1. Chapter 4 Financial Decisions and Planning

2. What Are Needs and Wants?
Needs are things you must have.
Examples: food, clothing, shelter
Wants are things people desire.
Examples: new cars, vacations, luxury items
Financial resources are used to acquire goods and services.
4-1 Resources and Choices
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3. What Are Needs and Wants?
Financial resources are used to acquire goods and services.
Include: money or other items of value
While financial resources are limited, wants and needs are unlimited and growing
You will have difficult decisions between wants and needs
The amount of money a person has to spend after needs are met is called discretionary income.
4-1 Resources and Choices
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4. How Are Income and Wealth Measured?
Wealth: items of value minus any debts owed
Personal cash flow statement lists cash inflows and outflows.
Inflows = income
Money received from your job, investments, other sources
Outflows = expenses
Net income = positive cash flow
Net loss = negative cash flow
SHOW CASH FLOW STATEMENT
Personal net worth statement shows a person’s net worth based on assets and liabilities.
Assets = money or items of value
For assets like Cars, value is based on the price you could sell for.
Liabilities = debts
Amount owed for car is liability
Difference between assets and liabilities is net worth
Assets that grow in value are appreciating and assets that decline in value are depreciating
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5. PERSONAL NET WORTH STATEMENT
How Is Wealth Measured?
PERSONAL NET WORTH STATEMENT
Assets
Liabilities
Cash and checking account $
Car loan
$1,100.00
Savings account
500.00
Credit card debt
200.98
Savings bond
300.00
Total liabilities
$1,300.98
Baseball card collection
100.00
Computer, iPod, games
Car, current value
3,000.00
Net Worth
Total assets
$4,652.56
Assets minus liabilities
3,351.58
Total liabilities and net worth
Net Worth
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6. How Can You Make Good Financial Choices?
Decision-Making Process
When you give up one option in exchange for another you make a trade off.
The trade off results in an opportunity cost, which is the value of the next best alternative
Value can be measured in dollars, time, convenience, enjoyment, and so forth
Give Ipod and bicycle example
Define the need.
What need or problem will be resolved from buying the item or service.
Computer for online research
List options for meeting the need.
Buy or borrow computer
Go to library
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7. How Can You Make Good Financial Choices?
Compare the options.
List advantages and disadvantages
Consider the opportunity cost—the value of your next best option.
Opportunity costs of using library computer vs buying
Make a decision.
Take action based on your decision.
Reevaluate your choice.
Buyers remorse?
Make purchase that you later regret
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8. What Is the Purpose of Budgeting?
A budget is a spending and saving plan.
Similar to cash flow statement because both record income and expenses.
However, a cash flow statement differs because it lists actual cash inflows and outflows to show how much money you have available at a certain date.
4-2 Basics of Budgeting
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9. What Is the Purpose of Budgeting?
Spreadsheet allows you to answer what if questions.
What if expenses go up 8%?
What is the price of the car you are saving for goes up 10%?
What if prices on utilities drop 5%?
4-2 Basics of Budgeting
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10. How Do You Prepare a Budget?
Step 1: Estimate income
Keep track of money both earned and unearned.
Money should be calculated in weekly, monthly, and yearly
Once you see the big picture you're about to see how much comes in and goes out. It may change your spending habits.
Step 2: Plan savings
Pay yourself first, put money into savings before you consider other expenses.
Plan how much you want to save each month. This amount may have to change based on your expenses.
4-2 Basics of Budgeting
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11. How Do You Prepare a Budget?
Step 3: Estimate expenses: expenses are items which you spend money.
Lunch, clothes etc.
Variable expenses: costs the go up and down every month
Gas or electric bill fluctuate with weather
Can vary due to changing prices
Food, clothing, and entertainment are all variable.
Fixed expenses: costs that do not change
Rent, insurance, car payments
Fixed expenses remain constant even when income does not.
