chapter © 2010 south-western, cengage learning budgets and financial records 8.1 8.1budgeting and...

Chapter

© 2010 South-Western, Cengage Learning

Budgets andFinancial Records

8.18.1 Budgeting and Planning

8

© 2010 South-Western, Cengage Learning

Budgeting – Financial Planning

SLIDE 2

Chapter 8

4 things you do with your $

1- save2- spend3- donate4- invest

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Financial Values, Goals and Strategies

1. After you Identify your financial values, goals, and strategies create a budget.

2. Evaluate your financial strength and progress using financial ratios.

3. Maintain the financial records necessary for managing your personal finances.

4. Outline and work toward achieving your financial goals through budgeting.

SLIDE 3

Chapter 8

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Financial Planning: Managing income and wealth continuously through life to meet financial goals.

SLIDE 4

Chapter 8

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Copyright ©2004 Pearson Education, Inc. All rights reserved.

1-5

Definitions

Personal finance: the process of planning your spending, financing, and investing so as to optimize your financial situation

Personal financial plan: a plan that specifies your financial goals and describes the spending, financing, and investing plans that are intended to achieve those goals

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1-6

Definitions

Opportunity cost: what you give up as a result of a decision

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1-7

How You Benefit From An Understanding of Personal Finance

Make your own financial decisionsEvery spending decision has an

opportunity cost

Judge the advice of financial advisorsMake informed decisions

Become a financial advisorMany career opportunities available

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1-8

Components of a Financial Plan

Budgeting and tax planning

Managing your liquidity

Financing your large purchases

Protecting your assets and income (insurance)

Investing your money

Planning your retirement and estate

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1-9

Budgeting and Tax Planning

Exhibit 1.1: How a Budget Affects Savings

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1-10

A Plan to Manage Your Liquidity

Liquidity: access to funds to cover any short-term cash deficiencies

Money management: decisions regarding how much money to retain in a liquid form and how to allocate the funds among short-term investment instruments

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1-11

A Plan to Manage Your Liquidity

Credit management: decisions regarding

how much credit to obtain to support your

spending and which sources of credit to

use

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1-12

Managing Your Liquidity

Exhibit 1.2: Managing Your Liquidity

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1-13

A Plan for Your Financing

Loans often needed for large expendituresCollege tuition, car, house

Managing loansHow much can you afford to borrow?

Determining maturity of the loan

Selecting a loan with a competitive interest rate

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1-14

Financing Your Large Purchases

Exhibit 1.3: Financing Process

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1-15

A Plan for Your Investing

Funds not needed for liquidity can be invested

Stocks, bonds, mutual funds, real estate

All investments have some level of risk

Risk: uncertainty surrounding the potential return on an investment

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1-16

A Plan for Your Retirement and Estate This includes insurance planning, retirement

planning, and estate planning

Retirement planning: determining how much money should be set aside each year for retirement and how those funds should be invested

Estate planning: determining how your wealth will be distributed before or upon your death

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1-17

Exhibit 1.4: Components of Your Financial Plan

Components of Your Financial Plan

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1-18

How Financial Planning Relates to Cash Flow

Exhibit 1.6: How Financial Planning Affects Your Cash Flows

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1-19

Integrating Key Concepts

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Financial Values, Goals, and StrategiesValues define your financial success.

Financial goals follow from values.

Financial Goals: Specific objectives to be attained through financial planning and management efforts.

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3- 21

Financial Values, Goals, and StrategiesFinancial strategies guide your financial

success.

© 2010 South-Western, Cengage Learning SLIDE 22

Chapter 8

Lesson 8.1 Budgeting and Planning

GOALSExplain the purpose of financial planning

and prepare a personal budget.Explain the need for and create a net

worth statement and a personal property inventory.

© 2010 South-Western, Cengage Learning SLIDE 23

Chapter 8

Financial Planning Basics

Planning, budgeting, and keeping good records provide the road map that leads to financial security.

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3- 24

Financial Record KeepingFinancial record keeping saves time

and makes you money.

Financial Records: Documents that evidence financial transactions.

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3- 25

Budgeting

Budget: A paper or electronic document used to record both planned and actual income and expenditures over a period of time.

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Budgeting

Rules for successful budgeting:1. Keep it simple.

