Post on 24-Dec-2015
Essential Standard 8.0Apply procedures for managing personal finance.
Objective 8.02 Students will understand personal financial planning
ESSENTIAL QUESTIONS
• What are the steps in financial planning?• What are the benefits of financial planning?• What are the basic types of financial
statements, and how is each used?• How do income and expense statements
compare with spending plans?• How do I utilize a spending plan?
What is Financial Planning?
• Used for planning ways to reach financial goals
• A continual, cyclical process of tracking, then anticipating, income and expenses
Make financial planning your road map on a trip to financial success!
Where are you going? (goal or destination)
What road will you use to get there? (I-85) Will you have changes along the way?
(Take a scenic byway or visit a state park) Will you move faster through some roads
than on others? (Rural or interstate) Will there be unexpected detours? (bridge
out) What tools might you need? (to change lat
tire) Where will you stop to get fuel? Where will you stop to eat? Where will you stay overnight?
Brainstorm Income Items
Income Items
Earned Income• Wages-hourly• Tips, Gratuity• Salary• Commission• Production/piece rate• Combination • Contract labor• Bonuses
Other Income Sources • Interest
– from savings
• Dividends– from stock
• Lottery/gambling– usually an expense!
• Tax refund– based on past overpayment
• Loans– Must be repaid
• Gifts• Inheritance
– wills
• Scholarships
Brainstorm Expense Items
Expense Items
• Housing– Rent/Mortgage– Maintenance – Utilities –gas, electricity,
garbage – Homeowner’s insurance – Furniture, appliances,
kitchen equipment
• Taxes– Income– Property– Sales
• Food– Restaurant, Grocery store
• Insurance – Health – Life – Disability
• Transportation– Auto/truck payments, lease– Fuel– Tires, oil, maintenance– Insurance– Public transport, parking
• Other Expenses– Entertainment– Movies, vacation, games– Cleaning & health supplies
What are the Steps in Financial Planning?
1. Identify financial goals
2. Prepare a balance sheet showing what you own and what you owe
3. Track income and expenditures for a set time period, usually a month, and record in an income and expense statement
4. Analyze amount of money earned and how it was spent
5. Prepare a spending plan (budget)with anticipated income and expenses to meet financial goals during the next time period
6. At the end of the time period, revise financial goals, if needed, and use the actual income and expenses to again analyze income and how it was spent
7. Prepare your next spending plan
Review: What are the Steps in Financial Planning?
What are Benefits of Financial Planning?
1. Learn to live “within one’s means”
2. Helps avoid financial difficulties
3. Have resources for one’s desired standard of living
4. Reduces the need to use credit
5. Increases sense of security
6. Lessens anxiety about money matters
7. Stay in control of finances
8. Become financially independent
Financial Statements• Three types of financial
statements, in bold on the previous slide, are needed for financial planning.
• Balance Sheet
• Income and Expense Statement
• Spending Plan– aka Budget
Balance Sheet• Shows assets, liabilities, and net worth of an individual, family,
business, or government entity
– Assets• things of value that you own
– Liabilities• Debts owed
– Owners Equity/Net Worth• Formula: Assets-Liabilities = Owner’s Equity/Net Worth• OE & NW are two names for the same thing!
Formula : Assets - Liabilities = Net Worth• Reason used: need to know financial status in order to plan finances
Sample Balance Sheet BALANCE SHEET*
Date
ASSETS LIABILITIES
Cash Credit card balance
Savings account Car Loan balance
Vehicle College Loan balance
Electronic Equipment Other:
Total assets Total liabilities
Owner's equity (Net Worth)
(Total assets-Total liabilities)
•Both sides of the balance sheet must be equal •Assets = Liabilities + Owner’s Equity
Who is Wealthier?
Juanita – earns $35,000 per year
Assets
Home $60,000Retirement $24,000Automobile $8,000
Total Assets $92,000LiabilitiesCollege loan $6,000Mortgage $35,000Total Liabilities $41,000
Net Worth $51,000
Alexis – earns $100,000 per year
AssetsHome $75,000Retirement $35,000Automobile $8,000Total Assets $118,000LiabilitiesCollege loan $10,000Automobile loan $4,000Credit card debt $20,000Mortgage $65,000Total Liabilities $99,000Net Worth $19,000
Answer on your notes page before going to next slide.