If you lose you job, you may have to eliminate a fixed expense if you cannot afford it. An example would be a car.
4-2 Basics of Budgeting
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12. How Do You Prepare a Budget?
Charitable giving: act of donating money or time
Donate through the church
Donate money to red cross to help victims of natural disaster.
Step 4: Balance the budget
Savings and expenses should equal total income.
When these amounts are the same, the budget is balance
4-2 Basics of Budgeting
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13. Personal Budget Income Weekly Monthly Yearly Work (part-time) $30.00
$120.00
$1,440.00
Allowance for household chores
10.00
40.00
480.00
Lunch money allowance
15.00
60.00
720.00
Savings account interest
.50
2.00
24.00
Total income
$55.50
$222.00
$2,664.00
Savings
Deposit to savings account
$ 5.50 $ $
Expenses
Gifts
$ 5.00 $ $
Clothes and shoes
Loan payment to parents
5.00
20.00
240.00
Lunches
Entertainment/miscellaneous
Total expenses
$50.00
$200.00
$2,400.00
Total savings and expenses
4-2 Basics of Budgeting
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14. Budget Analysis Variances Favorable Variances Unfavorable Variances
When you spend more than 10% of what you planned you should look at it carefully.
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15. Recordkeeping Methods
Manual records
Electronic records
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16. Focus On . . .
Philanthropy
Philanthropy is a form of charitable giving.
It supports a societal cause.
It often lasts for an extended period of time.
It is the primary source of funding for the fine arts, performing arts, and most religious and humanitarian causes.
4-2 Basics of Budgeting
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17. What Is Financial Planning?
Financial planning is a process of looking at your current financial situation and thinking about your future.
More than a budget.
Purpose is to plan for earning, saving, spending, and investing to allow you to achieve goals today and in the future.
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18. What Is Financial Planning?
Step 1: Gather financial information
Everything related to your finances should be considered
List of financial records. Need to prepare first 3
Cash flow statement, Net worth statement, Budget, Checkbook, Bank statements, Investment accounts, Insurance policies, Paycheck stubs, Tax returns, Wills, Trusts, Credit accounts, Any legal documents related to finances
At some point you will need to retire.
Look at medical history and medical history of family members to estimate life expectancy
You should plan to meet financial needs all the way to the end of life
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19. What Is Financial Planning?
Step 2: Analyze information
Look at inflows and outflows
Answer questions
Is your income growing over time?
Is your net worth growing?
How are your spending habits changing?
Who else depends on your income?
What new goals do you need to add and plan?
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20. What Is Financial Planning?
Step 3: Set goals
Personal goals: things you want to achieve in your life
Financial goals: describe how you will pay for your personal goals.
Short term goals: one week to one year
Replenish the money spent on PS4 in savings account
Medium term: 2 – 5 years
Save money for college
Increase income over the next 3 years
Long term goals: 5+ years
Contribute to 401(k) for retirement
Buy a car
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21. What Is Financial Planning?
Step 4: Develop a timeline and benchmarks
Timeline: visual display of how long it will take to achieve each phase of your plan
Timeline should include benchmarks, which are standards progress is measured against.
Step 5: Implement and evaluate the plan
Since goals and plans change, you need to constantly update your plan
4-3 Personal Financial Planning
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22. Financial Plan (One Goal)
Net worth on April 1, 20--: $525.56
Personal Goal
Financial Goal
Benchmarks
Timeline
Live in my own house in the country.
Buy a house in the country.
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
Get a job that provides enough income to make monthly payments
2 years
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23. Where Can You Get Good Financial Advice?
Financial planners
Financial experts
Newspapers and magazines
Seminars and workshops
Financial websites
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24. How Can You Protect Financial Resources?
Deal only with financial advisers you know and trust.
Keep good records.
Verify account balances regularly.
Guard passwords.
Be aware of phishing.
Internet scam in which an is sent from someone posing as your bank or other legitimate business asking for personal information.
Guard against identity theft.
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