Financial Decisions and Planning

*Chapter 4

*Needs and

Wants

Slide 3

*What Are Needs and Wants?

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

*Wants are things people desire.*Examples: new cars, vacations, luxury items

*Financial resources are used to acquire goods and services.

Slide 4

*How Are Income and Wealth Measured?*Personal cash flow statement lists cash inflows

and outflows.oInflows = income

oOutflows = expenses

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

oLiabilities = debts

*THE PERSONAL NET WORTH STATEMENT

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

*Assets  are money and items of value that you own. For certain assets, such as a car, their value is the price you could get if you sold them. Debts that you owe are called 

*liabilities . The amount owed on a car loan is a liability. The difference between your assets (what you own) and your liabilities (what you owe) is called net worth .

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

Slide 8

*How Can You Make Good Financial Choices?

*Decision-Making Process1. Define the need.

2. List options for meeting the need.

3. Compare the options.1. Consider the opportunity cost—the value of your

next best option.

4. Make a decision.

5. Take action based on your decision.

6. Reevaluate your choice.

4-1 Resources and Choices

Financial Strategies

*Should be forward-looking

*Consider the opportunity cost

*When in doubt do not make the purchase

*DO NOT MAKE SNAP DECISIONS

*Be Realistic

*Read all the financial agreements

*Learn from your mistakes!

Slide 10

*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 11

*How Do You Prepare a Budget?

*Step 1: Estimate income

*Step 2: Plan savings

*Step 3: Estimate expenses*Variable expenses

*Fixed expenses

*Charitable giving

*Step 4: Balance the 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 40.00 480.00

Lunch 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

Slide 14

*What Is Financial Planning?

*Financial planning is a process of looking at your current financial situation and thinking about your future.

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

*Review and update your financial plan periodically.

4-3 Personal Financial Planning

Slide 15

*What Is Financial Planning?

*Step 1: Gather financial information

*Step 2: Analyze information

*Step 3: Set goals*Personal and financial

*Step 4: Develop a timeline and benchmarks

*Step 5: Implement and evaluate the plan

Slide 16

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 18

*Where Can You Get Good Financial Advice?

*Financial planners

*Financial experts

*Newspapers and magazines

*Seminars and workshops

*Financial websites

4-3 Personal Financial Planning

Slide 19

*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.

*Guard against identity theft.

4-3 Personal Financial Planning

*Moving Out