BUDGETING (part 2) Mr. Stasa – W-E City Schools © 1

Essential Question #3 IanMitchell Income - $30,000 Net Worth - $50,000 Income - $85,000 Net Worth - $35,000 What is your definition of financial wealth? How is it that Ian is wealthier than Mitchell, yet Mitchell makes more than double the income than Ian? What factors do you think could cause such a difference?

ASSETSLIABILITIES Checking acct$800Credit card$1,200 Savings Account$4,000Car loan$3,500 Pepsi stock$6,500House mortgage$123,000 Retirement fund$16,000Computer payments$500 House$140,000Student loans$23,000 Furniture$8,000TOTAL LIABILITIES$151,200 Car$14,500NET WORTH: Loan to brother$3,000Assets – Liabilities = Net worth Jewelry$400193, ,200 = $42,000 TOTAL ASSETS$193,200 3 Personal Balance Sheet

What’s a personal balance sheet?  A personal balance sheet is a current snapshot of your financial situation.  A personal balance sheet lists  Current assets (amounts you own)  Current liabilities (amounts you owe)  Net worth (measure of your wealth) 4

 To determine exactly how much money you own and owe  To track progress towards goals  Lenders will ask at the time of applying for loans, accounts, life insurance, etc.  Provides a financial report card that allows you to evaluate your current financial health 5 Why do you need a personal balance sheet?

What Should My Net Worth be Doing?  Your net worth should increase as you age because….  You gain more assets as you age  Your debts are gradually paid off as you age  Once you retire, your net worth will gradually decrease 6

How Much Should it be? Net Worth Estimation Formula Example: At the age of 22, earning $35,000 per year… 22 x 35,000 / 10 = $77,

What About Beth?  Calculate if Beth’s net worth of $307,111 is on track from the Suze Orman clip:   Beth’s current age:  Beth’s monthly income:  Beth’s annual household income (multiply her monthly income by 12)  What should Beth’s estimated net worth be?  Is Beth’s current net worth on track or off track of where she should be? 8 43 years old $3,100 $3,100 x 12 = $37, x $37,200 / 10 = $159,960 Beth’s current net worth is $307,111 Her current net worth is more than on track of where it should be.

Categories of a Balance Sheet 1. An asset is any item of value that you own  Examples :  Cash  Property  Collectibles  Investments 9

How much is it worth?  You should list assets at their current value, not the value they were purchased at. 10

Use fair market value! The fair market value is the price at which a willing and rationale buyer would pay. 11 Derek purchased a car for $12,000 two years ago Today’s current market value = $8,500

Categories of a Balance Sheet  Liabilities:  Debts you owe that have not been fully paid  Examples :  Loans  Mortgage  Credit card bills  Medical bills 12

What’s net worth  Net worth is a true measure of your wealth. 13 AssetsLiabilities Net Worth

Net Worth vs. Income Net WorthIncome A person may have high income and low net worth or vice versa Depends on how a person manages their income Money received such as wages earned from working for pay

Figure this out…  What is your current net worth if you have $4,000 in assets and $1,250 in liabilities? 15 ASSETS-LIABILITIES=NET WORTH $4,000-$1,250=$2,750

So who is wealthier? Ian’s Statement of Financial Position Mitchell’s Statement of Financial Position Assets Home60,000 Home100,000 Retirement Savings 20,000 5,000 Retirement Savings 20,000 7,000 Automobile10,000 Automobile20,000 Total Assets$95,000 Total Assets$147,000 Liabilities Mortgage (house loan)40,000 Mortgage (house loan)80,000 College loan5,000 College loan20,000 Automobile loan0 10,000 Credit card debt0 2,000 Total Liabilities$45,000 Total Liabilities$112,000 Net Worth$50,000 Net Worth$35,000 Income - $30,000 Net Worth - $50,000 Income - $85,000 Net Worth - $35,000

ASSETSLIABILITIES Checking acct$800Credit card$1,200 Savings Account$4,000Car loan$3,500 Pepsi stock$6,500House mortgage$123,000 Retirement fund$16,000Computer payments$500 House$140,000Student loans$23,000 Furniture$8,000TOTAL LIABILITIES$151,200 Car$14,500NET WORTH: Loan to brother$3,000Assets – Liabilities = Net worth Jewelry$400193, ,200 = $42,000 TOTAL ASSETS$193, Personal Balance Sheet

Meet Tori  Tori is considering purchasing a pre-owned car by taking out a loan to finance the costs. She would like to know what her net worth is to help her make this decision. Your Job: Use the information provided to create a Personal Balance Sheet for Tori that will ultimately calculate her net worth.

About Tori 21 years old Completing training to be a radiology technician Has one semester of training left Works part-time earning $13,000 per year Owes $5,000 in student loans that helped pay for her schooling

About Tori Owns a car that runs fine but she wants an upgrade Used a website to determine the market value of her current car = $3000 Has $1,000 in her checking account Keeps $20 in cash in her wallet at all times Keeps $2,000 in her savings account for emergencies

About Tori Rents a one bedroom apartment and owns $1,000 worth of furniture and other household supplies Bought a laptop computer when she started school but estimates that it is only worth $200 now Loves to shop and estimates that she owns $1,500 worth of clothes and shoes Invests $20 per month into a retirement account – that account is currently worth $500

22 Cash$20.00 Checking Account$ Savings Account$ Furniture$ Car$ Laptop $ Clothing$ Retirement$ Student Loans$5, $ $ $9,220.00$5,000.00$4,220.00

Tori’s Current statement of Financial position Assets Cash on hand Value of checking account 1, Value of savings account 2, Subtotal of monetary assets$3, Tangible Assets Market value of household furnishings 1, Market value of automobile 3, Market value of electronics Market value of clothing 1, Subtotal of tangible assets $5, Investment Assets Value of retirement account Subtotal of investment assets $ Total Assets $9, Liabilities Student loan balance 5, Total Liabilities $5, Net Worth = Total Assets - Total Liabilities $4,220.00