chapter 3 goal setting, career planning, and budgeting

CHAPTER 3Goal Setting, Career Planning, and Budgeting

Chapter Preview Setting short-term and long-term goals Establishing a career plan Developing and implementing a budget Monitoring and controlling expenses Understanding your personal money

attitudes and how they affect budgeting

…applying the planning process

Where Does This Fit in Your Comprehensive Financial Plan?

Establish a firm foundation: Evaluate your finances, acquire tools and skills, set goals, develop a budget (Chapters 1 - 4)

Secure basic needs: Liquidity, consumer purchases and credit decisions, insurance, employee benefits (Chapters 5-10)

Build wealth: Save and invest to meet short-term and long-term goals (Chapters 11-15)

Protection: Plan for death and incapacity (Chapters 16-17)

Short-term and Long-term Goals If you do not have goals, you are less likely

to achieve them. The most effective people are those who

regularly set goals and develop strategies for accomplishing them.

Goals should be specific and measurable.

Steps to Setting Goals

1. Make a wish list.

2. Prioritize your list.

3. Break big goals into smaller steps.

4. Re-evaluate regularly.

Why Is Career Planning Important?

Most personal financial goals cost money. Your earning potential is therefore integrally

related to your ability to achieve your goals. You can think of education as an investment in

your human capital—the present value of your future earnings potential

This is probably your most valuable asset.

Steps in Career Planning Identify your abilities and interests.

If you choose a career that’s compatible with your intrinsic interests, then you will be happier and more successful.

Identify career paths that fit. Evaluate the costs, benefits, and risks.

Research employment trends: population aging, growth industries and sectors, globalization

Prepare yourself for the job market.

Developing a Budget What is a budget?

A plan for spending and saving your money in the future so that you can achieve your financial goals.

Steps in the budgeting process Forecasting Implementing Monitoring Evaluating

How to Forecast Income and Expenditures Determine the period the budget will cover.

Monthly or annual in most cases Set up a record-keeping format

Excel spreadsheet or hand-written ledger Business supply stores have various budget

aids Begin with current cash flow statement Assume reasonable increases for variable

income and expenses.

Example: Danelle Washington

Cash Inflows 2004Salary

9,500

Student Loan6,000

Scholarship1,300

Gifts 200

Total 17,000

Cash Inflows 2005Salary 28,000

Gifts 250

Total 28,250

Example: Danelle WashingtonCash Outflows 2004

Taxes 850

Groceries 2,050

Housing/utilities 4,560

Car 2,310

Credit cards 1,500

Insurance/med. 1,500

Education 4,000

Other 2,120

Total 18,890

Cash Outflows 2005Taxes 3,000

Groceries 2,500

Housing/utilities 6,000

Car 4,300

Credit cards 1,500

Insurance/med. 1,500

Student loan 1,800

Other 3,000

Total 23,600

Example: Danelle Washington

2004 2005

Cash Inflows 17,000 28,250

Cash Outflows 18,890 23,600

Net Cash Flow -1,890 4,650

Based on this forecast, Danelle estimates she can save about $4,650/12 = $387 per month.

Tracking Budget Variances Objective

Stop small cash leakages. Ensure that large irregular cash flows do not

cause financial hardship.

How to do this Create a budget tracking worksheet to see how

well you stay within your forecast expenditure amounts.

Example of Budget Tracking Worksheet

CASH INFLOWS

Take-home pay

JANUARY

Forecast

2,100

JANUARYActual

1.950

BUDGET

VARIANCE

CASH OUTFLOWS

Gifts Housing/utilities

Car Credit cards Insurance/med

Student loan

Other

208

500

358

125

125

150

250

0

600

420

125

100

145

260

208

-100

-62

0

25

5

-10

Money Attitudes and Budgeting Couples with different attitudes toward

budgeting may experience conflict. You’ve been brown-bagging your lunch in order

to save $25 a week for your vacation fund. Your spouse buys a $200 power tool that he

doesn’t really need, without consulting you.

Before combining household finances, it’s important to discuss these issues.

How to Households Spend?

Family Finance Issues Who pays the bills and makes decisions? Should each person have separate funds? When does an expenditure require joint

approval? How will you approach gift giving? Who pays for debt that precedes the

marriage? Who pays for expenses associated with

children from previous marriage? Should you have a prenuptial?