1. McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER PLAYLIST SONGS: “Bear Necessities” from Disney’s The Jungle Book “Country Life” by Crash Test Dummies Planning and Budgeting

2. 3-2 Learning Objectives LO 3-1 Analyze your spending habits by using tools such as spending journals and balance sheets. LO 3-2 Estimate the opportunity costs of your purchases. LO 3-3 Identify methods of saving money. LO 3-4 Construct a realistic budget that reflects your priorities and provides a means of protection from overspending.

3. 3-3 Analyzing Your Spending Habits Buying 2 soda pops a day in a vending machine  $1.25 x 2 = $2.50/day  $2.50 x 5 = $12.50/week  $12.50 x 4 = $50.00/month  $12.50 x 52 = $650.oo/year  $650.00 x 10 = $6,500.00/decade Buying a snack from the vending machine  $1.00/day x 5 days = $5.00/week  $5.00 x 4 = $20.00/month  $5.00 x 52 = $260.00/year  $260.00 x 10 = $2,600.00/decade Buying a magazine a week  $5.00/week x 4= $20.00/month  $5.00/week x 52 = $260.00/year  $260.00 x 10 = $2,600.00/decade

4. 3-4 Analyzing Your Spending Habits Saturday evening out  $50/week x 4 = $200.00/month  $50/week x 52 = $2,600.00/year  $2,600.00 x 10 = $26,000.00/decade Parking tickets  $10.00/week x 4 = 40.00/month  $10/week x 52 = $520.00/year  $520.00 x 10 = $5,200.00/decade Cigarettes  $5.00/day x 7 = $35.00/week  $35.00/week x 4 = $140.00/month  $35.00/week x 52 = $1,820.00/year  $1,820.00 x 10 = $18,200.00/decade  $1,820.00 x 55 = $100,100.00/lifetime

5. 3-5 Steps to Understanding Your Current Financial Situation Keep a spending journal for at least a month Understand elements of personal financial statements Create a personal cash flow statement Software to help  www.mint.com www.mint.com  Quicken Quicken

6. 3-6 Keep a Spending Journal

7. 3-7 Journal Month-End Tally

8. 3-8 Elements of Personal Financial Statements Personal Financial Statement or Balance Sheet: A snapshot of your equity at a given point in time, derived from a summation of your assets and liabilities Assets: Money and other items of value that you own Liabilities: Debts or obligations that you owe Net Worth: Amount left over if you sold all your assets and repaid all your liabilities (Assets – Liabilities)

9. 3-9 Elements of Personal Financial Statements Liquidity: How quickly an asset can be turned into cash Cash Value (of life insurance): The amount of funds you receive if you cancel your policy Face Value (of life insurance): The amount of money the beneficiary receives when you die

10. 3-10 Elements of Personal Financial Statements

11. 3-11 Elements of Personal Financial Statements Personal Cash Flow Statement: Measures your cash inflows and outflows in order to show your net cash flow for a specific time period Cash Inflow: Cash coming in (i.e., salary, gifts, and interest income) Cash Outflow: Cash going out (i.e., rent, utilities, and groceries) Net Cash Flow: Cash inflows minus cash outflows for a specific time period

12. 3-12 Create a Personal Cash Flow Statement

13. 3-13 Monitoring Net Cash Flows

14. 3-14 Opportunity Cost Every penny you spend is a penny you didn’t save to spend somewhere else for something you really want. Opportunity Cost: The cost of an alternative that must be forgone in order to pursue a certain action

15. 3-15 Is College Worth the Price? What is the opportunity cost of going to college? What is the cost of 1 extra year of college?  Lost wages  Tuition, book expense $9,100 more if you have an associate’s degree $19,400 more if you have a bachelor’s degree In 2007, the increase in the earning power of a college degree was about $450,000 in today’s dollars

16. 3-16 2009 Annual Earning by Education Degree

17. 3-17 Unemployment Rates and Median Weekly Earnings by Degree

18. 3-18 Cost of One Extra Year of College

19. 3-19 Ways to Save Money Pay yourself first  Treat payments into savings and investment accounts as if they were bills that you would never skip Make saving easy  Savings and investments can be automatically transferred out of your paycheck or checking account Break down savings goals into monthly, weekly, and daily amounts  Saving seems less daunting  To save $1,000 a year you only have to save $2.74/day

20. 3-20 Creating a Budget Record your income and when you receive it List all your fixed expenses and when they are due (rent, utilities, phone, insurance, etc.) List your variable monthly expenses (gas, groceries, entertainment, dining out, etc.) List extraordinary expenses

21. 3-21 Realistic Budget Building Budget: An itemized summary of estimated income and expected expenditures in a given period 1. Observe spending habits via a spending journal 2. Record your income and when you receive it 3. List all your fixed expenses and when they are 4. List your variable monthly expenses 5. After 1 month, project spending and earnings for the next 12 months 6. Project when extraordinary expenses and income will change to maintain a positive cash flow

22. 3-22 Budgeting for Variability Estimated Yearly Expenses/12 months  In which months do you spend more than others?  In which months do you earn more than others? Set an amount aside each month to cover future anticipated expenses. If you get paid twice a month, divide the expected expense by 24 and the result will be how much you should set aside from each paycheck.

23. 3-23 Reviewing and Revising Your Budget Calculate your budget variance: The difference between a planned expense or expenditure and the actual amount Examine your budget variances and make adjustments to your budget if you see that the variance is permanent If you overspent, move money from the emergency fund to cover the shortage or strategize how to make up the difference

24. 3-24 Rules of the Weekly Budget Assessment Set aside 30 minutes each week to focus on the budget Leave emotion and value judgments at the door Forget past mistakes  You can’t change the past but you can impact the future Walk through every line of the budget  Review what went well and what to do differently next time; if need be, move money from the emergency fund to cover the shortage or strategize how to make up the difference

25. 3-25 Rules of the Weekly Budget Assessment, ctd Make necessary adjustments to your budget Plan the next month before the month arrives  Make spending and investing decisions before receiving money Pay yourself first Celebrate a successful week of budgeting

26. 3-26 Living Within Your Means Don’t use credit or debit cards Use the envelope system and a cash-only budget  Every paycheck, put the cash in the envelope for the budget category  When spending, take that cash out of the envelope  Don’t rob Peter to pay Paul  Don’t buy things you cannot afford Don’t buy things you cannot afford

27. 3-27 Learn LO 3-1 Analyze your spending habits by using tools such as spending journals and balance sheets. LO 3-2 Estimate the opportunity costs of your purchases. LO 3-3 Identify methods of saving money. LO 3-4 Construct a realistic budget that reflects your priorities and provides a means of protection from overspending.

28. 3-28 Plan & Act Journal daily spending Transfer journal entry to ‘Every Penny Counts’ spreadsheet Create a personal balance sheet Construct a cash flow statement Draft a budget Schedule weekly budget reviews Set up automatic transfer to savings

29. 3-29 Evaluate Evaluate your spending using your ‘Every Penny Counts’ and spending journals and your budget Make decisions about your earnings, spending, savings, and investing based on your values, goals, and your budget variance Review your online GoalTracker and make notes on how your budget supports your SMART goals