Management Example

Where Did $4,350 Go? A Monthly Budget and an Automatic System for Saving It

Student Name

Business Administration Program, Aspen University

MAT 245: Personal Finance

Instructor Name

Month Day, Year

Where Did $4,350 Go? A Monthly Budget and an Automatic System for Saving It

In Module 1, Taylor Monroe set five goals, from capturing an employer's 401(k) match to saving a house down payment. None of them will happen unless the monthly money has somewhere to go. Taylor tracked every dollar for a month using a banking app and a notes file, recording each purchase the same day and noting what it was for. The results were a surprise: $640 went to restaurants and delivery, $180 to subscriptions, several of them forgotten, and about $200 to small purchases that Taylor could not later identify. This paper builds a budget from those results and a system to make it work, using illustrative figures rather than a recommendation for any real reader.

Take-Home Pay

Taylor's $68,000 salary is $5,667 a month before deductions. After federal, Ohio and city income taxes, Social Security and Medicare, the 4% 401(k) contribution from Module 1 and health insurance, take-home pay is about $4,350. The budget starts from this figure, because it is the money Taylor actually controls.

The Budget

How People Actually Budget

Heath and Soll (1996) studied how consumers manage money and found that many set informal budgets for categories, such as entertainment or food, and track purchases against them. When people had spent heavily in a category, they tended to cut back on further purchases in that category, which helps control spending. But budgeting was imperfect: expenses that did not seem to belong to a category, or that were small or unusual, were less likely to be counted, so they escaped the budget. Taylor's $200 of unremembered purchases fits that finding.

The budget responds with a category for irregular expenses and a weekly check of the banking app, so small purchases are noticed.

Reminders and Automation

Karlan et al. (2016) ran field experiments with savings accounts in Bolivia, Peru and the Philippines. People who received monthly reminders about their savings goals saved more than those who did not, and reminders mentioning a specific goal were especially effective. The authors argued that limited attention explains part of why people save less than they intend: saving is easy to forget when spending is always in front of us.

Taylor's system uses both automation and reminders. On each payday, transfers move $125 to the emergency fund and $280 to the credit card, so savings happen before spending. Taylor is paid every two weeks, so two months a year contain a third paycheck; those extra checks go entirely to the down payment fund, a simple way to save about $4,000 a year without changing the monthly budget. A calendar reminder on the first of each month prompts a fifteen-minute review of the past month against the budget.

Why the Emergency Fund Matters

Lusardi et al. (2011) surveyed households about whether they could come up with $2,000 within thirty days for an unexpected need. About half of Americans said they probably or certainly could not, including many middle-income households. Financial fragility was common well above the poverty line.

Taylor's goal of a $1,500 starter fund, then a full three-month fund, is aimed directly at this risk. At $250 a month, the starter fund is reached in six months, sooner if Taylor adds a tax refund or a bonus. Without it, the next car repair returns to the credit card.

Irregular and Annual Expenses

Many budgets fail because of expenses that do not arrive every month: car registration, a friend's wedding, holiday gifts, a new pair of work shoes, annual subscriptions. Taylor listed last year's irregular costs and found they totaled about $1,800, or $150 a month. The irregular expenses line sets that amount aside each month in a separate savings bucket, so a December full of gifts does not become a January credit card bill. This is also where Heath and Soll's finding about uncounted expenses becomes practical: naming the category makes the spending visible. Taylor keeps the list of expected irregular costs in the notes file, with the month each is due, and checks the bucket's balance against it each quarter.

Two Accounts, Not One

The system uses two checking accounts. Paychecks arrive in a bills account, from which rent, utilities, the car payment and loans are paid automatically. A fixed amount for flexible spending moves each payday to a second spending account linked to Taylor's debit card. When the spending account runs low, Taylor knows the flexible budget is used up, without needing to add up categories. Savings sit in a separate high-yield savings account at a different bank, out of sight of the debit card. Moving money back from that bank takes a day or two, a small delay that discourages impulse withdrawals without making the money unavailable in a real emergency.

Reviewing the Budget

After three months, Taylor will compare actual spending with the budget by category and adjust. When the card is paid off, its $560 moves to the emergency fund, and when the full three-month fund is reached, that amount moves to the down payment savings. The budget changes in steps, but the total saved each month never falls, so Taylor's spending does not quietly expand to absorb the freed money. Each review also checks the subscriptions list, since forgotten charges tend to return.

Conclusion

Tracking showed where Taylor's money went, and the budget redirects $810 a month to savings and debt, $860 including health savings. At that pace, the credit card is gone in about seven months, ahead of the nine-month goal set in Module 1. Heath and Soll, Karlan and colleagues and Lusardi, Schneider and Tufano show why the system relies on categories that include small expenses, automatic transfers, reminders and an emergency fund.

References

Heath, C., & Soll, J. B. (1996). Mental budgeting and consumer decisions. Journal of Consumer Research, 23(1), 40-52. https://doi.org/10.1086/209465

Karlan, D., McConnell, M., Mullainathan, S., & Zinman, J. (2016). Getting to the top of mind: How reminders increase saving. Management Science, 62(12), 3393-3411. https://doi.org/10.1287/mnsc.2015.2296

Lusardi, A., Schneider, D. J., & Tufano, P. (2011). Financially fragile households: Evidence and implications. Brookings Papers on Economic Activity, 2011(1), 83-134. https://doi.org/10.1353/eca.2011.0002