Question

Katy wants to invest early in her life. She decides to save some amount every month to invest in shares. To save a specific amount every month, Katy must create a personal budget. How can Katy determine if she has surplus to invest in shares?
A. 

Calculate total expenses and then subtract the average income derived from all sources.

B. 

Calculate total income derived from one regular source and then add the average expense to it.

C. 

Calculate total income derived from one regular source and then subtract all expenses from it.

D. 

Calculate total income derived from all sources and then subtract the average expense from it.

E. 

Calculate total expense and then divide the average income derived from all the sources.

its not E.
Help me get my diploma
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Answer 1

Answer:

add up all your "regular" income (money coming in) and subtract all your expenses (money going out) for a period of time. If you receive a paycheck regularly, you will use the net amount you receive after all deductions

Explanation:

The money that you have coming in should be the income that you earn or receive on a regular basis.  If someone gives you an unexpected lump sum, it is not a regular amount of money coming in. You might also deduct from income, the amount of tax you will still have to pay on your income, spread out as an average per month.  Ask an accountant to help if you need to.

And the longer the period you take into consideration, it  will help with determining a better approximation of your average income.  If possible add up your regular income (incoming money from work and other regular and routine amounts you receive and can rely upon) each month for a year, and determine the arithmetic mean (average per month).  A spreadsheet program will help and you can also find budget templates online to download and use or websites that do this online for you.

Next you do the same with all your regular monthly expenses for the same periods of time, let's assume you will do this for a full year, recording all expenses monthly as you do for your income.   It is easier to accurately list all your income than it is to list all your expenses.  So think hard and discover and add in all the expense categories you have, including discretionary or miscellaneous expenses like cash that you spend monthly for every little thing you spend money on.  Now I don't know your age but the older you are the more financial expenses you will probably have, so catch all the expense categories and keep records or receipts or write down expenses as they occur and keep your receipts and notes in one place so you know where they are.

Spread out your AVERAGE monthly income over the periods such as 12 months on your spreadsheet. and underneath list and deduct your average monthly expenses.  Subtract your average monthly expenses from your average monthly income to see if you have a surplus. If you do, wonderful. If you don't, this is not good as you are now cash flow negative and building  debt.  Of course, doing this work can be eye opening as you will now have a way to look at each expense category and decide upon what expenses you might spend less upon.

Assuming you are cash flow positive, it will be easy to determine the fixed monthly amount you can put into your investment account.  Don't put all your monthly surplus into that account, as you never know when you might need some more money for an unexpected expense that you must pay.

Caveats

Investing means taking risks. There can be no profit when you invest if there is no risk.  You must learn about the risks, and your risk tolerances, and you must not gamble in the markets.

If you don't know anything about investing, find a knowledgeable and successful family member to help. If not available, seek out an investment counselor at a reputable stock brokerage company like Fidelity Investments or TD Ameritrade, or another reputable firm.

By the way, the importance of a budget throughout your life cannot be underestimated. The key to personal financial success will always be spending less than you earn, and putting part of your excess positive cash flow to work for you.

Hope this helps.  The answer is D.  However, the D choice is not as clear as it should be.  You must add all sources of regular income for a period of time and take an average per period you can rely upon. AND then, you must do the same for all expenses.   List all your expenses for each period of time you are working with, the more the better (such as for a year) Then you subtract the average period expenses from the average income to find if you have a surplus (positive cash flow) or a negative cash flow (not so good, although you can do something about that) Hope you do.