Chapter 4

Financial Decisions and Planning

Financial Literacy• Chapter 4 Objectives

– Describe needs and wants– Apply a decision making process to make

personal financial choices– Understand terms on personal cash flow

statements and net worth statements – Prepare a personal budget, planning for

projected income and expenses– Explain and draft a financial plan

Slide 2

Slide 3

What Are Needs and Wants?

4-1 Resources and Choices

• Needs are things you must have.o Examples: food, clothing, shelter

• Financial resources are used to acquire goods and services.

• Wants are things people desire.o Examples: new cars,

vacations, luxury items

Resources Limit Choices

• People’s wants and needs are unlimited

• Financial resources are limited

• With limitations comes choice

Slide 4

Slide 5

How Are Income and Wealth Measured? See page 120

4-1 Resources and Choices

• Personal cash flow statement lists cash inflows and outflows.o Inflows = incomeo Outflows = expenses

• Personal net worth statement shows a person’s net worth based on assets and liabilities.o Assets = money or items of valueo Liabilities = debts

Slide 6

How Is Wealth Measured? See page 120

4-1 Resources and Choices

PERSONAL NET WORTH STATEMENT

Assets Liabilities

Cash and checking account $ 452.56 Car loan $1,100.00

Savings account 500.00 Credit card debt 200.98

Savings bond 300.00 Total liabilities $1,300.98

Baseball card collection 100.00

Computer, iPod, games 300.00

Car, current value 3,000.00 Net Worth

Total assets $4,652.56 Assets minus liabilities 3,351.58

Total liabilities and net worth $4,652.56

Net Worth

Know these terms well:From the

Net Worth Statement

Assets: Money and items of value that you own

Liabilities: Debts that you owe

Net Worth: difference between your assets and your liabilities

Value of Assets Appreciating: Assets

that are growing in value, ex. Land, house, savings bonds

Depreciating: Assets that are decreasing in value, ex. Cars and electronics

Slide 7

Financial Strategies• Consider your future – how will this choice affect

your future?

• If you have doubt, don’t buy it - wait

• Avoid buyer’s remorse:

(emotional or impulse buys)

• Learn from other’smistakes

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Slide 9

What Is the Purpose of Budgeting?

• A budget is a spending and saving plan.

• It is based on estimated income and expenses.

• Use spreadsheet software to prepare a budget.

4-2 Basics of Budgeting

Slide 10

How Do You Prepare a Budget?

4-2 Basics of Budgeting

• Step 1: Estimate income• Step 2: Plan for savings (10% to start)• Step 3: Estimate expenses

o Variable expenses- ex. Gas and electric billo Fixed expenses – ex. Rent, car paymento Charitable giving

• Step 4: Balance the budget: Budget Equation

Savings + Expenses = Income

Slide 11

Personal Budget

4-2 Basics of Budgeting

Income Weekly Monthly Yearly

Work (part-time) $30.00 $120.00 $1,440.00Allowance for household chores 10.00 40.00 480.00Lunch money allowance 15.00 60.00 720.00Savings account interest .50 2.00 24.00Total income $55.50 $222.00 $2,664.00

Savings

Deposit to savings account $ 5.50 $ 22.00 $ 264.00

Expenses

Gifts $ 5.00 $ 20.00 $ 240.00Clothes and shoes 15.00 60.00 720.00Loan payment to parents 5.00 20.00 240.00Lunches 15.00 60.00 720.00Entertainment/miscellaneous 10.00 40.00 480.00Total expenses $50.00 $200.00 $2,400.00

Total savings and expenses $55.50 $222.00 $2,664.00

Preparing a Budget Analysis

• Not everything will go as planned

• Variances– Difference between

planned amounts and

actual amounts

• Favorable and Unfavorable (F or U)

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Record Keeping

• Manual– Pen and paper– Keep it somewhere safe

• Electronic– Using software such as Quicken or Quickbooks– Microsoft Excel– Google Docs

Slide 13

Q&A: Answer these Questions in space below:

page 123: #13, #14, #16

• Then go to Activity 1 in back of packet. Slide 14

Financial Literacy …continuing Chapter 4

• Current Objectives:– Identify the purpose of a personal budget– Prepare a personal budget– Learn how to analyze and prepare for

variances in a budget– Learn importance of Financial Planning

Slide 15

Slide 16

What Is Financial Planning? • Financial planning is a process of looking at your

current financial situation and thinking about your

future.

4-3 Personal Financial Planning

• A financial plan has personal and financial goals along with steps and a timeline.

• Review and update your financial plan periodically.

• Helps you insure that your “net worth” increases over time

Slide 17

Financial Planning Steps to Success

• Step 1: Gather financial information• Step 2: Analyze information• Step 3: Set goals

o Personal and financial• Step 4: Develop a timeline and

benchmarks• Step 5: Implement and evaluate the plan

4-3 Personal Financial Planning

Slide 18

Financial Plan (One Goal)

4-3 Personal Financial Planning

FINANCIAL PLAN

Net worth on April 1, 20--: $525.56

Personal Goal Financial Goal Benchmarks Timeline

Live in my own house in the country.

Buy a house in the country.

1. Save money for a down payment ($12,000)

5 years

• Set aside $200 per month

Once per month

• Open a separate account for money saved

April 8 (next week)

• Talk to a mortgage broker to get prepared

Make an appointment for April 15

2. Get a job that provides enough income to make monthly payments

2 years

Slide 19

Success Skills for Life:

Tips for Dealing With Conflict…

4-2 Basics of Budgeting

• Stop and take a ten-second time out.o Ask yourself “what is happening here?”o Listen rather than talk.

• Suggest that you continue your talk later.• Focus on the problem, not the person.• Be willing to compromise when appropriate.

Slide 20

Focus On . . .

Philanthropy • Philanthropy is a form of

charitable giving.• It is the primary source of funding for the fine

arts, performing arts, and most religious and humanitarian causes.

• It is good to add some sort of charitable giving to your budget, through a church, a non-profit cause, or other reputable organization

4-2 Basics of Budgeting

Activity 11. What do things really cost?

– Find a cell phone plan – monthly cost?• Pick a phone, add to cart, then go through

individual plans. • Write in your choice and monthly cost:• _________________________________

– Find TV and Internet Service – monthly cost?• Could be a bundle or separate.• Write in your choice and monthly cost:• ___________________________________

2. Ch. 4 Key Terms List Slide 21

Slide 22

Activity 2 –What is your monthly car payment?

1. Find your car on any website and write price:

Car:_____________Total price:_____________•Then, using autos.yahoo.com

– Go to the Finance tab

– Select the Monthly Payment calculator

•Info needed:

– Your car sales price

– You will put $1500 down payment

– Interest: Choose national average

•Monthly car payment: ______________2. Finish Ch. 4 Key Terms List

Activity 31. What is your estimated annual/monthly income

for your future career? (see green Career WS )

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Annual Income:______________ Monthly Income: _____________

2. Start a new Spreadsheet in Excel OR use my Sample Budget template on my website and SAVE AS:“Your Name, Personal Monthly Budget”

• Set up the Rows as on My Sample Budget on my website

3. In your Excel Personal Budget spreadsheetAdd in your researched decisions:

Monthly incomeMonthly car paymentMonthly cell phone payment Monthly TV/Internet payment.

4. Save as “Personal Budget” in the “Fin Lit” folder you created on your server