2. Make it personal.

3. Keep it flexible.

4. Be positive.

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Chapter 8

Getting Started

Income and expensesGross incomeDisposable income

Financial planA financial plan is a set of goals for

spending, saving, and investing the money your receive

Resources and obligations

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Chapter 8

Visualizing Your Future

What comes in and how it goes outChanges you could make

© 2010 South-Western, Cengage Learning SLIDE 29

Chapter 8

Preparing a Budget

A budget is a spending and saving plan based on your expected income and expenses. Money coming in (earnings plus borrowing) must

equal money going out (spending plus saving). The budget must balance.

A budget helps you plan your spending and saving so that you won’t have to borrow money or use credit to meet your daily needs.

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Chapter 8

Steps in Preparing a Budget

Estimate your income.Estimate your expenses.Decide how much to save.Balance your budget.

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Chapter 8

Evan Anderson—Budget for September

Income Expenses

Part-time job $320 Daily lunches $ 80

Allowance 20 Supplies 20

Birthday gift 40 Clothes 40

Total Income $380 Entertainment 140

Total expenses $280

Savings

Credit union account $100

Total expenses plus savings

$380

Simple Budget

The budget balances.

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Chapter 8

Monthly Budget

Fixed expenses are costs that do not change from month to month.

Variable expenses are costs that vary in amount and type, depending on the choices you make.

© 2010 South-Western, Cengage Learning SLIDE 33

Chapter 8

Personal Records

Good personal records makes budgeting and long-range planning easier.

Your records also make it easier to prepare income tax returns, credit applications, and other financial forms.

You should keep five types of personal records: Income and expenses records Net worth statement Personal property inventory Tax records Other miscellaneous documents

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Chapter 8

Income and Expenses Records

Examples of income recordsW-2 forms Statements from banksStatements from investment companies

Examples of income records Receipts listing charitable contributionsMedical billsReceipts for work-related expenses

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Chapter 8

Net Worth Statement

A net worth statement shows a person’s net worth based on his or her assets and liabilities.

Assets are items of value that a person owns. Money or debts you owe to others are called

liabilities. When you subtract your liabilities from your

assets, the difference is known as net worth.

Assets – Liabilities = Net worth

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Chapter 8

Anisa Newkirk

January 1, 20—

Assets Liabilities

Checking account $500 Loan on car $1,800

Savings account 800 Loan from parents 100

Car value 3,000 Total liabilities $1,900

Personal property 5,000 Net Worth

Total assets $9,300 Assets minus liabilities $7,400

Total liabilities and net worth $9,300

Net Worth Statement

These two numbers must be the same.

© 2010 South-Western, Cengage Learning SLIDE 37

Chapter 8

Personal Property Inventory

A personal property inventory is a list of the valuable items you own, along with their purchase prices and approximate current values.

Personal property includes anything of value inside your home—clothing, furniture, appliances, and so forth.

© 2010 South-Western, Cengage Learning SLIDE 38

Chapter 8

Personal Property InventoryAnisa Newkirk: January 2, 20—

ItemYear

PurchasedPurchase

PriceApproximate Current Value

Sphinx XTL DVD Player with big-screen TV 2008 $ 3,200 $1,300

Bedroom furniture (bed, dresser, lamp, clock) 2006 2,000 1,200

Clothing, jewelry ------ 3,000 500

MBD motor bike 2005 1,800 1,000

CD collection, CD burner, digital camera, scanner 2006 2,000 1,000

$12,000 $5,000

(continued)

© 2010 South-Western, Cengage Learning SLIDE 39

Chapter 8

Tax Records

All taxpayers should keep copies of their tax records for at least three years after they file their tax return.

Tax records include the tax return itself (a copy of the signed form), W-2 forms, and other receipts verifying income and expenses listed on each return.

Keep your tax records in a safe place in case of an audit.

© 2010 South-Western, Cengage Learning SLIDE 40

Chapter 8

Other Miscellaneous Documents

Lists of credit card numbersCar titlesInsurance policiesBirth certificatesMarriage certificatesPassports

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1-41

Financial Planning Online: Financial Planning Tools for You

Go to http://finance.yahoo.com

This website provides much information and many tools that can be used for all aspects of financial planning.

It also provides information for creating retirement plans and wills.