The Functions of Budgeting, Saving, and Credit
Budgets
A budget can be both a plan and a tracking device. Budgeting allows people to track their weekly, monthly, and yearly expenses and provides data for making plans for financial goals. Components of a personal budget are based on how much money you have coming in on a regular basis (i.e., income), fixed expenses (e.g., rent, insurance, car payments), variable expenses, unexpected expenses (e.g., an unexpected auto repair), and savings (Burns-Millyard, 2018). Ideally, if no unexpected expenses occur, households will be able to maintain a balanced budget—that is, their total income will be greater than or equal to their outgoing expenses.
The content at the link below goes into greater detail about components of a personal budget.
https://www.wikihow.com/Do-a-Monthly-Budget
Just as individuals use budgets to allocate their financial resources and plan for the future, local, state, and national governments also use budgets, although federal budgets take into account the fact that state and federal governments (and some municipal governments) can levy taxes. In addition, the federal government can also print money (at the risk of creating conditions for inflation). Take a look at how our national budget is created at the link below.
Savings
As noted above, saving money is one component of a personal budget. There are many reasons to save money: to have a cushion for unexpected expenses, to buy a house, to enable further education, or to fulfill personal dreams such as going into business or traveling overseas. Saving money is required in order to invest in the stock market or retire from one's job.
The article at the link below expands on why it's important to make saving money part of your personal plan.
https://www.investopedia.com/articles/personal-finance/031215/why-saving-money-important.asp
Savings are also important to the national economy. Having a financial cushion means that "consumers can adjust their budgets to spend a larger chunk of income on increased mortgage payments or better compensate if they lose their jobs…. After all, when the bills are being paid, the banks, utilities and grocery stores can keep their doors open – and their workers employed" (Elmerraji, 2019, paras. 8-9). Read more about the importance of savings at the link below.
https://www.investopedia.com/financial-edge/0310/savings-are-a-blessing-in-a-slow-recovery.aspx
Credit
As long ago as 1300 B.C.E., credit transactions were taking place, when the Babylonians and Assyrians made loans on the security of mortgages. As the concept of credit developed, it became essential to trading activities in medieval Europe and later in the New World. The voyage of the Mayflower was financed with credit: the Pilgrims promised to work for seven years in order to pay their creditor, a wealthy London merchant.
Today, credit influences financial life through banks and banking, credit cards, loans, insurance, and various forms of tax credits.
Loans
Loans fall in two basic categories: secured and unsecured.
Secured loans are backed by some sort of collateral, a pledge of the borrower's property in order to secure the loan. For example, a bank requiring collateral for a loan may accept stocks or bonds. Car loans, mortgages, and home equity loans are examples of secured loans.
Unsecured loans include those for credit cards, personal loans, and student loans.
Personal loans are used for personal needs and are unsecured. Banks will generally require some sort of income verification or proof of assets. Interest rates on personal loans are generally high.
A mortgage is a loan from a bank or credit union, secured by real property (usually the house being purchased). The amount of the loan is generally for 80 percent of the house's value and must be paid back with interest. Usually a downpayment is required for the portion of the house's value that is not covered by the mortgage. Until recently, a typical mortgage fixed the interest rate at a relatively low rate and ran for a 30-year term. In the 1980s, a new type of mortgage appeared: the adjustable-rate mortgage (ARM), with very low initial interest rates that "reset" for each year of the mortgage. If a mortgage is not paid back, the house goes into what is known as foreclosure, and the lender can take the house back.
The following link provides a history of mortgages and information on how they work.
http://home.howstuffworks.com/real-estate/mortgage2.htm
Home equity loans may borrow against the equity they have built up in their house—in other words, borrowers are trading on the value of their house. These loans, offered by banks or credit unions, are often used for home improvement or to consolidate debt. The life of a home equity loan often is around 10 to 15 years, and interest is often tax-deductible. (A home-equity line of credit is set up in a similar fashion to a home equity loan, but offers a revolving line of credit.)
The Small Business Administration and local banks offer small business loans. These loans must usually be personally guaranteed with personal assets for collateral, can range from a few thousand to a few million dollars, and have a term of repayment ranging from five to 25 years.
Read more about different types of loans at the following link.
http://www.investopedia.com/articles/pf/07/loan_types.asp#axzz26GZBhF2V
