The Financial Plan Chapter 2

Definitions You Need to Know Personal financial plan: specifying financial goals and describing in detail the spending, financing, and investing plans needed to reach those goals. Budgeting: the process of forecasting future expenses and income. Assets: anything you own like your car or your house. Liabilities: what we owe, or our debt Net Worth: the difference between the value of the asset and how much we owe on it. Net Worth = Assets - Liabilities

More Definitions Equity: this means ownership. Income: the money coming in through wages earned, allowance, or other sources. Liquidity: how much readily available cash you have on hand for meeting immediate wants and needs. Money Management: making decisions about how much cash or liquid assets to keep in reserve and how much to invest in less liquid assets like Real Estate. Real Estate: buildings and land

And Still More! Credit Management: making decisions about getting and using credit. To Finance: To take out a loan on the remaining amount of how much you owe on something. Payment Terms: specific information about the interest rate the lender will charge you and the time period for paying back the loan.

Personal Financial Plan Components of the Plan Budgeting and Taxes Liquidity Management Personal Financing Protecting Your Assets and Income Personal Investing Retirement and Estate Planning Communication and Record Keeping

Component 1: Budgeting and Taxes Budgeting is planning for future expenses and income for the next week, month, or year. Budget Steps: Establishing your net worth Establishing your income Identifying your expenses Consider the impact of taxes

Step 1: Establishing Net Worth Net worth = Assets – Liabilities Assets – Anything you own Liabilities – What you owe or your debt Net Worth – the difference between the value of the asset and how much you owe For Example: Asset (Car’s worth) $5000 Liability (Amount owed on Car) - $2000 Net Worth (Car value minus amount owed) $3000 Equity means ownership or how much you owe of something

Step 2: Establishing Your Income Income is money that you have coming to you through wages earned, allowance, or other sources. Your income depends on your level of education, your career choice, your wise use of investing.

Step 3: Identifying Your Expenses You will need to accurately estimate how much money you are spending every month. Accurately estimating ensures that you will be able to pay your bills and accurately determine how much you can save.

Step 4: Considering the Impact of Taxes Income Taxes: money owed to the government on earned income. The more money you make, the higher share of your income you will pay in income taxes. In your budget plan you may need to set money aside each month if your income is large enough that you have to pay taxes.

How we spend money Food 12.6% Housing 33.8% Apparel and service 3.9% Transportation 17.6% Health care 5.7% Entertainment 4.9% Personal insurance and pensions 10.9% Other 10.6%

Component 2: A Plan for Managing Your Liquidity Liquidity refers to how much readily available cash you have on hand for meeting your immediate wants and needs. Your level of liquidity is important in case of an emergency. You will need to have an emergency fund that is liquid. Money management involves making decisions about how much cash or liquid assets to keep in reserve and how much to invest in less liquid assets such as real estate. In a nutshell – money management helps you decide what money to keep liquid and what money can be tied up. Credit Management refers to the decisions that you will make about how much credit you want to take out.

Component 3: A Plan for Your Financing If you are planning on purchasing something large like a home you will probably need some kind of financing to help you make the purchase. When you need financing for a larger purchase, you will need to find a lender. They won’t lend you money unless you meet specific requirements. Payment terms: The lender will set out specific instructions for you to get the loans paid off. This will include dates payments are due, the interest rate you are being charged, and when the loans must be paid off.

Component 4: A Plan for Managing Your Risk You need to devise a plan to protect your assets. This is usually done with insurance. Common Types of Insurance Home Car Health Life If you do not have insurance, you will be assuming all of the risk if something were to happen to yourself or your assets.

Component 5: A Plan for Your Investing The money that you don’t spend to meet your needs should be invested. Common types of investments are Stocks Bonds Mutual Funds Real Estate Different types of investments have different levels of risk.

Component 6: A Plan for Your Retirement You need to determine how much to save for retirement every year and how to invest that money. There are several tax advantaged plans allowed by the government to help you save up for retirement. These plans allow you to delay paying taxes on the money you make. It is important to plan and save for your retirement. You do not want to rely on the government’s Social Security Plan to support you.

Component 7: A Plan for Communicating and Keeping Records Communicating your financial plan to your family is critical. Many fights about finances can be avoided with clear communication Keeping records is critical to your financial success. Accurate Records are needed to File taxes Calculate your net worth Meet your financial goals Write down your financial goals and refer to them frequently to ensure your success.