1. Chapter 4 Financial Decisions and Planning

2. Slide 2 What Are Needs and Wants? 4-1 Resources and Choices Needs are things you must have. o Examples: food, clothing, shelter Financial resources are used to acquire goods and services. Wants are things people desire. o Examples: new cars, vacations, luxury items

3. Slide 3 How Are Income and Wealth Measured? 4-1 Resources and Choices Personal cash flow statement lists cash inflows and outflows. o Inflows = income o Outflows = expenses Personal net worth statement shows a person’s net worth based on assets and liabilities. o Assets = money or items of value o Liabilities = debts

4. Slide 4 How Is Wealth Measured? 4-1 Resources and Choices PERSONAL NET WORTH STATEMENT AssetsLiabilities Cash and checking account$ 452.56Car loan$1,100.00 Savings account500.00Credit card debt 200.98 Savings bond300.00Total liabilities$1,300.98 Baseball card collection100.00 Computer, iPod, games300.00 Car, current value 3,000.00Net Worth Total assets$4,652.56Assets minus liabilities 3,351.58 Total liabilities and net worth $4,652.56 Net Worth

5. Slide 5 How Can You Make Good Financial Choices? 4-1 Resources and Choices Decision-Making Process 1.Define the need. 2.List options for meeting the need. (trade-offs) 3.Compare the options. o Consider the opportunity cost—the value of your next best option. 4.Make a decision. 5.Take action based on your decision. 6.Reevaluate your choice.

6. Why Budget? Why Save? Budgeting can help you identify what you can spend and what you should save. Saving money can give you huge long-term gains. It can help you reach your goals—big or small. –What do you want to save for? A new car? A “rainy day” fund for emergencies? College?

7. Slide 7 What Is the Purpose of Budgeting? A budget is a spending and saving plan. It is based on estimated income and expenses. Use spreadsheet software to prepare a budget. 4-2 Basics of Budgeting

8. Slide 8 How Do You Prepare a Budget? 4-2 Basics of Budgeting Step 1: Estimate income Step 2: Plan savings – pay yourself first Step 3: Estimate expenses o Variable expenses – go up and down (LG&E) o Fixed expenses – do not change (car payment) o Charitable giving Step 4: Balance the budget

9. Slide 9 Personal Budget 4-2 Basics of Budgeting IncomeWeeklyMonthlyYearly Work (part-time)$30.00$120.00$1,440.00 Allowance for household chores10.0040.00480.00 Lunch money allowance15.0060.00720.00 Savings account interest.50 2.00 24.00 Total income $55.50$222.00$2,664.00 Savings Deposit to savings account$ 5.50$ 22.00 $ 264.00 Expenses Gifts$ 5.00$ 20.00$ 240.00 Clothes and shoes15.0060.00720.00 Loan payment to parents5.0020.00240.00 Lunches15.0060.00720.00 Entertainment/miscellaneous 10.00 40.00 480.00 Total expenses$50.00$200.00$2,400.00 Total savings and expenses $55.50 $222.00$2,664.00

10. Preparing A Budget Analysis Refer to page 130 Income (actual-budgeted/budgeted) –Favorable variance – when you earn or save more than you estimated –Unfavorable variance – when you earn or save less than you estimated Expenses (budgeted-actual/budgeted) –Favorable variance – when you spend less than you had planned to spend –Unfavorable variance – when you spend more than you planned to spend Slide 10

11. Slide 11 What Is Financial Planning? Financial planning is a process of looking at your current financial situation and thinking about your future. 4-3 Personal Financial Planning A financial plan has personal and financial goals along with steps and a timeline. Review and update your financial plan periodically.

12. Slide 12 What Is Financial Planning? Step 1: Gather financial information Step 2: Analyze information Step 3: Set goals o Personal and financial Step 4: Develop a timeline and benchmarks Step 5: Implement and evaluate the plan 4-3 Personal Financial Planning

13. Slide 13 Financial Plan (One Goal) 4-3 Personal Financial Planning FINANCIAL PLAN Net worth on April 1, 20--: $525.56 Personal GoalFinancial GoalBenchmarksTimeline Live in my own house in the country. Buy a house in the country. 1.Save money for a down payment ($12,000) 5 years Set aside $200 per month Once per month Open a separate account for money saved April 8 (next week) Talk to a mortgage broker to get prepared Make an appointment for April 15 2.Get a job that provides enough income to make monthly payments 2 years

14. Slide 14 Where Can You Get Good Financial Advice? 4-3 Personal Financial Planning Financial planners Financial experts Newspapers and magazines Seminars and workshops Financial websites

15. Slide 15 How Can You Protect Financial Resources? 4-3 Personal Financial Planning Deal only with financial advisers you know and trust. Keep good records. Verify account balances regularly. Guard passwords. Be aware of phishing. Guard against identity theft.