Chapter © 2010 South-Western, Cengage Learning Budgets and Financial Records Budgeting and Planning 8

© 2010 South-Western, Cengage Learning Budgeting – Financial Planning SLIDE 2 Chapter 8 4 things you do with your $ 1- save 2- spend 3- donate 4- invest

© 2010 South-Western, Cengage Learning Financial Values, Goals and Strategies 1.After you Identify your financial values, goals, and strategies create a budget. 2. Evaluate your financial strength and progress using financial ratios. 3. Maintain the financial records necessary for managing your personal finances. 4.Outline and work toward achieving your financial goals through budgeting. SLIDE 3 Chapter 8

© 2010 South-Western, Cengage Learning Financial Planning: Managing income and wealth continuously through life to meet financial goals. SLIDE 4 Chapter 8

© 2010 South-Western, Cengage Learning Copyright ©2004 Pearson Education, Inc. All rights reserved. 1-5 Definitions Personal finance: the process of planning your spending, financing, and investing so as to optimize your financial situation Personal financial plan: a plan that specifies your financial goals and describes the spending, financing, and investing plans that are intended to achieve those goals

© 2010 South-Western, Cengage Learning Copyright ©2004 Pearson Education, Inc. All rights reserved. 1-6 Definitions Opportunity cost: what you give up as a result of a decision

© 2010 South-Western, Cengage Learning Copyright ©2004 Pearson Education, Inc. All rights reserved. 1-7 How You Benefit From An Understanding of Personal Finance Make your own financial decisions Every spending decision has an opportunity cost Judge the advice of financial advisors Make informed decisions Become a financial advisor Many career opportunities available

© 2010 South-Western, Cengage Learning Copyright ©2004 Pearson Education, Inc. All rights reserved. 1-8 Components of a Financial Plan Budgeting and tax planning Managing your liquidity Financing your large purchases Protecting your assets and income (insurance) Investing your money Planning your retirement and estate

© 2010 South-Western, Cengage Learning Copyright ©2004 Pearson Education, Inc. All rights reserved. 1-9 Budgeting and Tax Planning Exhibit 1.1: How a Budget Affects Savings

© 2010 South-Western, Cengage Learning Copyright ©2004 Pearson Education, Inc. All rights reserved A Plan to Manage Your Liquidity Liquidity: access to funds to cover any short-term cash deficiencies Money management: decisions regarding how much money to retain in a liquid form and how to allocate the funds among short-term investment instruments

© 2010 South-Western, Cengage Learning Copyright ©2004 Pearson Education, Inc. All rights reserved A Plan to Manage Your Liquidity Credit management: decisions regarding how much credit to obtain to support your spending and which sources of credit to use

© 2010 South-Western, Cengage Learning 1-12 Managing Your Liquidity Exhibit 1.2: Managing Your Liquidity

© 2010 South-Western, Cengage Learning Copyright ©2004 Pearson Education, Inc. All rights reserved A Plan for Your Financing Loans often needed for large expenditures College tuition, car, house Managing loans How much can you afford to borrow? Determining maturity of the loan Selecting a loan with a competitive interest rate

© 2010 South-Western, Cengage Learning Copyright ©2004 Pearson Education, Inc. All rights reserved Financing Your Large Purchases Exhibit 1.3: Financing Process

© 2010 South-Western, Cengage Learning Copyright ©2004 Pearson Education, Inc. All rights reserved A Plan for Your Investing Funds not needed for liquidity can be invested Stocks, bonds, mutual funds, real estate All investments have some level of risk Risk: uncertainty surrounding the potential return on an investment

© 2010 South-Western, Cengage Learning Copyright ©2004 Pearson Education, Inc. All rights reserved A Plan for Your Retirement and Estate This includes insurance planning, retirement planning, and estate planning Retirement planning: determining how much money should be set aside each year for retirement and how those funds should be invested Estate planning: determining how your wealth will be distributed before or upon your death

© 2010 South-Western, Cengage Learning Copyright ©2004 Pearson Education, Inc. All rights reserved Exhibit 1.4: Components of Your Financial Plan Components of Your Financial Plan

© 2010 South-Western, Cengage Learning Copyright ©2004 Pearson Education, Inc. All rights reserved How Financial Planning Relates to Cash Flow Exhibit 1.6: How Financial Planning Affects Your Cash Flows

© 2010 South-Western, Cengage Learning Copyright ©2004 Pearson Education, Inc. All rights reserved Integrating Key Concepts

© 2010 South-Western, Cengage Learning Copyright ©Houghto n Mifflin Company. All rights reserved Financial Values, Goals, and Strategies Values define your financial success. Financial goals follow from values. Financial Goals: Specific objectives to be attained through financial planning and management efforts.

© 2010 South-Western, Cengage Learning Copyright ©Houghto n Mifflin Company. All rights reserved Financial Values, Goals, and Strategies Financial strategies guide your financial success.

© 2010 South-Western, Cengage Learning SLIDE 22 Chapter 8 Lesson 8.1 Budgeting and Planning GOALS Explain the purpose of financial planning and prepare a personal budget. Explain the need for and create a net worth statement and a personal property inventory.

