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Personal Finance Unit 2: Budgeting and banking

A budget plans spending and saving, and bank accounts store money safely and make payments easy.

Covers: Needs and wants, budgeting methods, cash flow, banks and credit unions, checking and savings accounts, payments, financial safety

Study guide

A budget is a plan for using income. It starts by tracking income and expenses. Fixed expenses, like rent, stay the same each month; variable expenses, like groceries, change. Needs are essential, while wants are not. A popular guideline is the 50/30/20 rule: about 50% of take-home pay for needs, 30% for wants and 20% for savings and debt payments. Zero-based budgeting assigns every dollar a job, and the envelope method sets cash aside for categories. Paying yourself first means saving before spending. An emergency fund, often three to six months of expenses, protects against job loss or surprise bills.

Banks and credit unions keep money safe and offer services. Banks are for-profit businesses, while credit unions are nonprofit cooperatives owned by members, often with lower fees. Deposits are insured up to $250,000 per depositor, per institution, per ownership category by the FDIC for banks and the NCUA for credit unions. A checking account is for everyday spending through debit cards, checks and transfers; a savings account earns interest. Online banks often pay higher interest. Watch for fees: overdraft fees occur when you spend more than your balance, and some accounts charge monthly maintenance or ATM fees. Reconciling your account means comparing your records with the bank statement.

Payment methods include cash, debit cards (which take money directly from checking), credit cards (which borrow money), checks, mobile payments and peer-to-peer apps. People without bank accounts may rely on check-cashing services and prepaid cards, which often charge high fees. Protecting your money means guarding against identity theft and scams: use strong passwords and two-factor authentication, never share account information in response to unexpected messages (phishing), and check your statements. The Consumer Financial Protection Bureau (CFPB) handles complaints about financial companies.

A budget tracks money flowing in and out over a period. A personal balance sheet shows net worth at a point in time: assets (what you own) minus liabilities (what you owe). Overdraft protection covers a transaction that exceeds your balance, often by moving money from a linked savings account or credit line. It usually carries a fee. Banks need your permission (opt-in) before charging overdraft fees on ATM and one-time debit card purchases. If a check is returned for insufficient funds (a "bounced" check), the bank charges an NSF fee.

Online and mobile banking let you set up automatic bill pay for recurring bills, receive pay by direct deposit, deposit checks with your phone and get balance alerts. Automating bills helps avoid late fees, but you still need to keep enough money in the account. FDIC and NCUA insurance protects deposit accounts such as checking, savings, money market deposit accounts and CDs. It does not cover stocks, bonds, mutual funds, annuities or crypto, even if you buy them through a bank.

If you suspect identity theft, you can place a free fraud alert or a credit freeze with the credit bureaus. A freeze stops new accounts from being opened in your name. Report the theft at IdentityTheft.gov.

Key ideas

• A budget tracks income and plans spending and saving.
• The 50/30/20 rule divides take-home pay among needs, wants and savings.
• An emergency fund covers three to six months of expenses.
• FDIC and NCUA insure deposits up to $250,000.
• Protect accounts from fees, scams and identity theft.

Formulas and rules

Common mistakes

• Thinking a debit card builds credit; it doesn't, because you're not borrowing.
• Thinking credit unions aren't insured; NCUA insures them just like FDIC insures banks.

Words to know

Budget

A plan for spending and saving income.

Fixed expense

A cost that stays the same each month.

Variable expense

A cost that changes month to month.

Need

Something essential, like housing or food.

Want

Something nice to have but not essential.

50/30/20 rule

Budget guideline: 50% needs, 30% wants, 20% savings.

Pay yourself first

Saving a set amount before spending.

Emergency fund

Savings for unexpected expenses or job loss.

Credit union

A nonprofit, member-owned financial institution.

FDIC

Federal agency that insures bank deposits.

NCUA

Federal agency that insures credit union deposits.

Checking account

An account for everyday spending.

Savings account

An account that earns interest on deposits.

Overdraft

Spending more than your account balance.

Reconciling

Comparing your records with your bank statement.

Phishing

Fake messages that try to steal personal information.

Identity theft

Using someone's personal information without permission.

Sample practice questions

5 more questions like these, from level 1 to 5, are in the practice set.