CHAPTER 4 Financial Decisions and Planning 4-1 Resources and Choices 4-2 Basics of Budgeting 4-3 Personal Financial Planning

4-1 Resources and Choices Learning Objectives 4-1.1 Describe needs and wants, and explain how financial resources help fulfill needs and wants. 4-1.2 Prepare a personal cash flow statement and a personal net worth statement. 4-1.3 Apply a decision-making process to personal financial choices. Slide 2

What Are Needs and Wants? Things needed for survival, such as food, water, clothing, shelter, and medical care Wants Things people desire for reasons beyond survival and basic comfort Resources Limit Choices Financial resources: Money or other items of value that are used to acquire goods and services Slide 3

How Are Income and Wealth Measured? Personal Cash Flow Statement Cash inflows: Income from your job, investments, and other sources Cash outflows: Expenses, or items for which you must spend money Slide 4

Personal Cash Flow Statement Slide 5

How Are Income and Wealth Measured? (continued) Personal Net Worth Statement Assets: Money and items of value that you own Liabilities: Debts that you owe Net worth: The difference between your assets and liabilities Slide 6

Personal Net Worth Statement Slide 7

How Can You Make Good Financial Choices? Decision-Making Process Define the problem or goal Gather information Compare choices Make a decision Take action Re-evaluate your choice Slide 8

How Can You Make Good Financial Choices? (continued) Decision-Making Process (continued) Trade-off: Giving up one option in exchange for another Opportunity cost: The value of your next best option—what you are giving up Financial Strategies Slide 9

4-2 Basics of Budgeting Learning Objectives 4-2.1 Identify the purpose of a personal budget and prepare one. 4-2.2 Describe recordkeeping methods used in the budgeting process. Slide 10

What Is Budgeting? Budget Steps in Preparing a Budget A spending and saving plan based on expected income and expenses Steps in Preparing a Budget Estimate income Plan savings Estimate expenses Balance the budget Slide 11

Personal Budget Slide 12

What Is Budgeting? (continued) Steps in Preparing a Budget (continued) Fixed expenses: Costs that do not change each month Variable expenses: Costs that can go up and down each month Charitable giving: The act of donating money or time to a cause in which you believe Slide 13

What Is Budgeting? (continued) Preparing a Budget Analysis Variances: The differences between planned amounts and actual amounts Slide 14

Budget Variances Slide 15

What Are Recordkeeping Methods? Manual Records Information recorded in hard-copy format using pen and paper Electronic Records Soft-copy formats of your financial information stored on your computer Slide 16

What Are Recordkeeping Methods? (continued) Electronic Records (continued) Spreadsheet software: A computer program that allows you to insert numbers and formulas to compute amounts and then easily change them later as needed Encryption: The process of converting data to a coded form Slide 17

Excel Spreadsheet Slide 18

4-3 Personal Financial Planning Learning Objectives 4-3.1 Explain the purpose and steps of financial planning. 4-3.2 List reliable sources of financial advice. 4-3.3 Describe ways you can protect your financial resources. Slide 19

What Is Financial Planning? A set of personal and financial goals, along with steps and a timeline for reaching them Step 1 Gather Information Step 2 Analyze Information Step 3 Set Goals Slide 20

What Is Financial Planning? (continued) Step 3 Set Goals (continued) Personal goals: Things you want to achieve in your life Financial goals: Plans for how you will pay for your personal goals Short-term goals: Things you expect to achieve within one week to one year Intermediate goals: Things you wish to achieve in the next two to five years Slide 21

What Is Financial Planning? (continued) Step 3 Set Goals (continued) Long-term goals: Things you want to achieve more than five years from now Step 4 Develop a Timeline and Benchmarks Timeline: A visual display of how long it will take to achieve each phase of a plan Benchmarks: Standards against which progress is measured Step 5 Implement and Evaluate the Plan Slide 22

Financial Plan (One Goal) Slide 23

Where Can You Get Good Financial Advice? Financial Planners Financial planner: A professional consultant who provides financial advice Newspapers and Magazines Seminars and Workshops Financial Planning Websites Slide 24

How Can You Protect Financial Resources? Phishing A common Internet scam that uses email messages to deceive you Identity theft The use of your personal information by someone else without permission to commit fraud or other crimes Slide 25