1. Financial Algebra © Cengage/South-Western Slide 1 PREPARE A BUDGET 10-1Utility Expenses 10-2Electronic Utilities 10-3Charting a Budget 10-4Cash Flow and Budgeting 10

2. Financial Algebra © Cengage/South-Western Slide 2 10-4 CASH FLOW AND BUDGETING Develop and interpret a cash flow chart. Develop and interpret a frequency budget plan. Develop and interpret a year-long expense budget plan. OBJECTIVES

3. Slide 3  cash flow analysis  cash flow  pro-rate  envelope accounting system  frequency budget plan  year-long expense budget plan  net worth  assets  liabilities  debt reduction plan  debt-to-income ratio Key Terms

4. Slide 4 How do you plan for expenses, reduce debt, and grow savings?  What types of modifications might a person make to their lifestyle based upon a budget?  How do you plan for your monthly expenses?

5. VOCABULARY, p. 509 Slide 5 Define and differentiate:  Income  Fixed Expenses  Variable Expenses  Savings  Cash Flow Analysis  Cash Flow  Pro Rate

6. Slide 6 Example 1 Dave and Joan want to chart their monthly cash flow. Create a spreadsheet that will help them keep track of their income and expenses for the month. Document monthly amounts in these broad categories:  Income —all after tax sources of revenue  Fixed Expenses —same from month to month  Variable Expenses —change from month to month  Savings —should be considered a “bill” you pay yourself; between 5-20%

7. Slide 7 Example 1 Cash Flow Analysis — Documents current income and spending habits NOT a budget Details how much money comes in and how much goes out over a fixed period of time Cash Flow —the movement of your money, like a liquid Pro Rate— divide annual expenses proportionally between another pay period

8. Slide 8 Suppose that the cash flow had been − $160. What advice might you give to Dave and Joan? CHECK YOUR UNDERSTANDING

9. Slide 9 Example 2 The Consumer Credit Counseling Service suggests that transportation expenses be between 6−20% of your budget and savings be between 5−20%. Using Dave and Joan’s cash flow analysis, determine whether they remain within the guidelines. Total TP = $469 469/6100 = 0.077 = 7.7% > 6% Total savings = $300 300/6100 = 0.049 = 4.9% < 5% 

10. Slide 10 Dave and Joan want to include a section in their cash flow spreadsheet that will calculate the monthly percentage allocated to certain categories suggested by the Consumer Credit Counseling Service. Write the spreadsheet formula that will calculate the transportation percentage for the month. Total category amounts ÷ net income = category % CHECK YOUR UNDERSTANDING

11. Slide 11 #6 — non-monthly expenses #5 — % guideline comparison APPLICATIONS, pp. 518-519

12. Slide 12 Define and differentiate:  Envelope accounting system  Frequency budget plan  Year-long expense budget plan VOCABULARY, p.512

13. Slide 13  Envelope accounting system —a way to manage your money with real dollars and physical paper envelopes; after placing cash in different budget envelopes, you literally take out cash to pay for expenses  Frequency Budget Plan —shows a budget in terms of how often —what frequency—payments or credits are made  Year-long Expense Budget Plan —entries are placed according to which months payments are made, i.e. a schedule is built for when to pay each expected expense VOCABULARY, p.512

14. EXAMPLE 3 Create a frequency budget plan for Dave and Joan using their cash flow analysis from Example 1.

15. p. 513 Slide 15

16. Slide 16 The frequency budget, shown on the next slide, states that Dave and Joan have an annual surplus of $1,284.00. How does this relate to the monthly positive cash flow that was computed in Example 1? CHECK YOUR UNDERSTANDING

17. EXAMPLE 4 Construct a year-long expense budget spreadsheet using the cash flow data from Dave and Joan.

18. Slide 18 p. 515

19. Slide 19 Use the spreadsheet to create row 43 in which the totals for each month will be calculated. What formula would be used for January? What entries will appear for each of the months in this row if the same formula is applied to the remaining months? CHECK YOUR UNDERSTANDING

20. Slide 20 #7 #8 #10 #11 Applications, page 519

21. Slide 21 Define and differentiate:  Net Worth  Assets  Liabilities VOCABULARY

22. Slide 22 Define and differentiate:  Net Worth —a number that states your financial status; the difference between your assets and your liabilities; can be a positive or negative amount  Assets —what you own  Liabilities —what you owe VOCABULARY

23. Slide 23 EXAMPLE 5 Liam Brown is single, in his mid-twenties, and owns a condo in a big city. He has calculated the following assets and liabilities. Assets Current value of condo: $580,000 Current value of car (as listed in Kelley Blue Book): $17,000 Balance in checking account: $980 Combined balance in all savings accounts: $22,500 Current balance in retirement account: $24,800 Current value of computer: $2,900 Current value of collector bass guitar: $6,700 Current value of stocks/bonds: $18,300 Liabilities Remaining balance owed on home mortgage:$380,000 Remaining balance owed on student loans: $51,000 Combined credit card debt: $1,600 Calculate Liam’s net worth. Last year at this time, he calculated his net worth as $205,780. Compare both values. What do the changes mean? $673,180 $432,600

24. Slide 24 EXAMPLE 5 Liam Brown is single, in his mid-twenties, and owns a condo in a big city. He has calculated the following assets and liabilities. Assets673,180 Liabilities432,600 $240,580 240,580 – 205,780 = $34,800

25. Slide 25 What two general actions can Liam do to continue improving his net worth trend? Assets Current value of condo: $580,000 Current value of car (as listed in Kelley Blue Book): $17,000 Balance in checking account: $980 Combined balance in all savings accounts: $22,500 Current balance in retirement account: $24,800 Current value of computer: $2,900 Current value of collector bass guitar: $6,700 Current value of stocks/bonds: $18,300 Liabilities Remaining balance owed on home mortgage:$380,000 Remaining balance owed on student loans: $51,000 Combined credit card debt: $1,600 CHECK YOUR UNDERSTANDING

26. Slide 26 What specific action can Liam do to continue improving his net worth trend? Assets Current value of condo: $580,000 Current value of car (as listed in Kelley Blue Book): $17,000 Balance in checking account: $980 Combined balance in all savings accounts: $22,500 Current balance in retirement account: $24,800 Current value of computer: $2,900 Current value of collector bass guitar: $6,700 Current value of stocks/bonds: $18,300 Liabilities Remaining balance owed on home mortgage:$380,000 Remaining balance owed on student loans: $51,000 Combined credit card debt: $1,600 CHECK YOUR UNDERSTANDING

27. Slide 27 Tome’s monthly liabilities and assets are shown in the table. Total Liabilities:$8,300 Total Assets (debt):$3,400 Debt-to-income = debt = 3400 = 0.405 = 40.5% ratiopre-tax income8300 EXAMPLE 6

28. Slide 28 Tome anticipates that next year, his car and student loans will have been paid off and he will have received a 10% salary increase. If everything else remains the same, calculate that debt-to-income ratio. CHECK YOUR UNDERSTANDING +10%

29. Slide 29 #4 #12 APPLICATIONS, pp. 518-519

30. Slide 30  Vocabulary Words from Chapter 10.4 (See earlier slides) One problem each:  Create and explain a Cash Flow Statement (example 1)  Prorate expenses for Cash Flow Statement (example 1)  Determine if budget categories are meeting a percent allocation goal (example 2)  Create and explain a Frequency Budget (example 3)  Create and explain a Year-long Expense Budget (example 4)  Calculate Net Worth and Debt-to-Income ratio  Conduct Debt Reduction analysis FINAL EXAM PREP