2-1 Copyright  2002 by Harcourt, Inc. All rights reserved. CHAPTER 2: YOUR FINANCIAL STATEMENTS AND PLANS Clip Art  2001 Microsoft Corporation. All rights reserved.

2-2 Copyright  2002 by Harcourt, Inc. All rights reserved. Mapping Out Your Financial Future  Financial planning facilitates greater wealth and financial security.  Financial plans, budgets, and financial statements provide direction in attaining personal financial goals.

2-3 Copyright  2002 by Harcourt, Inc. All rights reserved. * Evaluate and plan major outlays * Reduce taxes * Establish savings and investment programs * Manage credit * Secure adequate insurance * Implement retirement program * Facilitate estate distribution FINANCIAL PLANS

2-4 Copyright  2002 by Harcourt, Inc. All rights reserved. * Evaluate and plan major outlays * Reduce taxes * Establish savings and investment programs * Manage credit * Secure adequate insurance * Implement retirement program * Facilitate estate distribution FINANCIAL PLANS * Monitor and control income, living expenses, purchases, and savings on a monthly basis BUDGETS feedback

2-5 Copyright  2002 by Harcourt, Inc. All rights reserved. * Evaluate and plan major outlays * Reduce taxes * Establish savings and investment programs * Manage credit * Secure adequate insurance * Implement retirement program * Facilitate estate distribution FINANCIAL PLANS * Monitor and control income, living expenses, purchases, and savings on a monthly basis BUDGETS feedback Actual financial results * Balance sheet * Income & expense statement FINANCIAL STATE- MENTS feedback

2-6 Copyright  2002 by Harcourt, Inc. All rights reserved. Special Planning Concerns: 1. Dual income families 2. Employee benefit choices 3. Major life changes, such as:  First job  Marriage  Children  Death of family member  Divorce  Change in health  Loss of job  Change in economy

2-7 Copyright  2002 by Harcourt, Inc. All rights reserved. Types of Financial Planners:  Commissioned salespeople who work for financial institutions  Computerized financial plans prepared by financial institutions  Fee-only financial planners who work for the individual client

2-8 Copyright  2002 by Harcourt, Inc. All rights reserved. Time Value of Money: Putting a Dollar Value on Financial Goals Clip Art  2001 Microsoft Corporation. All rights reserved. A dollar today is worth more than a dollar received in the future because it can be invested and earn interest.

2-9 Copyright  2002 by Harcourt, Inc. All rights reserved. Types of TVM Calculations:  Single sum—one lump sum investment with no more additions or subtractions.  Annuity—a series of equal payments made at fixed time intervals for a specified number of periods.

2-10 Copyright  2002 by Harcourt, Inc. All rights reserved. Ways to Calculate TVM:  Formulas  Tables (see Appendices A-D)  Financial calculators  Spreadsheets (ex: Excel)  Internet calculators (search on “calculators”)

2-11 Copyright  2002 by Harcourt, Inc. All rights reserved. Future Value  The value your invested money will grow to become earning a specific rate of interest over a given time period.  The process of growing today’s present value to a larger future value by applying compound interest is known as “compounding.”

2-12 Copyright  2002 by Harcourt, Inc. All rights reserved. Calculating the Future Value of a Single Sum: Example: What will $5000 grow to become if invested at 10% for 6 years?

2-13 Copyright  2002 by Harcourt, Inc. All rights reserved. Tables (Find Future Value Factor for 6 years and 10% in Appendix A) FV = PV x Factor $5000 x = $8,860 Calculator (Set on 1 P/YR and END mode.) /PV 6N 10I/YR FV$8,857.81

2-14 Copyright  2002 by Harcourt, Inc. All rights reserved. Calculating the Future Value of an Annuity Example: What would you accumulate if you could invest $5000 every year for the next 6 years at 10%?

2-15 Copyright  2002 by Harcourt, Inc. All rights reserved. Tables (Find Future Value Annuity Factor for 6 years and 10% in Appendix B) FV = PMT x Factor $5000 x = $38,580 Calculator (Set on 1 P/YR and END mode.) /-PMT 6N 10I/YR FV 38,578.05

2-16 Copyright  2002 by Harcourt, Inc. All rights reserved. Present Value  The amount needed today to invest at a specific rate of interest over a given time period to accumulate the desired future amount.  “Discounting” is the reverse of compounding and is the process of working from the future value back to the present value.

2-17 Copyright  2002 by Harcourt, Inc. All rights reserved. Calculating the Present Value of a Single Sum Example: You wish to accumulate a retirement fund of $300,000 in 25 years. If you can invest at 7%, what single lump-sum deposit must you make today in order to achieve your goal?

2-18 Copyright  2002 by Harcourt, Inc. All rights reserved. Tables (Find Present Value Factor for 25 years and 7% in Appendix C) PV = FV x Factor $300,000 x.184 = $55,200 Calculator (Set on 1 P/YR and END mode.) /-FV 25N 7I/YR PV $55,274.75

2-19 Copyright  2002 by Harcourt, Inc. All rights reserved. Calculating the Present Value of an Annuity Example: Your rich uncle wishes to give you a sum of money today to use for the next 4 years of college. If you need $10,000 a year and will leave the remainder invested at 7%, how much should you tell him you need?

