Financial Decisions and Planning Chapter 4

Financial Planning Financial Planning - the process of developing and implementing a coordinated series of financial plans Financial plan considers financial and personal goals along with steps and milestones for reaching them

Resources and Choices Needs – things required for survival, such as food, clothing, shelter, and medical care Wants - things people desire for reasons beyond survival and basic comfort

Resources and Choices Financial resources – money or other items of value that are used to acquire goods and services Disposable income Discretionary income Scarcity – the gap between limited resources and unlimited wants

Financial Statements

Income and Wealth Cash flow statement Balance sheet/personal wealth statement/net worth Liabilities Assets

Income and Wealth Assets Monetary Tangible Investment Appreciation Depreciation

Net Worth by Age

Financial Decision-Making Resource allocation Trade-offs Opportunity costs – the value of the next best option given up

Financial Decision-Making Define the need List the options meeting the need Compare the options Make a decision Take action Reevaluate your choice

Financial Strategies Consider the future Consider opportunity cost If in doubt – reconsider Do not make snap decisions Spend less than you earn Be realistic Read the fine print Learn from others mistakes

Budgeting Budget Spend and save plan based on expected income and expenses Assist making ends meet and achieving financial goals

Budgeting Estimate income Plan savings Estimate expenses Pay yourself first Plan for the unexpected Estimate expenses Fixed expenses Variable expenses Balance the budget

8 Steps to Creating a Personal Budget Keep it simple Set a time period Build an emergency fund into your budget Don't worry about finding the perfect record keeping method Make sure everyone involved is on the same page Make adjustments along the way Try adding on instead of only cutting back Don't set yourself up for failure

Money Left Over at the End of the Month? Carry the surplus forward. Put into a revolving savings fund. Build a cash reserve in a savings account. Pay down credit card debt. Put toward a mortgage or other loan. Invest in a retirement account. Spend like “mad money.”

Record Keeping Why? Manual records Electronic records

Financial Planning Financial Plan – a plan listing personal and financial goals along with steps and a timeline for reaching them Gather information Analyze information Set goals Timeline and benchmarks Implementation/evaluation

Financial Advice Professional planners/advisors Self-study Seminars and workshops

Protect Your Financial Resources Strong passwords Social Engineering Phishing Spearfishing Identity theft

Questions?

Homework Complete budget worksheet Use your best estimate for income Try to complete as many expenses as possible – add as many additional lines as you can think of