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“Take Charge of Your Finances” Advanced Level
Spending Plans “Take Charge of Your Finances” Advanced Level
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Typical Spending Plan Pie Chart
Provides guidance when creating a spending plan What variables may cause these percentages to be different?
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Males vs Females
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Having a plan Financial planning - a tool used to achieve financial success based upon the development and implementation of financial goals Spending plan - paper or electronic document used to record both planned and actual income through expenditures over a period of time Step 2– Creating Personalized Income and Expense Categories Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 4– Implement and Control Step 3– Allocate Money to Each Category Spending Plan Development Process
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Everyone has a unique spending plan
Value A fundamental belief about what is desirable, worthwhile, and important to an individual Need An essential item required for life Want Something unnecessary, but desired Based upon the following elements:
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SMART Financial Goals SMART Goals Why is goal setting important?
Specific Exactly what is to be done with the money involved Measurable Write the exact dollar amount Attainable Determine how it can be reached Realistic Do not set the goal for something unattainable or unrealistic Time Bound Specifically state when the goal needs to be reached SMART Financial Goals Why is goal setting important?
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Example of SMART goals I plan to save $15.00 from my monthly paycheck for ten months to purchase a new MP3 player for $150.00 What is the…… S= M= A= R= T=
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Components of a Spending Plan
Gumball machine represents components of the financial planning process Income - money earned Gumballs going into the machine Wages from a job, allowance, gifts
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Components of a Spending Plan
Expense - money spent Money going out of the gumball machine Fixed expenses -may have a fixed amount due each month and are contractual Flexible expenses -can vary each month in the amount owed and are not contractual
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Spending Plan Activity
Decide if each item would be income, a fixed expense, or a flexible expense
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Spending Plan Activity
Paying Rent Wages
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Spending Plan Activity
Groceries Internet bill
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Spending Plan Activity
Tips Utilities
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Spending Plan Activity
Gift from family Income Savings Fixed expense or Income
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Spending Plan Activity
Automobile registration Eating out/Snacks
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Spending Plan Activity
Scholarships Hobbies
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How to Develop and Maintain a Spending Plan
Steps 1-3 help develop a spending plan Steps 4-5 help maintain a spending plan Evaluate and adjust to meet personal needs and adapt to life changes Step 2– Creating Personalized Income and Expense Categories Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 4– Implement and Control Step 3– Allocate Money to Each Category Spending Plan Development Process
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Step 1: Track Current Income and Expenses
Step 2– Creating Personalized Income and Expense Categories Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 4– Implement and Control Step 3– Allocate Money to Each Category What period of time will your spending plan include? Usually concurrent with payday How much money am I earning? Income How much money am I spending? Expenses Necessary to creating a realistic spending plan
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Must work for the individual! There is not one right method!
Tracking Methods Carrying a small notebook and writing down all expenses Keep all receipts Use a debit card if your depository institution creates spending reports for your account Input information into a cell phone Cell phone applications Must work for the individual! There is not one right method!
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The Costs Add Up Weekly date night at the movies with popcorn
$30 per week $1,560 per year Daily Latte $3.75 every day $1,369 per year Eating lunch out 5 days per week $5-$10 daily $1,300-$2,600 per year Daily sport drink $2.00 daily $730 per year
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Gross vs. Net Income Payroll Deductions Net Income Gross Income
Total amount of money earned during a pay period (salary or hourly wage x hours worked) Gross Income Taxes Retirement Health Benefits Payroll Deductions Take home pay (the amount of the paycheck) Net Income
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What are two items or services you use that are paid for by taxes?
Payroll Deductions Taxes Required by local, state, and federal governments Provide public goods and services Account for approximately 31% of an individual’s gross income Payroll deductions: Federal Taxes (mandatory) State Taxes (If applicable) Federal Insurance Contribution Act (FICA tax) (mandatory) Retirement (depends upon the employer) 401K Health care benefits (depends upon the employer) What are two items or services you use that are paid for by taxes?
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Saving and Investing Savings- Current income not spent on consumption
Pay Yourself First! Save then spend Recommend saving % of net income Save at least 6 months worth of expenses for emergencies Continue to invest
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Housing - Typically 30% of net income
Possible expenses associated with housing: Monthly payment – a fee charged each month to live in a home Utilities – includes electricity, water, and garbage fees Home or renters insurance – purchased to protect the home and possessions inside from loss Property taxes – paid by the owner of the home Maintenance – Repairs, cleaning, and care Household furnishings - furniture, decorations, etc.
