Chapter 4 Financial Decisions and Planning

What Are Needs and Wants? Needs are things you must have. Examples: Wants are things people desire. Examples: Financial resources are used to acquire goods and services. 4-1 Resources and Choices Slide 2

How Are Income and Wealth Measured? Personal cash flow statement: cash inflows and outflows Inflows = income Outflows = expenses Inflows > Outflows Outflows > Inflows 4-1 Resources and Choices Slide 3

Personal Cash Flow Statement Cash Inflows Total cash inflows _______ Cash Outflows Total cash outflows _______ ____________ Net Cash Flow ________ Slide 4

How Are Income and Wealth Measured? Personal net worth statement: based on assets and liabilities Assets = money or items of value Liabilities = debts Assets – Liabilities = Net Worth Slide 5

PERSONAL NET WORTH STATEMENT How Is Wealth Measured? PERSONAL NET WORTH STATEMENT Assets Liabilities Cash and checking account $ 452.56 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 4-1 Resources and Choices Slide 6

Personal Net Worth Statement Create your own! Use page 120 as a reference Slide 7

How Can You Make Good Financial Choices? Decision-Making Process Define the need. List options for meeting the need. Compare the options. Consider the opportunity cost—the value of your next best option. Make a decision. Take action based on your decision. Reevaluate your choice. 4-1 Resources and Choices Slide 8

What Is Financial Planning? Financial planning is a process of looking at your current financial situation and thinking about your future. A financial plan has personal and financial goals along with steps and a timeline. 4-3 Personal Financial Planning Slide 9

Steps of a Financial Plan Step 1: Gather financial information Step 2: Analyze information Step 3: Set goals Step 4: Develop a timeline and benchmarks Step 5: Implement and evaluate the plan 4-3 Personal Financial Planning Slide 10

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 4-3 Personal Financial Planning Slide 11

What Is the Purpose of Budgeting? A budget is a spending and saving plan. It is based on estimated income and expenses. 4-2 Basics of Budgeting Slide 12

How Do You Prepare a Budget? Step 1: Estimate income Step 2: Plan savings Step 3: Estimate expenses Variable expenses Fixed expenses Charitable giving Step 4: Balance the budget 4-2 Basics of Budgeting Slide 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 $ 22.00 $ 264.00 Expenses Gifts $ 5.00 $ 20.00 $ 240.00 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 Slide 14

Analyzing Your Budget Variances: Differences between planned amounts and actual amounts Reasons for variances? Why should you analyze your budget? Analyze budget on page 130 Slide 15