Chapter 4 Financial Decisions and Planning Financial Literacy

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

What Are Needs and Wants? • Needs are things you must have. o Examples: food, clothing, shelter • Wants are things people desire. o Examples: new cars, vacations, luxury items • Financial resources are used to acquire goods and services. 4 -1 Resources and Choices Slide 3

Resources Limit Choices • People’s wants and needs are unlimited • Financial resources are limited • With limitations comes choice Slide 4

How Are Income and Wealth Measured? See page 120 • Personal cash flow statement lists cash inflows and outflows. o Inflows = income o Outflows = expenses • Personal net worth statement shows a person’s net worth based on assets and liabilities. o Assets = money or items of value o Liabilities = debts 4 -1 Resources and Choices Slide 5

How Is Wealth Measured? See page 120 PERSONAL NET WORTH STATEMENT Assets Cash and checking account Liabilities $ 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, i. Pod, games 300. 00 Car, current value Total assets 3, 000. 00 Net Worth $4, 652. 56 Assets minus liabilities Total liabilities and net worth 3, 351. 58 $4, 652. 56 Net Worth 4 -1 Resources and Choices Slide 6

Know these terms well: From the Value of Assets Net Worth Statement Ø Appreciating: Assets Ø Assets: Money and that are growing in value, items of value that you ex. Land, house, savings own bonds Ø Liabilities: Debts that Ø Depreciating: Assets you owe that are decreasing in Ø Net Worth: difference value, ex. Cars and between your assets and electronics your liabilities 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’s mistakes Slide 8

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 9

How Do You Prepare a Budget? • Step 1: Estimate income • Step 2: Plan for savings (10% to start) • Step 3: Estimate expenses o Variable expenses- ex. Gas and electric bill o Fixed expenses – ex. Rent, car payment o Charitable giving • Step 4: Balance the budget: Budget Equation Savings + Expenses = Income 4 -2 Basics of Budgeting Slide 10

Personal Budget Income Work (part-time) Allowance for household chores Lunch money allowance Savings account interest Total income Weekly Monthly Yearly $30. 00 15. 00. 50 $55. 50 $120. 00 40. 00 60. 00 2. 00 $222. 00 $1, 440. 00 480. 00 720. 00 24. 00 $2, 664. 00 $ 5. 50 $ 22. 00 $ 264. 00 Gifts Clothes and shoes Loan payment to parents Lunches Entertainment/miscellaneous Total expenses $ 5. 00 15. 00 10. 00 $50. 00 $ 20. 00 60. 00 40. 00 $200. 00 $ 240. 00 720. 00 480. 00 $2, 400. 00 Total savings and expenses $55. 50 $222. 00 $2, 664. 00 Savings Deposit to savings account Expenses 4 -2 Basics of Budgeting Slide 11

Preparing a Budget Analysis • Not everything will go as planned • Variances – Difference between planned amounts and actual amounts • Favorable and Unfavorable (F or U) Slide 12

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

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. • Helps you insure that your “net worth” increases over time 4 -3 Personal Financial Planning Slide 16

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 17

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 4 -3 Personal Financial Planning 2 years Slide 18

Success Skills for Life: Tips for Dealing With Conflict… • 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. 4 -2 Basics of Budgeting Slide 19

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 Slide 20

Activity 1 1. 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

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 Slide 22

Activity 3 1. What is your estimated annual/monthly income for your future career? (see green Career WS ) 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 spreadsheet Add in your researched decisions: Ø Monthly income Ø Monthly car payment Ø Monthly cell phone payment Ø Monthly TV/Internet payment. 4. Save as “Personal Budget” in the “Fin Lit” folder you created on your server Slide 23