MANAGE Your MONEY How to control your money so it doesn’t control you. Personal Finance Unit 2 MANAGE Your MONEY How to control your money so it doesn’t control you.

Why are people so broke? Some bad habits, like cracking knuckles, are gross but certainly not life-threatening Bad spending habits, however, can easily destroy you Hurt your marriage Make you drop out of school Make you turn to other vises to “escape”

Don’t let this be you… Mary and Steven earn a good living, combined $100,000/year. At the end of each month, however, they have NO MONEY left over – they are living “paycheck-to-paycheck” Why? Because they don’t know basics of financial planning and budgeting.

Before we start the unit notes… Let’s find out a little bit about how YOU view money… www.themint.org Lifespan Calculator What Kind of Spender are You? Quiz Determine Your Budget (shows us how much you like to “live it up”)

The FINANCIAL PLANNING PROCESS Make It, Keep It, Grow It

What can you do with money? Spend It Save It Invest It Give It Away

FINANCIAL PLANNING Creating a roadmap for handling everything you do with money.

FINANCIAL PLANNING PROCESS Set SMART Goals Analyze your Financial Information Create a Plan Implement the Plan Monitor and Modify the Plan

Set SMART Goals FINANCIAL PLANNING STEP 1: Specific (be very clear and detailed) Measurable (set in definable terms) Attainable (can it actually be done?) Realistic (can it actually be done by YOU?) Time Bound (set a date to achieve goal)

What is wrong with these goals? I will learn how to speak and write Mandarin. Time I will have a net worth of one million dollars by the time that I reach my 30th birthday. Realistic I will lose 30 pounds by next Friday. Attainable I will be able to buy a house in 5 years. Specific I will be nicer to my siblings. Measurable/Specific

FINANCIAL PLANNING PROCESS Set SMART Goals Analyze your Financial Information Create a Plan Implement the Plan Monitor and Modify the Plan

Analyze your Financial Information FINANCIAL PLANNING STEP 2: Analyze your Financial Information FINANCIAL DOCUMENTS: Paycheck stubs, statement of interest earned, amounts of cash gifts, tips, bonuses, credit card statements, past tax returns, loan agreements, W-2s

Analyze your Financial Information FINANCIAL PLANNING STEP 2: Analyze your Financial Information 2. NET WORTH: ASSETS (everything you OWN), minus LIABILITIES (everything you OWE money on) See Net Worth Worksheet

Assets and Liabilities Apartment Lease Savings Account Car (paid in full) Cash DVD Collection Phone Bill Car Loan Paycheck Gift Cards Student Loans House (paid in full) Birthday check from Gram Mortgage $10 you owe your friend

Assets and Liabilities Apartment Lease Savings Account Car (paid in full) Cash DVD Collection Phone Bill Car Loan Paycheck Gift Cards Student Loans House (paid in full) Birthday check from Gram Mortgage $10 you owe your friend

Assets and Liabilities Apartment Lease Savings Account Car (paid in full) Cash DVD Collection Phone Bill Car Loan Paycheck Gift Cards Student Loans House (paid in full) Birthday check from Gram Mortgage $10 you owe your friend

Who has the higher net worth? JONES SMITHS Home: $300,000 Cars: $57,000 Savings Account: $21,000 Cash: $3,000 Mortgage: $275,000 Car Loans: $40,000 Student Loans: $56,000 Credit Card Debt: $6,000 Home: $125,000 Cars: $30,000 Savings Account: $45,000 Cash: $8,000 Mortgage: $75,000 Car Loans: $5,000 Student Loans: $6,000 Credit Card Debt: $0 $4,000 $122,000

Analyze your Financial Information FINANCIAL PLANNING STEP 2: Analyze your Financial Information 3. DISCRETIONARY (DISPOSABLE) Income: The amount of money you have to spend on non-essentials

Debt Ratio Example Your Discretionary Income would be $230. Luke has a monthly NET income of $1700. He spends… To calculate Discretionary Income: Rent and Utilities………….... Food………………………….. Gas and Car Insurance…..... Paying back Student Loans.. Paying back Credit Cards..... Puts into Savings Account…. $850 $100 $220 $225 $75 1. Add up essential bills. 850+100+220+225+75= $1470 2. Subtract this total from your net income. $1700 – $1470 = $230 Your Discretionary Income would be $230.

Analyze your Financial Information FINANCIAL PLANNING STEP 2: Analyze your Financial Information 4. DEBT RATIO: The amount of debt you have compared to your income(the lower the better) Monthly debt/monthly income

Debt / Income = Debt Ratio Debt Ratio Example Luke has a monthly income of $1700. He spends… To calculate Debt Ratio: Rent and Utilities………….... Gas and Car Insurance…..... Food………………………….. Paying back Student Loans.. Paying back Credit Cards..... Puts into Savings Account…. $850 $220 $100 $225 $75 Divide the amount of debt by the amount of income. Debt / Income = Debt Ratio (300 / 1700) = 17% Total Debt = 225 + 75 = 300 Your Debt Ratio is 17%.

