Chapter 4 Financial Decisions and Planning Copyright 2007 Thomson South-Western

Meeting Wants and Needs Basic needs – items or services that are necessary to survive. Examples: Food, water, clothing Other needs – items or services that are not necessary to survive but that we have become dependent upon as a society. Examples: computers, cell phones 4-1 Resources and Choices Slide 2

Meeting Wants and Needs Wants – items and services that are not necessary to survive. These items are bought with discretionary income. An expensive car is a product that fills customers’ wants. PR Newswire PORSCHE CARS NORTH AMERICA, INC. Slide 3

Financial Resources Financial resources are money or other assets used to acquire goods and services Many people do not have enough resources to meet all their needs and wants People must decide how to use their scarce resources 4-1 Resources and Choices Slide 4

Personal Income and Expense Statement 4-1 Resources and Choices Slide 5

Personal Balance Sheet 4-1 Resources and Choices Slide 6

Making Financial Choices Buying decisions play an important part in managing your money A trade-off involves giving up a particular benefit or item to get another that you think is more desirable Opportunity cost is the benefit or item you give up (do not buy) 4-1 Resources and Choices Slide 7

Opportunity Cost You have $20 and you feel like going to dinner and then to the movies and you would like to have a new shirt to wear. The movie will cost $9, a fast food dinner will cost $7, and the new shirt costs $19. If you go to dinner and the movie, what is your opportunity cost? If you buy the shirt, what is your opportunity cost? Slide 8

Decision-Making Process Define the need or problem List options available Compare the options Make a decision Take action to apply the decision Reevaluate your choices after some time has passed 4-1 Resources and Choices Slide 9

Building Communications Skills Reading Vocabulary Reading is a basic communications skill Your vocabulary is the words you know and understand how to use Improving your vocabulary will help you better understand the material you read 4-1 Resources and Choices Slide 10

Purpose of Budgeting Budget A spending and saving plan Based on expected income and expenses Allows you to compare financial resources with financial needs A budget can be created using a spreadsheet. 4-2 Budgeting Slide 11

Building a Budget Estimate income Plan savings Estimate expenses Variable expenses Fixed expenses Balance the budget Eating at a fancy restaurant is entertainment, a variable expense. 4-2 Budgeting Slide 12

Personal Budget 4-2 Budgeting Slide 13

Budget Analysis Income, savings, and expenses will not be exactly as budgeted Differences between planned and actual amounts are called variances Favorable variances Unfavorable variances Looking at variances can help you budget better in the future 4-2 Budgeting Slide 14

Discretionary Income This is the amount of money a person has to spend after needs are met. Slide 15

Budget Variances Report 4-2 Budgeting Slide 16

Recordkeeping Methods Keeping good records will help you prepare better budgets Manual records Computerized records You can keep financial records on a handheld computer using programs such as Microsoft® Money or Excel. 4-2 Budgeting Slide 17

Technology Corner Internet Research The Internet can be used to research and compare products and prices Search engines allow you to search using keywords. Ex: Google, Bing, Yahoo Search Search results provide links to Web pages Enter a word or term and click Search. Search 4-2 Budgeting Slide 18

Success Skills Dealing With Conflict Conflicts will occur sooner or later When faced with a conflict Take a time out to consider the situation State the problem briefly to show that you understand it Suggest talking later if the other person is angry Focus on the problem and be objective Be willing to compromise to reach a resolution 4-2 Budgeting Slide 19

Financial Planning A financial plan contains Gather Information Analyze information Set goals (financial and personal) Develop a timeline to achieve them Implement and Evaluate the plan 4-3 Personal Financial Planning Slide 20

One Goal in a Financial Plan 4-3 Personal Financial Planning Slide 21

Financial Planning Process Gather information  Personal income and expense statements Personal balance sheet Personal budget Current bank account statements Investment account statements Financial contracts Other documents related to your finances Checkbooks Insurance policies Current paycheck stub Tax returns Will Trusts 4-3 Personal Financial Planning Slide 22

Financial Planning Process Analyze information Review income and expenses Review your balance sheet Consider changing goals or spending habits Set goals Personal goals Financial goals 4-3 Personal Financial Planning Slide 23

Financial Planning Process Develop a timeline Consider how soon you want to achieve each goal Consider steps must you take to achieve each goal Implement and evaluate the plan Work toward achieving goals Review and adjust the plan at least once a year 4-3 Personal Financial Planning Slide 24

Ethics A financial planner Financial Planners and Commission Earnings A financial planner Provides financial advice to individuals May also buy and sell products on commission Financial planners are unethical if they buy or sell products just to earn a commission Choose a financial planner you can trust to deal fairly 4-3 Personal Financial Planning Slide 25

Focus on... Phishing Is a type of Internet scam You are asked by e-mail to provide personal information such as a bank account number Your data may be used to commit identity theft or other crimes To protect yourself, do not send personal data in reply to e-mails that appear to be from a bank or business 4-3 Personal Financial Planning Slide 26