Chapter 8 Budgets and Financial Records 8 1

Lesson 8. 1 Budgeting and Planning GOALS n Explain the purpose of financial planning and prepare a personal budget. n Explain the need for and create a net worth statement and a personal property inventory. Chapter 8 © 2010 South-Western, Cengage Learning 2

Financial Planning Basics n Planning, budgeting, and keeping good records provide the road map

Getting Started n Income and expenses n Gross income n Disposable income n Financial plan n A financial plan is a set of goals for spending, saving, and investing the money your receive n Resources and obligations Chapter 8 © 2010 South-Western, Cengage Learning 4

Visualizing Your Future n What comes in and how it goes out n Changes

Preparing a Budget n A budget is a spending and saving plan based on your expected income and expenses. n Money coming in (earnings plus borrowing) must equal money going out (spending plus saving). n The budget must balance. n A budget helps you plan your spending and saving so that you won’t have to borrow money or use credit to meet your daily needs. Chapter 8 © 2010 South-Western, Cengage Learning 6

Steps in Preparing a Budget n Estimate your income. n Estimate your expenses. n

Simple Budget Evan Anderson—Budget for September Income Expenses Part-time job $320 Daily lunches $ 80 Allowance 20 Supplies 20 Birthday gift 40 Clothes 40 Total Income $380 Entertainment 140 Total expenses $280 Savings Credit union account The budget balances. Total expenses plus savings $100 $380 Chapter 8 © 2010 South-Western, Cengage Learning 8

Monthly Budget n Fixed expenses are costs that do not change from month to month. n Variable expenses are costs that vary in amount and type, depending on the choices you make. Chapter 8 © 2010 South-Western, Cengage Learning 9

Personal Records n Good personal records makes budgeting and longrange planning easier. n Your records also make it easier to prepare income tax returns, credit applications, and other financial forms. n You should keep five types of personal records: n n n Income and expenses records Net worth statement Personal property inventory Tax records Other miscellaneous documents Chapter 8 © 2010 South-Western, Cengage Learning 10

Income and Expenses Records n Examples of income records n W-2 forms n Statements from banks n Statements from investment companies n Examples of income records n Receipts listing charitable contributions n Medical bills n Receipts for work-related expenses Chapter 8 © 2010 South-Western, Cengage Learning 11

Net Worth Statement n A net worth statement shows a person’s net worth based on his or her assets and liabilities. n Assets are items of value that a person owns. n Money or debts you owe to others are called liabilities. n When you subtract your liabilities from your assets, the difference is known as net worth. Assets – Liabilities = Net worth Chapter 8 © 2010 South-Western, Cengage Learning 12

Net Worth Statement Anisa Newkirk January 1, 20— Assets Checking account Savings account Liabilities $500 800 Car value 3, 000 Personal property 5, 000 Total assets $9, 300 Loan on car $1, 800 Loan from parents Total liabilities 100 $1, 900 Net Worth Assets minus liabilities $7, 400 Total liabilities and net worth $9, 300 These two numbers must be the same. Chapter 8 © 2010 South-Western, Cengage Learning 13

Personal Property Inventory n A personal property inventory is a list of the valuable items you own, along with their purchase prices and approximate current values. n Personal property includes anything of value inside your home—clothing, furniture, appliances, and so forth. Chapter 8 © 2010 South-Western, Cengage Learning 14

(continued) Personal Property Inventory Anisa Newkirk: January 2, 20— Year Purchased Purchase Price Approximate Current Value Sphinx XTL DVD Player with big-screen TV 2008 $ 3, 200 $1, 300 Bedroom furniture (bed, dresser, lamp, clock) 2006 2, 000 1, 200 Clothing, jewelry ------ 3, 000 500 MBD motor bike 2005 1, 800 1, 000 CD collection, CD burner, digital camera, scanner 2006 2, 000 1, 000 $12, 000 $5, 000 Item Chapter 8 © 2010 South-Western, Cengage Learning 15

Tax Records n All taxpayers should keep copies of their tax records for at least three years after they file their tax return. n Tax records include the tax return itself (a copy of the signed form), W-2 forms, and other receipts verifying income and expenses listed on each return. n Keep your tax records in a safe place in case of an audit. Chapter 8 © 2010 South-Western, Cengage Learning 16

Other Miscellaneous Documents n Lists of credit card numbers n Car titles n Insurance policies n Birth certificates n Marriage certificates n Passports Chapter 8 © 2010 South-Western, Cengage Learning 17

Lesson 8. 2 Legal Agreements and Record Keeping GOALS n List the elements of a legally binding agreement. n Design an effective filing system for your personal records. Chapter 8 © 2010 South-Western, Cengage Learning 18

