GoodheartWillcox Co Inc 6 Personal Finance An Overview

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6 Personal Finance: An Overview

Objectives • Prepare a budget tailored to income and needs. • Prepare cash flow and net worth statements. • Plan family finances for different stages in the life cycle. • Give examples of economic, demographic, cultural, and technological factors that can impact financial planning. continued

Objectives • Explain ways to deal with a financial crisis. • Identify important financial and legal documents to keep on hand.

Preparing Financial Statements • Financial planning enables you to – reach important goals – achieve a sense of financial security for life • Financial security is the ability to meet essential needs without taking on more debt than you can repay continued

Preparing Financial Statements • Financial literacy is – having a basic understanding of knowledge and skills needed to manage financial resources – being aware of and knowledgeable about financial management options – feeling secure in your ability to make your resources work for you continued

Preparing Financial Statements • Financial statements include – budget – cash flow statement – net worth statement

Tailoring a Budget to Income and Needs • A budget helps you manage – income and spending – day-to-day expenses • Creating a basic budget involves seven steps

1. Establish Financial Goals • List your financial goals • Your goals will change over time

2. Estimate and Total Your Income • Determine a budget period • Estimate income from each source • Total the estimated income

3. Estimate and Total Your Expenses • Fixed expenses – must be paid each budget period – are often the same or nearly the same amount from month to month – include payments for rent, mortgage, tuition, insurance premiums, and auto and other loans continued

3. Estimate and Total Your Expenses • Variable expenses – can change from month to month, both in amount and time to pay – can often be pared down or cut – include payments for food, clothing, medical expenses, discretionary expenses continued

3. Estimate and Total Your Expenses • Use a form to estimate and total expenses

Building Savings into Your Budget • Build savings into a budget for – unexpected emergencies: medical expense, car repair, a possible period of unemployment – medium- and long-term goals – investments to improve your financial circumstances

Charitable Giving as an Expense • Budget for philanthropy by giving to reputable charities • Making donations may lower taxes

4. Analyze Current Income and Spending • Subtract expenses from income • If the number is positive, you have money left over for goals • If the number is 0 or negative, find ways to increase income or cut expenses continued

4. Analyze Current Income and Spending • Ways to increase income: – Handle more responsibilities at home to possibly increase your allowance – Get a part-time job – If you work, negotiate a raise or increased hours continued

4. Analyze Current Income and Spending • Ways to reduce spending: – Reduce or cut discretionary expenses – Reduce fixed and variable expenses – Cut expenses unrelated to goals and priorities

5. Prepare a Trial Budget • Use goals, income, and expenses • Use estimated expenses

6. Put Your Budget into Action • Fill in actual amounts for income and expenses • If actual amounts exceed budgeted amounts, identify the cause • Revise budget using actual costs • Study budget before making financial decisions

7. Evaluate Your Budget Periodically • Is your budget working? • Are you reaching important goals and setting new ones? • Are you controlling your spending? • Has your income or spending pattern changed? • Do life changes call for adjustments?

Preparing a Cash Flow Statement • Shows real income and spending • Inflow is income; outflow is expenses • Prepare at end of budget period continued

Preparing a Cash Flow Statement • By recording income and expenses, you get a good picture of your spending patterns

Preparing a Net Worth Statement • Net worth = assets – liabilities – Positive net worth lets you meet your financial obligations and goals, and accumulate wealth – Negative net worth can be eliminated by reducing expenses or increasing income continued

Preparing a Net Worth Statement • This measures your financial standing at a specific point in time

Assets • Liquid assets are easily converted to cash – Cash, money in savings • Investment assets are invested funds set aside for long-term goals – Stocks, bonds • Use assets are durable goods – Auto, furniture

Liabilities • Current liabilities are items that must be paid soon, usually within a year – Medical bill, taxes, credit card bill • Long-term liabilities are obligations paid over a longer period of time – Mortgage, student loan

Planning Family Finances • Factors affecting adult budgeting decisions are – age – stage in the family life cycle • Families can skip, overlap, or repeat family life cycle stages continued

Planning Family Finances • Family life cycle stages – Beginning – Expanding – Developing – Launching – Aging

Beginning Stage • Move away from parents, obtain higher education, marry, start jobs and careers • Expenses: education, college loans, home down payment, auto, home furnishings, insurance

Expanding Stage • Job advancement, increasing income, increasing responsibilities, childbirth, and parenting • Expenses: child-related costs, increased insurance protection, increased housing expenses

Developing Stage • Parenting school-age children and adolescents, climbing income and expenses • Expenses: child- and school-related costs, second car, retirement planning

Launching Stage • Departure of children from home, peaking earnings, aging parents • Expenses: college, retirement savings, costs of caring for aging parents

In Your Opinion • Which stages of the family life cycle can you recognize in your own family’s history? Were any stages skipped or repeated?

