Copyright 2007 Thomson South-Western Chapter 4 Financial Decisions and Planning

Slide 2 Meeting Wants and Needs Basic needs Other needs Wants 4-1 Resources and Choices An expensive car is a product that fills customers’ wants. PR Newswire PORSCHE CARS NORTH AMERICA, INC.

Slide 3 Financial Resources Financial resources are money or other assets used to acquire goods and services Many people do not have enough resources to meet all their needs and wants People must decide how to use their scarce resources 4-1 Resources and Choices

Slide 4 Personal Income and Expense Statement 4-1 Resources and Choices

Slide 5 Personal Balance Sheet 4-1 Resources and Choices

Slide 6 Making Financial Choices Buying decisions play an important part in managing your money A trade-off involves giving up a particular benefit or item to get another that you think is more desirable Opportunity cost is the benefit or item you give up (do not buy) 4-1 Resources and Choices

Slide 7 Decision-Making Process Define the need or problem List options available Compare the options Make a decision Take action to apply the decision Reevaluate your choices after some time has passed 4-1 Resources and Choices

Slide 8 Purpose of Budgeting Budget –A spending and saving plan –Based on expected income and expenses –Allows you to compare financial resources with financial needs 4-2 Budgeting A budget can be created using a spreadsheet.

Slide 9 Building a Budget Estimate income Plan savings Estimate expenses –Variable expenses –Fixed expenses 4-2 Budgeting Eating at a fancy restaurant is entertainment, a variable expense. Balance the budget

Slide 10 Budget Analysis Income, savings, and expenses will not be exactly as budgeted Differences between planned and actual amounts are called variances –Favorable variances –Unfavorable variances Looking at variances can help you budget better in the future 4-2 Budgeting

Slide 11 Budget Variances Report 4-2 Budgeting

Slide 12 Recordkeeping Methods Keeping good records will help you prepare better budgets –Manual records –Computerized records You can keep financial records on a handheld computer using programs such as Microsoft ® Money. 4-2 Budgeting

Slide 13 Financial Planning A financial plan contains –Personal goals –Financial goals –Steps to take for achieving goals –A timeline for achieving goals 4-3 Personal Financial Planning

Slide 14 Financial Planning Process Gather information 4-3 Personal Financial Planning Personal income and expense statements Personal balance sheet Personal budget Current bank account statements Investment account statements Financial contracts Other documents related to your finances Checkbooks Insurance policies Current paycheck stub Tax returns Will Trusts

Slide 15 Financial Planning Process Analyze information –Review income and expenses –Review your balance sheet –Consider changing goals or spending habits Set goals –Personal goals –Financial goals 4-3 Personal Financial Planning

Slide 16 Financial Planning Process Develop a timeline –Consider how soon you want to achieve each goal –Consider steps must you take to achieve each goal Implement and evaluate the plan –Work toward achieving goals –Review and adjust the plan at least once a year 4-3 Personal Financial Planning

Slide 17 Ethics Financial Planners and Commission Earnings A financial planner –Provides financial advice to individuals –May also buy and sell products on commission Financial planners are unethical if they buy or sell products just to earn a commission Choose a financial planner you can trust to deal fairly 4-3 Personal Financial Planning