Analyze your Financial Information FINANCIAL PLANNING STEP 2: Analyze your Financial Information 5. SPENDING HABITS: Keep track of what you buy EVERYDAY Needs or wants Does the purchase help you reach your goals?

YOUR TASK! Use the handout provided in class to keep a spending log of all your cash inflow and outflow during the next 7 days. I will collect it for a grade on Thursday, October 4.

FINANCIAL PRINCIPLES TO HELP YOU… NEEDS VS. WANTS Let’s go PLAY in the hall!!! Needs – Essential living expenses Wants – everything else

FINANCIAL PRINCIPLES TO HELP YOU… OPPORTUNITY COST The cost of making one choice over another Example: Jan turns down an afterschool job because she has to be at soccer practice. Opportunity Cost: $ she would have made at job Example: Jan quits the soccer team to get an afterschool job. Opportunity Cost: enjoyment of sport she likes

FINANCIAL PRINCIPLES TO HELP YOU… COST-BENEFIT ANALYSIS Method of weighting the costs and benefits of an action. Example: You are going on vacation in another state. It will cost you $200 to drive, but take 10 hours. It will cost you $400 to fly, but will take 3 hours. Cost-Benefit: Is 7 hours of your time worth $200?

FINANCIAL PRINCIPLES TO HELP YOU… MARGINAL BENEFIT The change in benefit of using one additional unit of something Example: You are hungry and buy a slice of pizza. It tastes so good you buy another, but this one does not satisfy you as much as the first did. ALSO CALLED: LAW OF DIMINISHING MARGINAL UTILITY

FINANCIAL PLANNING PROCESS Set SMART Goals Analyze your Financial Information Create a Plan Implement the Plan Monitor and Modify the Plan

FINANCIAL PLANNING Step 3: Make a BUDGET and stick to it! A plan for managing your money during a given period of time Always based on SMART goals Will change as your income grows and your goals and priorities change

Parts of a BUDGET: INCOME SAVINGS EXPENSES

INCOME is any money that you receive during a certain period of time Parts of BUGET: INCOME is any money that you receive during a certain period of time Paycheck Allowance Cash gifts Interest you earn on savings and investments Others

P.Y.F. SAVINGS is money that you put aside and don’t spend Parts of BUGET: SAVINGS is money that you put aside and don’t spend P.Y.F. PAY YOURSELF FIRST! Philosophy of setting aside a certain amount of money as soon as you receive it Supports LONG TERM goals This is the money you use to invest

EMERGENCY FUND! 3-6 MONTHS EXPENSES

EXPENSES are everything you spend your money on Parts of a BUDGET: EXPENSES are everything you spend your money on FIXED EXPENSES VARIABLE EXPENSES PERIODIC/OCCASIONAL EXPENSES

Types of EXPENSES FIXED EXPENSES cost the same amount every time you pay them (usually once a month) Examples: Mortgage Utilities (if you are on budget billing) Student loan Car loan Cell phone plan Cable TV/Internet Etc…

Types of EXPENSES VARIABLE EXPENSES amount changes depending on how much you use Examples: Utilities (if NOT on budget billing) Groceries Credit card bill Gas for your car Etc…

Types of EXPENSES PERIODIC/ OCCASIONAL EXPENSES ones you don’t pay every month (could be fixed or variable). Examples: Car insurance (F) Auto Repairs (V) Clothing (V) Entertainment (V) Gifts for others (V) Etc…

FINANCIAL PLANNING PROCESS Set SMART Goals Analyze your Financial Information Create a Plan Implement the Plan Monitor and Modify the Plan

FINANCIAL PLANNING PROCESS Step 4: Implement the Plan Put reminders all around you Set up a system that will work for you Practice DELAYED GRATIFICATION Only spend in accordance with the plan

Methods of Staying on Track with Your BUDGET: The Envelope System The Tally System Tracking with your Checkbook Register The Budget Spreadsheet Personal Finance Software

The ENVELOPE System Label envelopes with each of your expenses categories When $ comes in, distribute it among envelopes Spend $ out of envelopes, when it’s gone – STOP SPENDING!

The TALLY System Keep a notebook tally of everything you spend throughout day within categories (with receipts) At end of day, add it up

Track with your CHECKING ACCOUNT REGISTER Use your updated checking account register and statements to keep track of all income and expenses Don’t forget to add cash withdrawals from ATMs

The BUDGET SPEADSHEET Use spreadsheet software (like MS EXCEL) to track all your spending on the computer We’ll practice this in class

PERSONAL FINANCE SOFTWARE Purchase special software programs (like Quickbooks) to help you track your income and expenses FREE = mint.com The programs are easy to use and create reports for you

FINANCIAL PLANNING PROCESS Set SMART Goals Analyze your Financial Information Create a Plan Implement the Plan Monitor and Modify the Plan

FINANCIAL PLANNING PROCESS STEP 5: Monitor and Modify the Plan Track your progress weekly, monthly or yearly and make changes as needed