© 2010 South-Western, Cengage Learning SLIDE 23 Chapter 8 Financial Planning Basics Planning, budgeting, and keeping good records provide the road map that leads to financial security.

© 2010 South-Western, Cengage Learning Copyright ©Houghto n Mifflin Company. All rights reserved Financial Record Keeping Financial record keeping saves time and makes you money. Financial Records: Documents that evidence financial transactions.

© 2010 South-Western, Cengage Learning Copyright ©Houghto n Mifflin Company. All rights reserved Budgeting Budget: A paper or electronic document used to record both planned and actual income and expenditures over a period of time.

© 2010 South-Western, Cengage Learning Copyright ©Houghto n Mifflin Company. All rights reserved Budgeting Rules for successful budgeting: 1.Keep it simple. 2.Make it personal. 3.Keep it flexible. 4.Be positive.

© 2010 South-Western, Cengage Learning SLIDE 27 Chapter 8 Getting Started Income and expenses Gross income Disposable income Financial plan A financial plan is a set of goals for spending, saving, and investing the money your receive Resources and obligations

© 2010 South-Western, Cengage Learning SLIDE 28 Chapter 8 Visualizing Your Future What comes in and how it goes out Changes you could make

© 2010 South-Western, Cengage Learning SLIDE 29 Chapter 8 Preparing a Budget A budget is a spending and saving plan based on your expected income and expenses. Money coming in (earnings plus borrowing) must equal money going out (spending plus saving). The budget must balance. 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.

© 2010 South-Western, Cengage Learning SLIDE 30 Chapter 8 Steps in Preparing a Budget Estimate your income. Estimate your expenses. Decide how much to save. Balance your budget.

© 2010 South-Western, Cengage Learning SLIDE 31 Chapter 8 Evan Anderson—Budget for September IncomeExpenses Part-time job$320Daily lunches$ 80 Allowance20Supplies20 Birthday gift40Clothes40 Total Income$380Entertainment140 Total expenses$280 Savings Credit union account$100 Total expenses plus savings $380 Simple Budget The budget balances.

© 2010 South-Western, Cengage Learning SLIDE 32 Chapter 8 Monthly Budget Fixed expenses are costs that do not change from month to month. Variable expenses are costs that vary in amount and type, depending on the choices you make.

© 2010 South-Western, Cengage Learning SLIDE 33 Chapter 8 Personal Records Good personal records makes budgeting and long- range planning easier. Your records also make it easier to prepare income tax returns, credit applications, and other financial forms. You should keep five types of personal records: Income and expenses records Net worth statement Personal property inventory Tax records Other miscellaneous documents

© 2010 South-Western, Cengage Learning SLIDE 34 Chapter 8 Income and Expenses Records Examples of income records W-2 forms Statements from banks Statements from investment companies Examples of income records Receipts listing charitable contributions Medical bills Receipts for work-related expenses

© 2010 South-Western, Cengage Learning SLIDE 35 Chapter 8 Net Worth Statement A net worth statement shows a person’s net worth based on his or her assets and liabilities. Assets are items of value that a person owns. Money or debts you owe to others are called liabilities. When you subtract your liabilities from your assets, the difference is known as net worth. Assets – Liabilities = Net worth

© 2010 South-Western, Cengage Learning SLIDE 36 Chapter 8 Anisa Newkirk January 1, 20— AssetsLiabilities Checking account$500Loan on car$1,800 Savings account800Loan from parents100 Car value3,000Total liabilities$1,900 Personal property5,000Net Worth Total assets$9,300Assets minus liabilities$7,400 Total liabilities and net worth$9,300 Net Worth Statement These two numbers must be the same.

© 2010 South-Western, Cengage Learning SLIDE 37 Chapter 8 Personal Property Inventory A personal property inventory is a list of the valuable items you own, along with their purchase prices and approximate current values. Personal property includes anything of value inside your home—clothing, furniture, appliances, and so forth.

© 2010 South-Western, Cengage Learning SLIDE 38 Chapter 8 Personal Property Inventory Anisa Newkirk: January 2, 20— Item Year Purchased Purchase Price Approximate Current Value Sphinx XTL DVD Player with big-screen TV2008$ 3,200$1,300 Bedroom furniture (bed, dresser, lamp, clock)20062,0001,200 Clothing, jewelry , MBD motor bike20051,8001,000 CD collection, CD burner, digital camera, scanner20062,0001,000 $12,000$5,000 (continued)

© 2010 South-Western, Cengage Learning SLIDE 39 Chapter 8 Tax Records All taxpayers should keep copies of their tax records for at least three years after they file their tax return. 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. Keep your tax records in a safe place in case of an audit.

© 2010 South-Western, Cengage Learning SLIDE 40 Chapter 8 Other Miscellaneous Documents Lists of credit card numbers Car titles Insurance policies Birth certificates Marriage certificates Passports

© 2010 South-Western, Cengage Learning 1-41 Financial Planning Online: Financial Planning Tools for You Go to This website provides much information and many tools that can be used for all aspects of financial planning. It also provides information for creating retirement plans and wills.