CHAPTER 3 Goal Setting, Career Planning, and Budgeting

Chapter Preview Setting short-term and long-term goals Establishing a career plan Developing and implementing a budget Monitoring and controlling expenses Understanding your personal money attitudes and how they affect budgeting

…applying the planning process

Where Does This Fit in Your Comprehensive Financial Plan? Establish a firm foundation: Evaluate your finances, acquire tools and skills, set goals, develop a budget (Chapters 1 - 4) Secure basic needs: Liquidity, consumer purchases and credit decisions, insurance, employee benefits (Chapters 5-10) Build wealth: Save and invest to meet short-term and long-term goals (Chapters 11-15) Protection: Plan for death and incapacity (Chapters 16-17)

Short-term and Long-term Goals If you do not have goals, you are less likely to achieve them. The most effective people are those who regularly set goals and develop strategies for accomplishing them. Goals should be specific and measurable.

Steps to Setting Goals 1. Make a wish list. 2. Prioritize your list. 3. Break big goals into smaller steps. 4. Re-evaluate regularly.

Why Is Career Planning Important? Most personal financial goals cost money. Your earning potential is therefore integrally related to your ability to achieve your goals. You can think of education as an investment in your human capital—the present value of your future earnings potential This is probably your most valuable asset.

Steps in Career Planning Identify your abilities and interests. If you choose a career that’s compatible with your intrinsic interests, then you will be happier and more successful. Identify career paths that fit. Evaluate the costs, benefits, and risks. Research employment trends: population aging, growth industries and sectors, globalization Prepare yourself for the job market.

Developing a Budget What is a budget? A plan for spending and saving your money in the future so that you can achieve your financial goals. Steps in the budgeting process Forecasting Implementing Monitoring Evaluating

How to Forecast Income and Expenditures Determine the period the budget will cover. Monthly or annual in most cases Set up a record-keeping format Excel spreadsheet or hand-written ledger Business supply stores have various budget aids Begin with current cash flow statement Assume reasonable increases for variable income and expenses.

Example: Danelle Washington Cash Inflows 2004 Salary9,500 Student Loan6,000 Scholarship1,300 Gifts 200 Total 17,000 Cash Inflows 2005 Salary28,000 Gifts 250 Total 28,250

Example: Danelle Washington Cash Outflows 2004 Taxes 850 Groceries2,050 Housing/utilities 4,560 Car2,310 Credit cards1,500 Insurance/med.1,500 Education4,000 Other2,120 Total 18,890 Cash Outflows 2005 Taxes3,000 Groceries 2,500 Housing/utilities6,000 Car 4,300 Credit cards1,500 Insurance/med.1,500 Student loan1,800 Other 3,000 Total 23,600

Example: Danelle Washington Cash Inflows17,00028,250 Cash Outflows18,89023,600 Net Cash Flow-1,890 4,650 Based on this forecast, Danelle estimates she can save about $4,650/12 = $387 per month.

Tracking Budget Variances Objective Stop small cash leakages. Ensure that large irregular cash flows do not cause financial hardship. How to do this Create a budget tracking worksheet to see how well you stay within your forecast expenditure amounts.

Example of Budget Tracking Worksheet CASH INFLOWS Take-home pay JANUARY Forecast 2,100 JANUARY Actual BUDGET VARIANCE CASH OUTFLOWS Gifts Housing/utilities Car Credit cards Insurance/med Student loan Other

Money Attitudes and Budgeting Couples with different attitudes toward budgeting may experience conflict. You’ve been brown-bagging your lunch in order to save $25 a week for your vacation fund. Your spouse buys a $200 power tool that he doesn’t really need, without consulting you. Before combining household finances, it’s important to discuss these issues.

How to Households Spend?

Family Finance Issues Who pays the bills and makes decisions? Should each person have separate funds? When does an expenditure require joint approval? How will you approach gift giving? Who pays for debt that precedes the marriage? Who pays for expenses associated with children from previous marriage? Should you have a prenuptial?