Legally Binding Agreement n A contract is a legally enforceable agreement between two or more people. n Common legal agreements n Credit accounts n Mortgage loans n Rental agreements n Express contracts n Oral n Written n Implied contracts Chapter 8 © 2010 South-Western, Cengage Learning 19

Contract Elements n Agreement n Consideration n Contractual capacity n Legality Chapter 8 ©

Agreement n A contract has legal agreement when a valid offer is made and accepted. n Both the offer (made by a person called the offeror) and acceptance (made by a person called the offeree) must express a voluntary intent to be bound. n When one person makes an offer and another person changes it, the second person is making a counteroffer. Chapter 8 © 2010 South-Western, Cengage Learning 21

(continued) Agreement n Genuine agreement does not exist when there is a mistake, fraud (an intentional misrepresentation), duress (threats), or undue influence (having free will overcome by a person who has a special interest, such as a parent or guardian). Chapter 8 © 2010 South-Western, Cengage Learning 22

Consideration n Consideration is something of value exchanged for something else of value. n Consideration may be an item of value, money, a promise, or a performed service. n If one person is to receive something but gives nothing in return, the contract may not be enforceable. n The idea behind consideration is that each party to the agreement receives something of value. Chapter 8 © 2010 South-Western, Cengage Learning 23

Contractual Capacity n Contractual capacity refers to the competence (legal ability) of the parties to enter a contract. n Competent parties are people who are legally capable of agreeing to a binding offer. n Those who are unable to protect themselves because of mental deficiency or illness, or who are otherwise incapable of understanding the consequences of their actions, cannot be held to contracts. n Minors have limited contractual capacity, which means that they may legally set aside contractual obligations. Chapter 8 © 2010 South-Western, Cengage Learning 24

Legality n To be legally enforceable, a contract must have a lawful purpose. n Some contracts must have a special form in order to be legally enforceable. n For example, a contract for sale of real estate would have to contain a specific legal description of the property. n A deed to transfer title to property would have to be notarized. n When a document is notarized the signature is verified by a notary public, who then applies a notary seal. Chapter 8 © 2010 South-Western, Cengage Learning 25

Statute of Frauds n Every state has a statute of frauds to prevent harm due to fraudulent conduct. n This law requires that some contracts be in writing and signed to be legally binding. n Examples include the following: n n Contracts for the sale of real property (homes and land) Contracts that cannot be fully performed in less than a year Contracts involving the sale of goods for $500 and over Contracts in which one person agrees to pay the debts of another n Contracts in consideration of marriage Chapter 8 © 2010 South-Western, Cengage Learning 26

Responsibilities in Agreements n Fill in all blank spaces or indicate N/A for items that are not applicable. n Write all terms clearly. n Enter dates, amounts, and other numbers correctly and clearly. n Be sure the seller has supplied all relevant information. n Understand all terms contained in the agreement. n Check that no changes have been made after you have signed it. n Keep a copy of the agreement. Chapter 8 © 2010 South-Western, Cengage Learning 27

Negotiable Instruments n A negotiable instrument is an unconditional written promise to pay a specified sum of money upon demand of the holder. n Common negotiable instruments n Checks n Promissory notes Chapter 8 © 2010 South-Western, Cengage Learning 28

Promissory Note n Written promise to pay a certain sum of money to another person or to the holder of the note on a specified date n Legal document, and payment can be enforced by law n Parties involved n The maker is the person who creates and signs the promissory note and agrees to pay it on a certain date. n The payee is the person to whom the note is made payable. n A co-signer is a person who promises to pay the debt of another person. Chapter 8 © 2010 South-Western, Cengage Learning 29

Warranties n A warranty, also called a guarantee, is a statement assuring quality and performance of a product or service. n If the product fails, the warranty usually states what remedies are available, such as return of the product for the purchase price or repair of the product at no extra charge. n Implied warranties n Written warranties Chapter 8 © 2010 South-Western, Cengage Learning 30

Personal Record Keeping n As you begin to accumulate financial records and legal documents, you should have a good filing system. n A filing system allows you to: n Organize n Store n Retrieve Chapter 8 © 2010 South-Western, Cengage Learning 31

Paper Filing System n Folders n Labels n File cabinet Chapter 8 © 2010

Electronic Record Keeping n The advantages of computerized systems include the following: n Ease of updating information n Ease of record storage and retrieval n Speed of making new computations and comparisons Chapter 8 © 2010 South-Western, Cengage Learning 33

Software Programs n Many software programs can help you keep better records. n A spreadsheet is a computer program that organizes data in columns and rows and can perform calculations using the data. n A database is a computer program that organizes data for easy search and retrieval. Chapter 8 © 2010 South-Western, Cengage Learning 34