Elements of Spending Plans• Income
– money earned from wages, salaries, tips, withdrawals from savings and investments, interest earnings, scholarships, sales of properties, and gifts
• Expenses– due by a specified date, often
agreed upon in a contract; difficult to change in a short time
– Flexible expenses---not due by a specified date; usually these are easier than fixed expenses to reduce or eliminate
Income – Expenses =Net Gain/Net Loss
• Net gain -when one has more income than expenses, the difference between the two– aka net profit/surplus
• Net loss -when one has more expenses than income, the difference between the two– aka net deficit
Income StatementShows income (revenue) and expenses (expenditures) for a family or
businessFormula: Income – Expenses = Profit/Loss• Income
• Total earnings received• Includes wages, salary, tips, commission, gifts, bonuses,
interest, dividends• Expenses
• Any expenditure; anything that costs money • Includes utilities, food, entertainment, transportation costs,
health care, shelter, clothing, taxes– IF Expenses > Income = LOSS– IF Income > Expenses = PROFIT
• Reason used: need to know financial status in order to plan finances
Sample Income
Statement
Elana Rocera
Income Statement
For Month Ending November 30, 20xx
Income
Salary $3,200
Commission $1,050
Interest $45
Dividends $35
Total Income $4,330
Expenses
Utilities $200
Car payment $350
Car maintenance $250
401-K $800
Insurance $750
Clothing $200
Entertainment 0
Food $300
Total expenses $2,850
Net Surplus/Deficit $1,480
Is there a Surplus or a Deficit?
What is the formula to calculate surplus or a Deficit?
What could Elana do with this information?
Answer on your notes page before going to next slide.
Sample Income StatementThe Clothing Store, Inc.
Income StatementJuly 31, 20XX
RevenueSales 38,000Interest earned 500Total Revenue $38,500
ExpensesSelling 1,000Marketing 1,500Wage payable 15,000Income taxes 3,027Mortgage 1,110Loan expense 12,355Deferred income taxes 1,485Credit Card 1,500Total Expenses $36,977Net Income $1,523
Income Items
Expenditure Items
Answer on your notes page before going to next slide.
List 5 income items an individual might have.
List 5 expense items a family might have.
Profit/Surplus or Loss/Deficit
Essential Question: What is the basic financial (profit) formula? ______________ - _______________ = Profit/LossBusiness 1Taylor’s Grocery Store revenue for this year is $91,750. The owner noticed an increase of
$3,000 in the store’s expenses. She determined that total expenses equal $81,000? Will this business net a profit or loss? _______ How much profit or loss? ________
Business 2Harry’s Shoe Store has noticed a significant increase of revenue of $123,000. The
manager has also determined that the total expenses equal to $128,000. Will this business net a profit or loss? _______ How much profit or loss? ________
Business 3Malinda’s Auto Dealership of Imported Cars made $895,000 in revenue. The accountant
determined total expenses equal to $598,000. Will business net a profit or loss? _____ How much profit or loss? ________
Answer questions on your notes page before going to next page!
Key Businesses 1-3Business 1Taylor’s Grocery Store revenue for this year is $91,750. The store manager noticed an
increase of $3,000 in the store’s expenses. She has determined that the total expenses equal to $81,000? Will this business net a profit or loss? Profit
• How much of a profit or loss? +$10,750 ( 91750-81000) Business 2Harry’s Shoe Store has noticed a significant increase of revenue of $123,000. The
manager has also determined that the total expenses equal to $128,000. Will this business net a profit or loss? Loss How much of a profit or loss? -$5,000 ( 123000-128000)
Business 3Malinda’s Auto Dealership of Imported Cars made $895,000 in revenue. The manager
has determined that the total expenses equal to $598,000. Will this business net a profit or loss? Profit How much of a profit or loss? +$297,000 (895000 – 598000)
Did you get the right answers before you looked?