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Transportation- Typically 20% of net income
Possible expenses associated with transportation: Monthly payment – if a loan is taken out to purchase an automobile License and registration – required by law to own an automobile Insurance – required by law to protect the vehicle and individuals if involved in an accident Repairs and maintenance Fuel Public transportation fees – including bus, metro pass, taxis, or parking fees
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Food- Typically 15% of net income
Possible expenses associated with food: Food at the grocery store Meals at restaurants Snacks eaten out (coffees, treats) Party and entertainment foods Non-food kitchen supplies (plastic wrap, dish soap)
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Insurance- Typically 7% of net income
Arrangement between an individual and an insurance company to protect the individual against risk Health – pays a portion of health care expenses if one is sick or injured Home/renters Automobile Life – provides financial support to an individual’s beneficiaries upon death Disability – provides financial support if an individual is injured and cannot work
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Other Expenses- Typically 18% of net income
Family member care (childcare) Communication and computers (Internet, cell phone, cable television) Medical costs not covered by insurance Clothing Educational expenses Personal care Pet care Entertainment Gifts and charitable contributions Credit costs (loan payments)
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Step 2: Create Personalized Income and Expenses Categories
Categories are based upon the individuals/families income and expenses Reference tracking from Step One Step 2– Creating Personalized Income and Expense Categories Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 4– Implement and Control Step 3– Allocate Money to Each Category
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Step 3: Allocate Money to Each Category
Step 2– Creating Personalized Income and Expense Categories Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 4– Implement and Control Step 3– Allocate Money to Each Category Use categories created in Step Two Reference tracking from Step One Refer to goals and determine if any changes in spending needs to be made A spending plan is now developed!
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Spending Plan Template
Everyone uses a different program to create a spending plan Paper and pencil Online software Electronic programs such as Microsoft Excel and Word Must be something that an individual can manage effectively
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Spending Plan Template
Income Amount Wages $ Total Income Expenses Percentage of income used for each expenditure Housing Rent or mortgage Utilities Maintenance Insurance Food Eating out Groceries Total Expenses Total Income – Total Expenses
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Net Gain or Net Loss? Income Expenses Net gain or loss Net gain - there is remaining money to either save, spend or invest Net loss - an individual is spending more money that he/she is earning and has to use credit (borrowed money) to meet their financial obligations A spending plan should have income and expense matching one another (reach zero)
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Step 4: Implement and Control
Step 2– Creating Personalized Income and Expense Categories Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 4– Implement and Control Step 3– Allocate Money to Each Category Implement: Put plan into action! Control: Determine what was actually spent Continued monitoring of spending allows an individual to know if they are spending too much in a category Helps avoid credit and savings use Utilize control systems
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Control Systems Envelope systems – place the actual budget amount of cash from a paycheck into a specific envelope system for the expense Check register system –track all expenditures in a checkbook register which has been divided into spending plan categories Electronic spending plan systems – Multiple types of software are available Cell Phone Applications
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Step 5: Evaluate and Make Adjustments
Step 2– Creating Personalized Income and Expense Categories Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 4– Implement and Control Step 3– Allocate Money to Each Category Assess if spending plan is working Are goals being met? Are the dollar amount allocations in each category accurate? Is money being saved or invested? Is credit being used? If so, then the spending plan needs to be adjusted (by increasing income or decreasing expenses) Make changes to spending plan if necessary Begin the process again!
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What is the Long-term Positive impact of a spending plan?
To know where your money is going! To build long-term wealth! To create long-term financial security!
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Net Worth Statement Assets Liabilities Net Worth Net worth statement - describes an individual or family’s overall financial condition on a specified date The components include: Assets – Everything a person owns with monetary value Liabilities – Debts or what is owed to others Net Worth – the amount of money left when liabilities are subtracted from assets (indicates wealth)
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Who is Wealthier? Juanita – earns $35,000 per year
Alexis – earns $100,000 per year Assets Home $60,000 Retirement $24,000 Automobile $8,000 Total Assets $92,000 Liabilities College loan $6,000 Mortgage $35,000 Total Liabilities $41,000 Net Worth $51,000 Assets Home $75,000 Retirement $35,000 Automobile $8,000 Total Assets $118,000 Liabilities College loan $10,000 Automobile loan $4,000 Credit card debt $20,000 Mortgage $65,000 Total Liabilities $99,000 Net Worth $19,000
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Gumball Analogy Income (money in) Net Worth (wealth)
Always have more money coming in than out! Work towards building wealth! Income (money in) Net Worth (wealth) Flexible Expenses (money out) Fixed Expenses (money out)
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Any Questions
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Let’s Review Katie Cole
First, review her estimated income and expenses? (Do you see her various categories; income, fixed expenses and flexible expenses?) Next, refer to her calendar to view her actual income (wages, tips, scholarships, etc.), fixed and flexible expenses.
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Katie Cole cont. Properly allocate her actual income and expenses.
Calculate the differences (correctly noting positive and negative differences) for each. Did she have a net gain or net loss? Answer the last page of your packet, making recommendations to her spending plan.
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The Brown Family… First read the hand-out about their family.
What does the Brown Family value? How will these values affect their spending?
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The Brown Family Complete Step 2 Review spending plan categories
Answer taxes question Complete Step 3 Complete the spending plan with the Brown families income and expenses Analyze the pie chart - Similarities - Differences - Adjustments
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The Brown Family Complete Step 4
Identify control systems for the Brown family Analyze the purpose of a control system Brainstorm advice for a family who does not have a control system in place Complete Step 5 Identify expenses encountered, but not included Identify ways to adjust their spending plan Create a new spending plan
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