2 Personal Financial Planning 2 1 Personal Financial

2 Personal Financial Planning

2. 1 Personal Financial Landscape

Objectives • Identify steps to develop a budget based on personal goals • Explain how to create personal financial statements • Discuss the benefits of creating a good recordkeeping system for financial documents • Describe how money management software can assist in financial planning Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Key Terms • • life span nature of financial planning budget spreadsheet income expense • • fixed expense variable expense discretionary expense pay yourself first wealth emergency fund charity Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Key Terms • • social responsibility data analysis discretionary income cash flow statement net worth asset liability • • • net worth statement liquidity record keeping legal document money management software Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Essential Question • Why is it important to create and maintain a budget? Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets • A life span is the time between birth and death • The nature of financial planning is the development of a strategy to meet a person’s financial needs over the course of his or her lifetime • Developing a financial plan begins with creating a budget Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) • A budget is a plan for the use of money over time based on goals, expenses, and expected income • Budgets help us make the most of our money and avoid financial problems Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) • A spreadsheet is a software program that formats data in columns and rows and can perform calculations • Spreadsheets can help us to calculate and analyze our financial information Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) • Step 1: Establish Financial Goals – Short-term goals may take days, weeks, or months to achieve – Medium-term goals may take one to three years to achieve – Long-term goals may take several years to achieve Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) • Step 2: Estimate and Total Your Income – Determine your budget period depending on when you receive most of your income – Income is any form of money received • • allowance paycheck gifts gains from an investment Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) • Step 3: Estimate and Total Your Expenses – An expense is the cost of goods and services purchased – Expenses are generally fixed or variable Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) • A fixed expense is a set amount that must be paid each budget period – rent – mortgage payments – insurance premiums – loan payments Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) • A variable expense is a cost that changes both in the amount and time it must be paid – food – clothing – entertainment Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) • Variable expenses may be necessary or discretionary – A discretionary expense is an amount spent for an item that a person could do without – Food is a necessary item, but an expensive restaurant dinner is a discretionary expense Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) • Budgeting for savings – Pay yourself first is a personal financial strategy that can help you save money – Wealth means an abundance of money and other assets – An emergency fund is an amount of money that can be easily accessed in case of a job layoff, illness, or unexpected expense – Include savings as fixed expense in your budget Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) • Charitable giving as an expense – A charity usually refers to an organization that aids those in need, such as the homeless or victims of natural disasters – A charitable contribution is a donation of money, gifts, or personal time Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) • Benefits of charitable giving – Tax deduction if it meets standards set by the IRS – Social responsibility is behaving with sensitivity to social, environmental, and economic issues – Philanthropy is giving money, goods, or services to meet the needs of others and supporting organizations and causes that are important to an individual Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) • Step 4: Analyze Estimated Income and Expenses – Data analysis is the process of studying data with the goal of discovering new information that can help with making decisions – Analyze your estimated income and expenses in order to evaluate your budget Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) • Do your total estimated expenses equal your total estimated income? • Do you have money left over? • Do you need to find ways to increase income? • Do you need to find ways to reduce spending? Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) • Step 5: Analyze Actual Income and Expenses – A variance is the difference between the budgeted amount and the actual amount – Compare your actual income and expenses in your budget to find the variance – Adjust your budget to reflect actual income and spending Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) Goodheart-Willcox Publisher Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) • Discretionary income is the money that remains after a person has paid all expenses – Also known as disposable income – Discretionary income can be saved, invested, and/or spent • A budget will change with significant life events Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Budgets (Continued) Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Personal Financial Statements • A cash flow statement is a summary of the amount of money received and the amount paid for goods and services during a specific period – Prepared at the end of the budget period – Shows real income and spending, not what was planned Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Personal Financial Statements (Continued) Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Personal Financial Statements (Continued) • Use an income and expense log (personal spending diary) to record actual amounts of – Income is called cash inflow – Expenses are called cash outflow • At the end of the budget period, you can prepare the next month’s budget more quickly and accurately Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Personal Financial Statements (Continued) Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Personal Financial Statements (Continued) • Net worth is the difference between what is owned and what is owed – An asset is an item of value that is owned • • cash stocks and bonds real estate personal possessions – A liability is a current or future financial obligation Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Personal Financial Statements (Continued) Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Personal Financial Statements (Continued) • Assets are divided into two categories on a net worth statement – Current assets include cash and savings that can be converted to cash quickly and easily • Also called liquid assets • Liquidity is the ease with which an asset can be converted into cash without losing value – Fixed assets include investments for long-term goals, homes, autos, personal possessions, and durable goods Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Personal Financial Statements (Continued) • Assets tend to change in value from year to year • Assets should be listed at their current or market value at the time the statement is made Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Personal Financial Statements (Continued) • Liabilities are divided into two categories on a net worth statement – Current liabilities are items due soon, usually within the year – Long-term liabilities include obligations to be paid over a long period of time Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Personal Financial Statements (Continued) • Total Assets – Total Liabilities = Net Worth • If you own more than you owe, you have a positive net worth • If you owe more than you own, you have a negative net worth and need to reduce expenses and/or increase income Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Recordkeeping • Recordkeeping is the process of setting up an organized system for important documents – Important part of money management – System should be simple, convenient, and secure Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Recordkeeping (Continued) • Financial records to keep include: – bank account information – credit and charge account information – PINs and passwords Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Recordkeeping (Continued) • Income records to keep include: – paycheck records – interest records – dividend records – cash gifts, tips, and bonus amounts Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Recordkeeping (Continued) • Spending records to keep include: – bank statements – checkbook registers – receipts from purchases and bills paid – statements from credit accounts – receipts for big purchases Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Recordkeeping (Continued) • A legal document is a paper that can be filed with a court officer or used to uphold an agreement in a court of law – marriage certificate – auto loan paperwork – mortgage – credit card agreement Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Recordkeeping (Continued) • Documents to keep in a secure place include: – personal information – savings and investment information – tax records – estate planning documents – valuable property inventories Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Money Management Software • Money management software is a computer program used to organize daily finances and keep track of income, spending, saving, debts, investments, and other financial data • It allows us to analyze data related to our finances Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Money Management Software (Continued) • Money management software allows users to: – create budgets – evaluate spending patterns – track goals – use online banking services – manage investment accounts – prepare financial documents – prepare and file income tax returns Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 2. 1 Review 1. When establishing a budget, what types of expenses should be tracked? A budget should track fixed expenses, variable expenses, and discretionary expenses. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 2. 1 Review (Continued) 2. List examples of benefits of charitable giving. One benefit of making charitable contributions is a tax deduction on an individual’s income tax return. Another benefit of charitable giving is the feeling of fulfilling social responsibility. Being socially responsible, or philanthropic, is also known to make individuals feel happier and relieve stress. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 2. 1 Review (Continued) 3. List two examples of personal financial statements. Cash flow statements and net worth statements are both examples of personal financial statements. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 2. 1 Review (Continued) 4. Why should an individual create a record keeping system for personal documents? Well-ordered records can help keep individuals within their budget and make adjustments as needed. It is helpful to keep money management records over a period of time so individuals can review their current financial situation, evaluate their progress, and plan for their future. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 2. 1 Review (Continued) 5. What are some tasks that can be performed using money management software? Computer programs can be used to organize daily finances and keep track of income, spending, saving, debts, investments, and other financial data. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