Profit/Surplus or Loss/Deficit Family 4The Breck family had income of $71,250 this year. The family spent $81,000. 1. How much profit or loss? ________2. What will the Breck’s need to do next year?3. How do you think they took care of this financial situation in the short term?
Family 5Mr. Hennessee earned $72,000 and Mrs. Hennessee earned $44,000 last year. Their stock earned
$1000 in dividends. Mr. Hennessee totaled all expenses for the family equal to $109,000. 1. What is their total family income ? 2. How much is the surplus or deficit?
Family 6Last year Jimmy earned $54,000 in salary and commission @ 2% of $185,000 salesJimmy spent $45,987. 1. What is Jimmy’s total income? 2. How much Surplus or Deficit does Jimmy have? 3. What changes might Jimmy make to his budget (spending plan) because of this information?
Essential Question: Which accounts appear on an income statement?Answer on your notes page before going to next page!
Net Worth Activity Essential Question: What is the Net Worth Formula?_______________ - ________________ = Net Worth/Owner’s Equity
Scenario 1Taylor has assets of $189,750. Their total liabilities are $172,250. What is Taylor’s net worth?
Scenario 2• Harry Stevens has assets as follows: cash in bank $18,500, IBMstock $25,000,
vehicles $32,000, record collection $2,500 and artwork $1,000. Harry owes $12,500 to MasterCard, $21,750 for his mortgage. What is Harry’s net worth?
Scenario 3• Malinda has the following assets: cash $32,000, savings $15,000, car $13,000.
Malinda’s has the following liabilities: college loan $35,000, car loan $3,000, and Visa card $2400. What is her net worth?
• Essential Question: Which type of accounts appear on a balance sheet? Answer on your notes page before going to next page!
Income and Expense Statement
• A list of all income and expenses for a specified time period
• A historical type of record that serves as the basis for a spending plan
• Shows whether individual/family was able to live within their means
• Shows where income was spent
• Shows when expenses exceed income and areas of excess expense
• Shows if income was sufficient to meet expenditures
Criteria Income and Expense Statement
Spending plan
BUDGET
Time orientation
Past---a historical record of what was earned and spent
Future forecast---a projection of anticipated earnings and expenditures
Basic use Used as a foundation for planning one’s finances
Used to estimate finances for a future time period
Specific uses Shows if living within means Shows where money was
spent Shows when too much is being
spent on a certain category of expenses
Shows if additional income is needed to meet necessary expenses
Helps one live within means Helps plan where to spend
money Helps track income and
expenditures Reduces the likelihood of
having to use credit and go into debt
Where fits in financial planning
Is used to develop a spending plan
Becomes the income and expense statement at end of specified time period
Comparison of Income and Expense Statement with Spending Plan
Gumball Analogy
• Gumball machine represents components of the financial planning process
• Income - money earned– Gumballs going into the
machine– Wages from a job, allowance,
gifts, interest, dividends
Gumball Analogy • Expense - money spent • Money going out of the gumball
machine• Fixed expenses -may have a
fixed amount due each month and are contractual – Ex: rent, insurance, car payment
• Flexible expenses -can vary each month in the amount owed and are not contractual – Ex: food, auto fuel, entertainment
Gumball Analogy
• Income (money in)
• Net Worth (wealth)
• Flexible Expenses (money
out)
• Fixed Expenses (money out)
Always have more money coming in than out!Work towards building wealth!
Spending Plan
• Also known as “aka”- budget or financial plan
• A tool used to plan income and expenses for a future time period
• Used to track income and expenditures
• Used to evaluate spending at the end of a time period
Typical Spending Plan Pie Chart
30%
20%15%
7%
18%
10%
Housing
Transportation
Food
Insurance
Other
Saving andInvesting
Provides guidance when creating a spending plan
1. What variables may cause these percentages to be
different?2. How does the family life
cycle affect the percentages?
Answer on your notes page before going to next page!
Steps to Create a Personal Budget
1. Track your current income and expenses
2. Create personalized income & expense categories
3. Allocate money to each category
4. Implement and control 5. Evaluate & make
adjustments
Step 2– Creating Personalized Income and Expense
Categories
Step 1- Track Current Income and ExpensesStep 5– Evaluate and Make
Adjustments
Step 4– Implement and Control
Step 3– Allocate Money to Each
Category Answer on your notes page before going to next page!What does allocate mean?
