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Chapter
© 2010 South-Western, Cengage Learning
Budgets andFinancial Records
8.18.1 Budgeting and Planning
8
© 2010 South-Western, Cengage Learning
Budgeting – Financial Planning
SLIDE 2
Chapter 8
4 things you do with your $
1- save2- spend3- donate4- invest
© 2010 South-Western, Cengage Learning
Financial Values, Goals and Strategies
1. After you Identify your financial values, goals, and strategies create a budget.
2. Evaluate your financial strength and progress using financial ratios.
3. Maintain the financial records necessary for managing your personal finances.
4. Outline and work toward achieving your financial goals through budgeting.
SLIDE 3
Chapter 8
© 2010 South-Western, Cengage Learning
Financial Planning: Managing income and wealth continuously through life to meet financial goals.
SLIDE 4
Chapter 8
© 2010 South-Western, Cengage Learning
Copyright ©2004 Pearson Education, Inc. All rights reserved.
1-5
Definitions
Personal finance: the process of planning your spending, financing, and investing so as to optimize your financial situation
Personal financial plan: a plan that specifies your financial goals and describes the spending, financing, and investing plans that are intended to achieve those goals
© 2010 South-Western, Cengage Learning
Copyright ©2004 Pearson Education, Inc. All rights reserved.
1-6
Definitions
Opportunity cost: what you give up as a result of a decision
© 2010 South-Western, Cengage Learning
Copyright ©2004 Pearson Education, Inc. All rights reserved.
1-7
How You Benefit From An Understanding of Personal Finance
Make your own financial decisionsEvery spending decision has an
opportunity cost
Judge the advice of financial advisorsMake informed decisions
Become a financial advisorMany career opportunities available
© 2010 South-Western, Cengage Learning
Copyright ©2004 Pearson Education, Inc. All rights reserved.
1-8
Components of a Financial Plan
Budgeting and tax planning
Managing your liquidity
Financing your large purchases
Protecting your assets and income (insurance)
Investing your money
Planning your retirement and estate
© 2010 South-Western, Cengage Learning
Copyright ©2004 Pearson Education, Inc. All rights reserved.
1-9
Budgeting and Tax Planning
Exhibit 1.1: How a Budget Affects Savings
© 2010 South-Western, Cengage Learning
Copyright ©2004 Pearson Education, Inc. All rights reserved.
1-10
A Plan to Manage Your Liquidity
Liquidity: access to funds to cover any short-term cash deficiencies
Money management: decisions regarding how much money to retain in a liquid form and how to allocate the funds among short-term investment instruments
© 2010 South-Western, Cengage Learning
Copyright ©2004 Pearson Education, Inc. All rights reserved.
1-11
A Plan to Manage Your Liquidity
Credit management: decisions regarding
how much credit to obtain to support your
spending and which sources of credit to
use
© 2010 South-Western, Cengage Learning
1-12
Managing Your Liquidity
Exhibit 1.2: Managing Your Liquidity
© 2010 South-Western, Cengage Learning
Copyright ©2004 Pearson Education, Inc. All rights reserved.
1-13
A Plan for Your Financing
Loans often needed for large expendituresCollege tuition, car, house
Managing loansHow much can you afford to borrow?
Determining maturity of the loan
Selecting a loan with a competitive interest rate
© 2010 South-Western, Cengage Learning
Copyright ©2004 Pearson Education, Inc. All rights reserved.
1-14
Financing Your Large Purchases
Exhibit 1.3: Financing Process
© 2010 South-Western, Cengage Learning
Copyright ©2004 Pearson Education, Inc. All rights reserved.
1-15
A Plan for Your Investing
Funds not needed for liquidity can be invested
Stocks, bonds, mutual funds, real estate
All investments have some level of risk
Risk: uncertainty surrounding the potential return on an investment
© 2010 South-Western, Cengage Learning
Copyright ©2004 Pearson Education, Inc. All rights reserved.
1-16
A Plan for Your Retirement and Estate This includes insurance planning, retirement
planning, and estate planning
Retirement planning: determining how much money should be set aside each year for retirement and how those funds should be invested
Estate planning: determining how your wealth will be distributed before or upon your death
© 2010 South-Western, Cengage Learning
Copyright ©2004 Pearson Education, Inc. All rights reserved.
1-17
Exhibit 1.4: Components of Your Financial Plan
Components of Your Financial Plan
© 2010 South-Western, Cengage Learning
Copyright ©2004 Pearson Education, Inc. All rights reserved.
1-18
How Financial Planning Relates to Cash Flow
Exhibit 1.6: How Financial Planning Affects Your Cash Flows
© 2010 South-Western, Cengage Learning
Copyright ©2004 Pearson Education, Inc. All rights reserved.
1-19
Integrating Key Concepts
© 2010 South-Western, Cengage Learning
Copyright ©Houghton Mifflin Company. All rights reserved.
3- 20
Financial Values, Goals, and StrategiesValues define your financial success.
Financial goals follow from values.
Financial Goals: Specific objectives to be attained through financial planning and management efforts.
© 2010 South-Western, Cengage Learning
Copyright ©Houghton Mifflin Company. All rights reserved.
3- 21
Financial Values, Goals, and StrategiesFinancial strategies guide your financial
success.
© 2010 South-Western, Cengage Learning SLIDE 22
Chapter 8
Lesson 8.1 Budgeting and Planning
GOALSExplain the purpose of financial planning
and prepare a personal budget.Explain the need for and create a net
worth statement and a personal property inventory.
