Chapter 4 Financial Decisions and Planning What Are

Chapter 4 Financial Decisions and Planning

What Are Needs and Wants? • Needs are things you must have. o Examples: • Wants are things people desire. o Examples: • Financial resources are used to acquire goods and services. 4 -1 Resources and Choices Slide 2

How Are Income and Wealth Measured? • Personal cash flow statement: cash inflows and outflows o Inflows = income o Outflows = expenses o Inflows > Outflows o Outflows > Inflows 4 -1 Resources and Choices Slide 3

Personal Cash Flow Statement Cash Inflows Total cash inflows _______ Cash Outflows Total cash outflows ____________ Net Cash Flow ____ Slide 4

How Are Income and Wealth Measured? • Personal net worth statement: based on assets and liabilities o Assets = money or items of value o Liabilities = debts o Assets – Liabilities = Net Worth Slide 5

How Is Wealth Measured? 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 $4, 652. 56 Net Worth Assets minus liabilities Total liabilities and net worth 3, 351. 58 $4, 652. 56 Net Worth 4 -1 Resources and Choices Slide 6

Personal Net Worth Statement • Create your own! • Use page 120 as a reference Slide 7

How Can You Make Good Financial Choices? Decision-Making Process 1. Define the need. 2. List options for meeting the need. 3. Compare the options. o 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 Slide 8

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. 4 -3 Personal Financial Planning Slide 9

Steps of a Financial Plan • Step 1: Gather financial information • Step 2: Analyze information • Step 3: Set goals • Step 4: Develop a timeline and benchmarks • Step 5: Implement and evaluate the plan 4 -3 Personal Financial Planning Slide 10

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. 1. Save money for a down payment ($12, 000) 5 years Buy a house in the country. • 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 11

What Is the Purpose of Budgeting? • A budget is a spending and saving plan. • It is based on estimated income and expenses. 4 -2 Basics of Budgeting Slide 12

How Do You Prepare a Budget? • Step 1: Estimate income • Step 2: Plan savings • Step 3: Estimate expenses o Variable expenses o Fixed expenses o Charitable giving • Step 4: Balance the budget 4 -2 Basics of Budgeting Slide 13

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 14

Analyzing Your Budget • Variances: Differences between planned amounts and actual amounts • Reasons for variances? • Why should you analyze your budget? • Analyze budget on page 130 Slide 15