2. 2 Young Adult and Family Finances

Objectives • Identify financial tasks that young adults must learn to address • Analyze how the family life cycle influences financial decisions • List ways to avoid financial problems Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Key Terms • family life cycle • personal financial crisis Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Essential Question • What type of financial decisions will you have to make when you start living on your own? Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

On Your Own • Young adults who are newly independent will face many new financial responsibilities • Planning the use of income to cover expenses will take on new meaning and importance Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

On Your Own (Continued) • Independent young adults will need to assume financial tasks – managing household expenses – paying bills on time – saving and investing for your future – protecting against financial losses – computing and paying taxes Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Family Life Cycle • The family life cycle consists of the stages a family passes through over its lifetime • The five stages of the family life cycle are: – beginning – expanding – developing – launching – aging Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Family Life Cycle (Continued) • Variations in the life cycle are patterns that differ from typical families • The number of children and spacing between them can cause the cycle to vary from family to family • Some families skip, overlap, or repeat stages of the family life cycle Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Family Life Cycle (Continued) • Singles and childless couples do not have expenses related to raising children, such as school and medical expenses – Both groups may spend more on travel, leisure, charitable causes, and other extras – Both groups often feel a greater responsibility to help their aging parents Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Family Life Cycle (Continued) • Single-parent families – Females lead most with income typically less than male-led single families and two-parent families – Saving and planning for the future can be difficult as families struggle to meet current expenses – Government and community services and assistance can be very helpful for these families Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Family Life Cycle (Continued) • Separated and divorced individuals face a unique set of financial concerns and may have the following expenses: – Legal fees and property settlement costs – Alimony and/or child support – A separate home, additional furnishings, and moving costs Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Personal Financial Problems • A personal financial crisis is a major problem that changes a person’s or family’s lifestyle and future – job loss – divorce – death – disability – serious illness – natural disasters Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Personal Financial Problems (Continued) • Handling financial problems – Start by discussing the problem with adult members of the household, including older children – Make sure that everyone understands the potential impact on their standard of living and what they can do to help – Make a list of financial and nonfinancial resources available Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Personal Financial Problems (Continued) • Preventive measures help people and families avoid financial problems altogether – Emergency fund with 8 to 10 months’ income – Sound money management – Practical credit controls – Regular savings – Insurance protection – Reasonable caution in financial matters – Regular family money management discussions Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Personal Financial Problems (Continued) • Avoid financial trouble by: – living within your means – controlling debt – taking responsibility for your financial choices – preparing to weather a financial crisis – getting the best education and continued training possible to find and keep work and advance on the job Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 2. 2 Review 1. What are the stages of the family life cycle? The five stages are beginning, expanding, developing, launching, and aging. 2. Name three family conditions that may change and affect financial planning. Childless couples having children, elderly parents becoming dependents, or a parent losing a job are all examples of changes in family conditions that may affect financial planning. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 2. 2 Review (Continued) 3. List examples of financial crisis that a person might face. Examples of financial crisis a person might face are job loss, divorce, death, serious illness, and natural disasters. 4. How many months’ income should an emergency fund cover? An emergency fund should equal 8 to 10 months’ income. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 2. 2 Review (Continued) 5. List three ways to minimize the negative consequences of a personal financial crisis. Preventive measures include sound money management, practical credit controls, regular savings, insurance protection, reasonable caution in financial matters, and regular family money management discussions. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.