Creating a Personal Budget
Step 1: Track your current income and expenses – Use income statement as your tool
• Estimate $ income & expense• Designate a time period• Be as accurate as possible• Be realistic• If you don’t know how much you spend,
– Carry a small notebook and write down everything you spend for a few weeks or
– Keep receipts and input into a cell phone
Step 1: Track Current Income and Expenses
Necessary to creating a realistic spending plan
What period of time will your spending plan include?
Usually concurrent with your payday
How much money am I earning?
Income
How much money am I spending?
Expenses
Payroll Deductions
• Taxes – Required by local, state, and federal governments– Provide public goods and services – Take out approximately 30% of an individual’s gross income
• Payroll deductions: • Federal Taxes (mandatory)• State Taxes (If applicable) • Federal Insurance Contribution Act (FICA tax) (mandatory)
– R S D HI• Retirement (depends upon the employer)• Health care benefits (depends upon the employer)• Other optional deductions
What are two items or services you use that are paid for by taxes?
Answer questions on your notes page before going to next page!
What does RSDHI stand for?What does mandatory mean?
Gross income vs. Net Income
• Total amount of money earned during a pay period (salary or hourly wage x hours worked)
Gross Incomeaka gross pay
• Taxes• Retirement• Health Benefits• Voluntary deductions
Payroll Deductions • Take home pay
(the amount of the paycheck)
Net Incomeaka net pay
Answer questions on your notes page before going to next page!
Question: Which of the above payroll deductions are mandatory?
Calculating Gross Income/Wages/Pay
Hourly wages• # of hours x regular rate of
pay= gross wages– 40 hours x $8.00=$320.00
• Overtime rate = 1.5 x regular rate of pay– 1.5 x $8.50 = $12.75 OT rateFair Labor Standards Act (FLSA)
regulates:Minimum wage, maximum
hours, child labor, minimum wage rate
ExampleCalculate gross wages for:
43 hours a week40 hours x $8.00=$320.00
regular pay3 x $12.75 = $38.25 OT wages Total gross wages = $358.25($320.00 + 38.25)
Calculate Commission Wages
• Commission rate x amount of sales= commission $ earned
• Zach sold $650,850 in the electronics department. He earns 5% commission on all sales.
• How much did Zach earn?
$650,850 X 5%$3254.25Practice:How much did Zach earn if
his commission rate is only 3%?Answer question on
your notes page before going to next page!
Practice Calculations• Alex earns 2%
commission on sales. His sales for this month were $760,550.
• What did Alex earn in commissions?
• Katie earns $10.40 per hour. Katie worked 43 hours this week?
• What are her regular wages?
• How much is her rate for overtime (OT)?
• What are her overtime wages?
• What are her total wages?
Answer questions on your notes page before going to next page!
Allocate $ to Each Category
30%
20%15%
7%
18%
10%
Housing
Transportation
Food
Insurance
Other
Saving andInvesting
Graphs can be easily created from spreadsheetPrograms. What are the other types of graphs?
Anticipated Expenses
• Housing 30%– Monthly rent/mortgage, utilities,
homeowners insurance, property taxes, maintenance, furnishings
• Transportation- 20%– Monthly payment/lease, license,
registration, vehicle insurance, maintenance, fuel, public transport fees, parking fees
• Food -15%– Food from grocery store, meals at
restaurants, snacks eaten out (coffees, treats), Party and entertainment foods, non-food kitchen supplies
• Insurance 7% – Arrangement between an individual
and an insurance company to protect the individual against risk
– Health- pays a portion of health care expenses if one is sick or injured
– Disability- provides financial support if an individual is injured and cannot work
– Life- provides financial support to an individual’s beneficiaries upon death
• Saving & Investing-10%– Keep 3-6 months $ liquid (cash
available)• Other – 18%
– Gifts, vacations, contributions, childcare, grooming, education, entertainment, medical costs, clothing, pet care, communication costs
Anticipated Expenses• Budgets are estimates of forecasted income/expense• Budgets must be flexible to adjust for change
Q: Why are we interested in the difference betweenanticipated amounts and actual spending/income?A: we will need to change the next budget period to reach our financial goals
Differences/Variances are easy to calculate usinga spreadsheet program! See next slide.
