chapter 4 financial decisions and planning. slide 2 what are needs and wants? 4-1 resources and...

Chapter 4

Financial Decisions and Planning

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

What Are Needs and Wants?


• Financial resources are used to acquire goods and services.• Include: money or other items of value• While financial resources are limited,

wants and needs are unlimited and growing

• You will have difficult decisions between wants and needs

• The amount of money a person has to spend after needs are met is called discretionary income.

How Are Income and Wealth Measured?


• Wealth: items of value minus any debts owed• Personal cash flow statement lists cash inflows and outflows.

o Inflows = incomeo Money received from your job, investments, other sources

o Outflows = expenseso Net income = positive cash flowo Net loss = negative cash flowo SHOW CASH FLOW STATEMENT

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

o For assets like Cars, value is based on the price you could sell for. o Liabilities = debts

o Amount owed for car is liabilityo Difference between assets and liabilities is net wortho Assets that grow in value are appreciating and assets that decline in value

are depreciating

How Is Wealth Measured?


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

How Can You Make Good Financial Choices?


Decision-Making Process

• When you give up one option in exchange for another you make a trade off.

• The trade off results in an opportunity cost, which is the value of the next best alternative

• Value can be measured in dollars, time, convenience, enjoyment, and so forth

• Give Ipod and bicycle example

1. Define the need.

• What need or problem will be resolved from buying the item or service.

• Computer for online research

2. List options for meeting the need.

• Buy or borrow computer

• Go to library

How Can You Make Good Financial Choices?


1. Compare the options.o List advantages and disadvantageso Consider the opportunity cost—the value of your next

best option.o Opportunity costs of using library computer vs buying

2. Make a decision.

3. Take action based on your decision.

4. Reevaluate your choice.

• Buyers remorse?

• Make purchase that you later regret

What Is the Purpose of Budgeting?• A budget is a spending and

saving plan.• Similar to cash flow statement

because both record income and expenses.

• However, a cash flow statement differs because it lists actual cash inflows and outflows to show how much money you have available at a certain date.

4-2 Basics of Budgeting

What Is the Purpose of Budgeting?• Spreadsheet allows you to

answer what if questions.• What if expenses go up 8%?• What is the price of the car you

are saving for goes up 10%?• What if prices on utilities drop

5%?


How Do You Prepare a Budget?


• Step 1: Estimate income• Keep track of money both earned and unearned.• Money should be calculated in weekly, monthly, and

yearly• Once you see the big picture you're about to see how

much comes in and goes out. It may change your spending habits.

• Step 2: Plan savings• Pay yourself first, put money into savings before you

consider other expenses.• Plan how much you want to save each month. This

amount may have to change based on your expenses.



• Step 3: Estimate expenses: expenses are items which you spend money.

• Lunch, clothes etc.o Variable expenses: costs the go up and down every month

o Gas or electric bill fluctuate with weathero Can vary due to changing priceso Food, clothing, and entertainment are all variable.

o Fixed expenses: costs that do not changeo Rent, insurance, car paymentso Fixed expenses remain constant even when income does not.o If you lose you job, you may have to eliminate a fixed expense

if you cannot afford it. An example would be a car.



o Charitable giving: act of donating money or timeo Donate through the churcho Donate money to red cross to help victims of natural

disaster.• Step 4: Balance the budget

• Savings and expenses should equal total income. • When these amounts are the same, the budget is balance

Personal Budget


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

Budget Analysis

• Variances– Favorable Variances– Unfavorable Variances– When you spend more than 10% of what

you planned you should look at it carefully.

Slide 14

Recordkeeping Methods

• Manual records

• Electronic records

Slide 15

Focus On . . .

Philanthropy • Philanthropy is a form of charitable giving.• It supports a societal cause.• It often lasts for an extended period of time.• It is the primary source of funding for the fine

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


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

• More than a budget.

• Purpose is to plan for earning, saving, spending, and investing to allow you to achieve goals today and in the future.


• Step 1: Gather financial information– Everything related to your finances should be considered– List of financial records. Need to prepare first 3

• Cash flow statement, Net worth statement, Budget, Checkbook, Bank statements, Investment accounts, Insurance policies, Paycheck stubs, Tax returns, Wills, Trusts, Credit accounts, Any legal documents related to finances

– At some point you will need to retire. – Look at medical history and medical history of family

members to estimate life expectancy– You should plan to meet financial needs all the way to the

end of life



• Step 2: Analyze information– Look at inflows and outflows– Answer questions

• Is your income growing over time?• Is your net worth growing?• How are your spending habits changing?• Who else depends on your income?• What new goals do you need to add and plan?



• Step 3: Set goalso Personal goals: things you want to achieve in your lifeo Financial goals: describe how you will pay for your

personal goals.o Short term goals: one week to one year

o Replenish the money spent on PS4 in savings accounto Medium term: 2 – 5 years

o Save money for collegeo Increase income over the next 3 years

o Long term goals: 5+ yearso Contribute to 401(k) for retiremento Buy a car



• Step 4: Develop a timeline and benchmarks– Timeline: visual display of how long it will take to

achieve each phase of your plan– Timeline should include benchmarks, which are

standards progress is measured against.• Step 5: Implement and evaluate the plan

– Since goals and plans change, you need to constantly update your plan


Financial Plan (One Goal)


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

Where Can You Get Good Financial Advice?


• Financial planners

• Financial experts

• Newspapers and magazines

• Seminars and workshops

• Financial websites

How Can You Protect Financial Resources?


• Deal only with financial advisers you know and trust.

• Keep good records.• Verify account balances regularly.• Guard passwords.• Be aware of phishing.

– Internet scam in which an e-mail is sent from someone posing as your bank or other legitimate business asking for personal information.

• Guard against identity theft.

chapter 4 financial decisions and planning. slide 2 what are needs and wants? 4-1 resources and...

Documents

o liabilities

items of value o

net worth o assets

o inflows

debts o

o examples

disadvantages o

income o money