2-20 Copyright  2002 by Harcourt, Inc. All rights reserved. Tables (Find Present Value Annuity Factor for 4 years and 7% in Appendix D.) PV = PMT x Factor $10,000 x = $33,870 Calculator (Set on 1 P/YR and END mode.) /-PMT 4N 7I/YR PV $33,872.11

2-21 Copyright  2002 by Harcourt, Inc. All rights reserved. Use Financial Statements to:  Define current financial position.  Track changes in financial position over time.  Monitor progress in achieving goals.  Reformulate plans as situations change.

2-22 Copyright  2002 by Harcourt, Inc. All rights reserved. Balance Sheet A statement of your financial position at one point in time.

2-23 Copyright  2002 by Harcourt, Inc. All rights reserved. Balance Sheet Equation: Liabilities Assets=+ Net Worth Clip Art  2001 Microsoft Corporation. All rights reserved.

2-24 Copyright  2002 by Harcourt, Inc. All rights reserved. ASSETSLIABILITIES (Fair Market Value of Assets) (Payoff Amount of Loans and Debts) NET WORTH (Your Equity Portion) Balance Sheet

2-25 Copyright  2002 by Harcourt, Inc. All rights reserved. ASSETS What you own : checking acct. car investments jewelry furniture Balance Sheet

2-26 Copyright  2002 by Harcourt, Inc. All rights reserved. ASSETSLIABILITIES What you own : checking acct. car investments jewelry furniture What you owe : mortgage car loan credit card balances education loans unpaid monthly bills Balance Sheet

2-27 Copyright  2002 by Harcourt, Inc. All rights reserved. The Concept of Solvency:  If your net worth is POSITIVE, you are SOLVENT and have enough assets to cover your financial obligations.  If your net worth is (NEGATIVE), you are INSOLVENT and do not have enough assets to cover your financial obligations.

2-28 Copyright  2002 by Harcourt, Inc. All rights reserved. The Income and Expense Statement A measure of your financial performance over a given time period.

2-29 Copyright  2002 by Harcourt, Inc. All rights reserved. Income and Expense Statement: Total Income – Total Expenses = CASH SURPLUS OR (CASH DEFICIT)

2-30 Copyright  2002 by Harcourt, Inc. All rights reserved. Income: Cash IN     Wages and salaries  Bonuses  Interest and dividends  Child support  Tax refunds  Gifts

2-31 Copyright  2002 by Harcourt, Inc. All rights reserved. Expenses: Cash OUT     FIXED Rent or mortgage payment Cable TV Insurance  VARIABLE Dry cleaning Recreation Eating out

2-32 Copyright  2002 by Harcourt, Inc. All rights reserved. CASH SURPLUS (DEFICIT):  If your income exceeds your expenses, you have a CASH SURPLUS.  If your expenses exceed your income, you have a (CASH DEFICIT). Clip Art  2001 Microsoft Corporation. All rights reserved.

2-33 Copyright  2002 by Harcourt, Inc. All rights reserved. 65%

2-34 Copyright  2002 by Harcourt, Inc. All rights reserved. How does a Deficit on your Income Statement affect your Net Worth on your Balance Sheet?  As an example, assume that all your income for the month has been spent.  You decide you just have to take a trip to Jamaica to get away from it all.  The trip will cost $1500.

2-35 Copyright  2002 by Harcourt, Inc. All rights reserved. Scenario 1: Deplete an Asset Take money from your savings account to pay for the trip.

2-36 Copyright  2002 by Harcourt, Inc. All rights reserved. Before the purchase: Assets$30,000 Liab.$22,000 Net worth$ 8,000 After the purchase: Assets $28,500 Liab. $22,000 Net worth$ 6,500 Because you took the money from your savings account, your total assets have declined. Your liabilities remain the same, so your Net Worth must decrease.

2-37 Copyright  2002 by Harcourt, Inc. All rights reserved. Scenario 2: Increase a Liability Charge the trip on your charge card.

2-38 Copyright  2002 by Harcourt, Inc. All rights reserved. Before the purchase: Assets$30,000 Liab.$22,000 Net worth$ 8,000 After the purchase: Assets $30,000 Liab. $23,500 Net worth$ 6,500 Your assets remain the same, so your Net Worth must decrease. Because you borrowed money, your total liabilities have increased.

2-39 Copyright  2002 by Harcourt, Inc. All rights reserved. Deficit spending DECREASES your Net Worth! Clip Art  2001 Microsoft Corporation. All rights reserved.

2-40 Copyright  2002 by Harcourt, Inc. All rights reserved. Setting Up a Cash Budget  Short-term financial planning report to help you achieve short- term financial goals.  Facilitates achievement of long- term financial goals.  Provides a system for disciplined spending.

2-41 Copyright  2002 by Harcourt, Inc. All rights reserved. Preparing a Cash Budget:  Estimate income  Estimate expenses  Reformulate as necessary to balance your yearly budget

2-42 Copyright  2002 by Harcourt, Inc. All rights reserved. What should you do if you have monthly deficits?  Shift expenses from months with deficits to months with surpluses.  Use savings, investments, or borrowing to cover temporary deficits. Clip Art  2001 Microsoft Corporation. All rights reserved.

2-43 Copyright  2002 by Harcourt, Inc. All rights reserved. What should you do if you end the year with a deficit?  Liquidate savings/investments.  Borrow to cover the deficit.  Cut low priority expenses; alter spending habits.  Increase income.

2-44 Copyright  2002 by Harcourt, Inc. All rights reserved. Things to remember about a budget:  Compare your budgeted figures to your actual figures.  Continually update, based upon the actual figures.  Always try to keep your budget balanced or, even better, at a surplus.

2-45 Copyright  2002 by Harcourt, Inc. All rights reserved. THE END!