PF 8.02 Understand personal financial planning (Unpacked Content)

Financial Planning Used for planning ways to reach financial goals A continual, cyclical process of tracking, then anticipating, income and expenses Steps in the process of financial planning Identify financial goals Prepare a balance sheet showing what you own and what you owe Track income and expenditures for a set time period, usually a month, and record in an income and expense statement Analyze amount of money earned and how it was spent Prepare a spending plan with anticipated income and expenses to meet financial goals during the next time period At the end of the time period, revise financial goals, if needed, and use the actual income and expenses to again analyze income and how it was spent Prepare your next spending plan Note that three types of financial statements, shown above in bold font, are needed for financial planning.

Benefits of Financial Planning Learn to live within one’s means Helps avoid financial difficulties Have resources for one’s desired standard of living Reduces the need to use credit Increases sense of security Lessens anxiety about money matters Stay in control of finances Become financially independent

Financial Statements *Balance Sheet* Shows assets, liabilities, and net worth of an individual or family Reason needed: need to know financial status in order to plan finances

Financial Statements *Income and Expense Statement* Also known as cash flow statement A list of all income and expenses for a specified time period A historical type of record that serves as the basis for a spending plan Shows whether individual/family was able to live within his/her/their means Shows where income was spent Shows when expenses exceed income and areas of excess expense Shows if income was sufficient to meet expenditures

Financial Statements *Spending Plan* Also known as a budget or a financial plan A tool used to plan income and expenses for a future time period Used to track income and expenditures Used to evaluate spending at the end of a time period

Financial Statements Comparison

Income & Expense Statement Time Orientation Income & Expense Statement Past---a historical record of what was earned and spent Spending Plan Future ---a projection of anticipated earnings and expenditures

Income & Expense Statement Basic Use Income & Expense Statement Used as a foundation for planning one’s finances Spending Plan Used to estimate finances for a future time period

Income & Expense Statement Specific Uses Income & Expense Statement Shows if living within means Shows where money was spent Shows when too much is being spent on a certain category of expenses Shows if additional income is needed to meet necessary expenses Spending Plan Helps one live within means Helps plan where to spend money Helps track income and expenditures Reduces the likelihood of having to use credit and go into debt

Where it Fits in Financial Planning Income & Expense Statement Is used to develop a spending plan Spending Plan Becomes the income and expense statement at end of specified time period