© 2010 South-Western, Cengage Learning SLIDE 23
Chapter 8
Financial Planning Basics
Planning, budgeting, and keeping good records provide the road map that leads to financial security.
© 2010 South-Western, Cengage Learning
Copyright ©Houghton Mifflin Company. All rights reserved.
3- 24
Financial Record KeepingFinancial record keeping saves time
and makes you money.
Financial Records: Documents that evidence financial transactions.
© 2010 South-Western, Cengage Learning
Copyright ©Houghton Mifflin Company. All rights reserved.
3- 25
Budgeting
Budget: A paper or electronic document used to record both planned and actual income and expenditures over a period of time.
© 2010 South-Western, Cengage Learning
Copyright ©Houghton Mifflin Company. All rights reserved.
3- 26
Budgeting
Rules for successful budgeting:1. Keep it simple.
2. Make it personal.
3. Keep it flexible.
4. Be positive.
© 2010 South-Western, Cengage Learning SLIDE 27
Chapter 8
Getting Started
Income and expensesGross incomeDisposable income
Financial planA financial plan is a set of goals for
spending, saving, and investing the money your receive
Resources and obligations
© 2010 South-Western, Cengage Learning SLIDE 28
Chapter 8
Visualizing Your Future
What comes in and how it goes outChanges you could make
© 2010 South-Western, Cengage Learning SLIDE 29
Chapter 8
Preparing a Budget
A budget is a spending and saving plan based on your expected income and expenses. Money coming in (earnings plus borrowing) must
equal money going out (spending plus saving). The budget must balance.
A budget helps you plan your spending and saving so that you won’t have to borrow money or use credit to meet your daily needs.
© 2010 South-Western, Cengage Learning SLIDE 30
Chapter 8
Steps in Preparing a Budget
Estimate your income.Estimate your expenses.Decide how much to save.Balance your budget.
© 2010 South-Western, Cengage Learning SLIDE 31
Chapter 8
Evan Anderson—Budget for September
Income Expenses
Part-time job $320 Daily lunches $ 80
Allowance 20 Supplies 20
Birthday gift 40 Clothes 40
Total Income $380 Entertainment 140
Total expenses $280
Savings
Credit union account $100
Total expenses plus savings
$380
Simple Budget
The budget balances.
© 2010 South-Western, Cengage Learning SLIDE 32
Chapter 8
Monthly Budget
Fixed expenses are costs that do not change from month to month.
Variable expenses are costs that vary in amount and type, depending on the choices you make.
© 2010 South-Western, Cengage Learning SLIDE 33
Chapter 8
Personal Records
Good personal records makes budgeting and long-range planning easier.
Your records also make it easier to prepare income tax returns, credit applications, and other financial forms.
You should keep five types of personal records: Income and expenses records Net worth statement Personal property inventory Tax records Other miscellaneous documents
© 2010 South-Western, Cengage Learning SLIDE 34
Chapter 8
Income and Expenses Records
Examples of income recordsW-2 forms Statements from banksStatements from investment companies
Examples of income records Receipts listing charitable contributionsMedical billsReceipts for work-related expenses
© 2010 South-Western, Cengage Learning SLIDE 35
Chapter 8
Net Worth Statement
A net worth statement shows a person’s net worth based on his or her assets and liabilities.
Assets are items of value that a person owns. Money or debts you owe to others are called
liabilities. When you subtract your liabilities from your
assets, the difference is known as net worth.
Assets – Liabilities = Net worth
© 2010 South-Western, Cengage Learning SLIDE 36
Chapter 8
Anisa Newkirk
January 1, 20—
Assets Liabilities
Checking account $500 Loan on car $1,800
Savings account 800 Loan from parents 100
Car value 3,000 Total liabilities $1,900
Personal property 5,000 Net Worth
Total assets $9,300 Assets minus liabilities $7,400
Total liabilities and net worth $9,300
Net Worth Statement
These two numbers must be the same.
© 2010 South-Western, Cengage Learning SLIDE 37
Chapter 8
Personal Property Inventory
A personal property inventory is a list of the valuable items you own, along with their purchase prices and approximate current values.
Personal property includes anything of value inside your home—clothing, furniture, appliances, and so forth.
© 2010 South-Western, Cengage Learning SLIDE 38
Chapter 8
Personal Property InventoryAnisa Newkirk: January 2, 20—
ItemYear
PurchasedPurchase
PriceApproximate Current Value
Sphinx XTL DVD Player with big-screen TV 2008 $ 3,200 $1,300
Bedroom furniture (bed, dresser, lamp, clock) 2006 2,000 1,200
Clothing, jewelry ------ 3,000 500
MBD motor bike 2005 1,800 1,000
CD collection, CD burner, digital camera, scanner 2006 2,000 1,000
$12,000 $5,000
(continued)
© 2010 South-Western, Cengage Learning SLIDE 39
Chapter 8
Tax Records
All taxpayers should keep copies of their tax records for at least three years after they file their tax return.
Tax records include the tax return itself (a copy of the signed form), W-2 forms, and other receipts verifying income and expenses listed on each return.
Keep your tax records in a safe place in case of an audit.
© 2010 South-Western, Cengage Learning SLIDE 40
Chapter 8
Other Miscellaneous Documents
Lists of credit card numbersCar titlesInsurance policiesBirth certificatesMarriage certificatesPassports
© 2010 South-Western, Cengage Learning
1-41
Financial Planning Online: Financial Planning Tools for You
Go to http://finance.yahoo.com
This website provides much information and many tools that can be used for all aspects of financial planning.
It also provides information for creating retirement plans and wills.