Aging Stage • Retirement, earnings drop, “empty nest”, birth of grandchildren, caring for elderly parents, estate planning • Expenses: medical costs, insurance, travel, costs of caring for elderly parents • Security at this stage depends on earlier planning

Variations in the Cycle • Singles and childless couples skip the expanding, developing, and launching stages • Single parents who remarry may repeat stages with new spouses continued

Variations in the Cycle continued

Variations in the Cycle • Single-parent female-headed families often have less income, less savings • After separation and divorce, income often falls while expenses increase

Financial Decisions in a Changing World • Other forces impacting financial decisions: – Economic factors – Social factors – Cultural factors – Technology factors • Financial planning and saving help people cope with economic challenges

The Economy and Your Finances • During good economic times, – consumers and business owners are optimistic – most people who want jobs can find them – income and savings rise – people save and invest for the future continued

The Economy and Your Finances • During a recession, – people are pessimistic – people fear or experience job loss – incomes stagnate – people spend less; save more continued

The Economy and Your Finances • During inflation, – prices rise faster than income – money buys less – people cannot buy or save as much

Demographics and Your Finances • Demographic trends that impact the economy and people’s finances – An aging population – Changing job market – Rising educational requirements for jobs – More young adults living with their parents

Culture and Your Finances • Greater ethnic, cultural, religious diversity, especially in urban areas • More relationships and marriages between people of different backgrounds • Cultural and ethnic traditions can affect financial decisions

Technology and Your Finances • New technology can have financial impacts • Example: medical advances led to longer lives and the need for more savings continued

Technology and Your Finances • Positive impacts of advanced technology: – New markets in which to buy and sell – Wider variety of goods and services – Less expensive goods and services – New jobs – New money management tools – Easy access to information continued

Technology and Your Finances • Problems created by advanced technology: – Offshore outsourcing—businesses move factories and jobs to other countries to benefit from cheap labor and weaker government regulations – American workers competing for jobs with lower-paid workers may lose jobs, benefits, or take pay cuts

Working Through Financial Problems • To minimize a financial crisis, – get the best education and job training possible – keep debt under control – create emergency fund; save regularly – avoid taking excess risks – get insurance protection – discuss finances with household members

Unexpected Crisis • Some crises cannot be anticipated or prepared for in advance continued

Unexpected Crisis • Causes of a family crisis include – job loss – separation and divorce – death – disability – serious illness – natural disaster continued

Unexpected Crisis • To cope with a family crisis – discuss problem with adult members of household – list your resources – minimize negative financial consequences – get the help of professionals

Keeping Important Documents • Keep documents and papers necessary for financial and legal transactions • Develop a recordkeeping system

Key Lists to Keep Current and Available • Savings and checking accounts • Credit card and charge accounts • PINs (personal identification numbers) • Securities and investment records • Wills and trusts • Insurance policies • Loan contracts, including mortgage continued

Key Lists to Keep Current and Available • Tax records • Property deeds and titles • Pension plans and employee benefits documents • Social Security and Medicare records • Property, possessions, and valuables • Product information and warranties • Instructions for management of your affairs

Scheduling Bills • Set aside a specific place to put bills as they arrive • If you don’t receive an expected bill, contact the business right away • Keep track of due dates • Set a special time for bill paying • Pay bills in the order they are due

Keeping Budgeting Records • Your files should contain records related to income, spending, and savings • Keep receipts for – fixed expenses – purchases you may want to return – purchases that may need warranty service

Central Ideas of the Chapter • Enjoying financial security throughout life is an achievable goal. • Budgets and other financial planning tools can help people achieve financial security.

Glossary of Key Terms • budget. A spending plan for the use of money over time based on goals and expected income. • cash flow statement. A summary of the amount of money received as well as the amount paid out for goods and services during a specific period. Back

Glossary of Key Terms Back • demographics. The statistical characteristics of the population. • expense. The cost of a good or service a person buys. • family crisis. A major problem that impacts the future of the family and its lifestyle.

Glossary of Key Terms Back • family life cycle. The stages of change a family passes through from formation to aging. • financial literacy. The understanding of the basic knowledge and skills needed to manage financial resources. • fixed expense. A set cost that must be paid each budged period.

Glossary of Key Terms Back • income. Any form of money a person receives from various sources. • liability. A financial obligation that a person currently owes or will owe in the future. • net worth. The difference between what a person owns and owes.

Glossary of Key Terms • net worth statement. A written record of a person’s current financial situation. • philanthropy. The act of giving money, goods, or services for the good of others. • recordkeeping. The process of setting up and maintaining an organized system for your financial affairs. Back

Glossary of Key Terms Back • variable expense. A cost that changes both in the amount and time it must be paid. • wealth. An abundance of assets that are accumulated over time.