To be financially literate means to be able to spend money wisely. The idea behind financial literacy is that it helps individuals make the appropriate decisions about how they spend, save, and earn their money. The two major components of financial literacy are:
A Calculation of Profit (What is Earned).
The Difference Between Fixed and Variable Expenses (Where Money is Going);
Part 1: Fixed vs. Variable Expenses
Definitions
| Type | Definition | Examples |
|---|---|---|
| Fixed Expenses | Costs that stay the same every time you pay them. | – Rent |
Fixed Expenses | Costs that will not change and that should be considered when developing a budget (fixed monthly bills) | – Subscription to Netflix
- Car Loan
Variable Expenses | Costs that can increase or decrease based on choices and usage for the month. | – Food (Groceries)
- Electricity Bill
- Toys/Snacks
Why is Financial Literacy Important?
- Budgeting: When creating a budget, you need to know what your fixed expenses will be (they are predictable). Therefore, you will be able to make changes in your variable expenses (reduce spending, i.e., stop eating out) in order to have more money to save or pay down debt.
Expenses can be classified as either (F) fixed or (V) variable.
For example:
1. 🏠 Fixed – Monthly Rent
2. 🍕 Variable – Pizza Night
3. 📱 Fixed – Phone Bill
4. ⚡ Variable – Electricity Bill
5. 🎮 Variable – New Video Game
Answers: 1-F, 2-V, 3-F, 4-V, 5-V
Part 2: To Calculate Profit
What is Profit?
Profit is determined by Subtracting Cost from Revenue.
Revenue is defined as the amount of money earned by a business (i.e., selling lemonade).
Cost is defined as the amount of money spent on the items needed to sell lemonade.
Example Problem: Scenario – You sell Friendship Bracelets for $3 each. All materials used to create the bracelets cost you a total of $10, and you sold 8 Friendship Bracelets.
1. Calculate Revenue:
8 Friendship Bracelets × $3 = $24
2. Subtract Costs:
$24 – $10 = $14
3. Profit = $14
Word Problems
1. You have a Cupcake Stand.
Sold 12 Cupcakes @$2.00 each; Cost of Ingredients was $8.00.
How much was your Profit?
(Ans: $16)
2. You are a toy store.
Sold 5 Robots @ $15.00 each; Bought the Robots for $10.00 each.
What is your Profit?
(Ans: $25)
How to Apply This Information to Real Life
* Make money by owning a Lemonade Stand – Track your Expenses (Cups & Lemons) and Revenue to know how much profit you are making.
* If you get an Allowance, Keep track of how you divide your money into Fixed Money (Savings) and Variable Money (Spending).