Variations in Budget CategoriesIncome Expenses
Anticipated Actual Difference Anticipated Actual Difference
(Cell 1) (Cell 2) (Cell 3) (Cell 4) (Cell 5) (Cell 6)
1. Noah expected to earn $300 wages at his part-time job. He received a A $.50 per hour raise. His gross wages were $325.
2. Steve budgeted $500 for transportation. When his transmission went badthe bill was $1150.
3. Joe budgeted $2300 in commission at his job. Due to the recession, his sales only generated $1950.
4. Todd and Noel celebrated his big promotion with a weekend in Vegas. They spent $2000, but had only budgeted $300 for entertainment.
The Costs Add Up
• Eating lunch out 5 days per week – $5-$10 daily– $1,300-$2,600 per year
• Daily sport drink– $2.00 daily– $730 per year
• Weekly date night at the movies with popcorn– $30 per week– $1,560 per year
• Daily Latte– $3.75 every day– $1,369 per year
Review: Which Items are Income?
Gift from family
Scholarships
Groceries
Utilities
Automobile registration
If an expense, which of these items are fixed/variable?
Eating out/Snacks
Internet bill
Wages
Paying Rent
Hobbies
Answer questions on your notes page before going to next page!
Spending Plan Template
• Everyone uses a different program to create a spending plan– Paper and pencil– Online software– Electronic programs such as Microsoft Excel and
Word• Must be something that an individual can
manage effectively
carmen's budget estimator
Check Register System
• Track expenditures in check register– Note beside check written- type of expenditure
• Advantage:– Process only by authorized signatures at the bank – Forged documents are not your legal responsibility
• Disadvantage– You can spend more money than is in your checkbook
• “Bounced check”, Not sufficient funds (NSF)• NSF charges from the bank $25-40 per item
Implement & Control• Confirmation of expense tracking is accurate
– Continued monitoring of spending helps to adjust spending to meet goals
• How can you monitor and control?– Envelope system– Check register system– Electronic spending plan system
Envelope System
• Put actual budget amount of cash from paycheck into envelope labeled for that purpose– Write actual withdrawals on envelope– Could also put receipts inside envelope
• Evaluate during month or at end• Disadvantage
– If theft occurs, no reimbursement for lost cash– Banks and credit cards have reimbursements options
• Advantage– You cannot spend $ not in envelope!
Electronic Spending Plans
• Computer spreadsheet programs– Specialized software available
• Use Online options, downloaded programs
– Excel style formulas help calculate costs• Disadvantage
– Only recording information after the fact– Does not keep you from spending
• Cash envelope system
• Advantage – Software Calculates totals for you– Can compare actual to estimated– Can create graphs
How will you keep track?
• Carry a small notebook to write down expenses?• Keep a check register showing expenditures?• Keep all receipts in folders or envelopes?• Use a debit card if your depository institution creates
spending reports for your account?• Input info into a cell phone application?• Use an Excel spreadsheet?• Purchase specialty budget software packages?
Must work for the individual! There is not one right method!
Evaluate & Make Adjustments • Review previous steps &
evaluate how actual compares to budget– surplus/deficit
• Adjust next time period for changes
• Use gumball analogy for income and expenses
1. Did I have money to pay bills?2. Was there money left over?3. Did I spend more than I earned?4. Can I increase my income?5. Can I reduce expenses?6. What do I need to change?
Net Gain or Net Loss?
• Net gain/profit/surplus- there is remaining money to either save, spend or invest
• Net loss/deficit - an individual is spending more money that he/she is earning and has to use credit (borrowed money) to meet their financial obligations
• A spending plan should have income and expense matching one another (reach zero)
Income Expenses Net gain or loss
WHAT IS THE LONG-TERM POSITIVE IMPACT OF A SPENDING PLAN?
To know where your money is going!To build long-term wealth!To create long-term financial security!
Who is in control of your finances?YOU ARE!