Personal Finance: An Overview C. P. Financial Literacy

Personal Finance:An Overview

C. P. Financial Literacy

Objectives

• Prepare a budget tailored to income and needs.

• Prepare cash flow and net worth statements.

• Plan family finances for different stages in the life cycle.

• Give examples of economic, demographic, cultural, and technological factors that can impact financial planning.

continuedC. P. Financial Literacy

Objectives

• Explain ways to deal with a financial crisis.

• Identify important financial and legal documents to keep on hand.


Preparing Financial Statements

• Financial planning enables you to– reach important goals– achieve a sense of financial security

for life

• Financial security is the ability to meet essential needs without taking on more debt than you can repay



• Financial literacy is – having a basic understanding of

knowledge and skills needed to manage financial resources

– being aware of and knowledgeable about financial management options

– feeling secure in your ability to make your resources work for you



• Financial statements include– budget– cash flow statement– net worth statement


Tailoring a Budget to Income and Needs

• A budget helps you manage– income and spending– day-to-day expenses


Creating a basic budget involves these seven steps:

1. Establish Financial Goals2. Estimate and Total Your Income3. Estimate and Total Your Expenses4. Analyze Current Income and

Spending5. Prepare a Trial Budget6. Put Your Budget into Action7. Evaluate Your Budget Periodically


1. Establish Financial Goals• List your financial goals• Including Short-, Medium-, and Long-

Term Goals.– Short-Term Goals may include buying a dress for

Prom or a new bathing suit for summer. (within a few months)

– Medium-Term Goals may include going on a camping trip next summer with friends. (within a few years)

– Long-Term Goals may include buying a house. (planning for many years usually 5 or more)


1. Establish Financial Goals• Your goals will change over time;

the following chart helps you see the difference between each type of financial goals.


2. Estimate and Total Your Income

• Period is how often you receive most of your money, for example: weekly, biweekly, or monthly.

•Income is any form of money you receive, such as an allowance, a paycheck, and gains from an investment.


2. Estimate and Total Your Income

• Determine a budget period• Estimate income from each source• Total the estimated income


3. Estimate and Total Your Expenses

• Fixed expenses – must be paid each budget period– are often the same or nearly the

same amount from month to month– include payments for rent,

mortgage, tuition, insurance premiums, and auto and other loans



• Variable expenses – can change from month to month,

both in amount and time to pay– can often be pared down or cut– include payments for food, clothing,

medical expenses, discretionary expenses



• Use a form to estimate and total expenses


Building Savings into Your Budget

• Build savings into a budget for – unexpected emergencies: medical

expense, car repair, a possible period of unemployment

– medium- and long-term goals– investments to improve your

financial circumstances


Charitable Giving as an Expense

• Budget for philanthropy by giving to reputable charities

• Philanthropy is the act of giving money, goods, or services for the good of others.

• Making donations may lower taxes


4. Analyze Current Income and Spending

• Subtract expenses from income• If the number is positive, you

have money left over for goals• If the number is 0 or negative,

find ways to increase income or cut expenses



• Ways to increase income:– Handle more responsibilities at

home to possibly increase your allowance

– Get a part-time job – If you work, negotiate a raise or

increased hours



• Ways to reduce spending:– Reduce or cut discretionary

expenses– Reduce fixed and variable expenses– Cut expenses unrelated to goals and

priorities


5. Prepare a Trial Budget • Use goals, income, and expenses• Use estimated expenses


6. Put Your Budget into Action

• Fill in actual amounts for income and expenses

• If actual amounts exceed budgeted amounts, identify the cause

• Revise budget using actual costs • Study budget before making

financial decisions


7. Evaluate Your Budget Periodically

• Is your budget working? • Are you reaching important goals

and setting new ones?• Are you controlling your spending? • Has your income or spending pattern

changed? • Do life changes call for adjustments?


Preparing a Cash Flow Statement

• Cash Flow Statement – a summary of the amount of money received as well as the amount paid out for goods and services during a specific period.

• A cash flow statement is also called an income and expense statement.



• Shows real income and spending

• Inflow is income; outflow is expenses

• Prepare at end of budget period



• By recording income and expenses, you get a good picture of your spending patterns


Preparing a Net Worth Statement

• Net worth = assets – liabilities– Positive net worth lets you meet

your financial obligations and goals, and accumulate wealth

– Negative net worth can be eliminated by reducing expenses or increasing income


Preparing a Net Worth Statement

• This measures your financial standing at a specific point in time


Assets

• Liquid assets are easily converted to cash– Cash, money in savings

• Investment assets are invested funds set aside for long-term goals– Stocks, bonds

• Use assets are durable goods – Auto, furniture


Liabilities• Liability is a financial obligation that

you currently owe or will owe in the future.

• Current liabilities are items that must be paid soon, usually within a year– Medical bill, taxes, credit card bill

• Long-term liabilities are obligations paid over a longer period of time– Mortgage, student loan


Planning Family Finances

• Factors affecting adult budgeting decisions are– age– stage in the family life cycle

• Families can skip, overlap, or repeat family life cycle stages


Planning Family Finances

• Family life cycle stages– Beginning – Expanding – Developing – Launching – Aging


Beginning Stage

• Move away from parents, obtain higher education, marry, start jobs and careers

• Expenses: education, college loans, home down payment, auto, home furnishings, insurance


Expanding Stage

• Job advancement, increasing income, increasing responsibilities, childbirth, and parenting

• Expenses: child-related costs, increased insurance protection, increased housing expenses


Developing Stage

• Parenting school-age children and adolescents, climbing income and expenses

• Expenses: child- and school-related costs, second car, retirement planning


Launching Stage

• Departure of children from home, peaking earnings, aging parents

• Expenses: college, retirement savings, costs of caring for aging parents


In Your Opinion

• Which stages of the family life cycle can you recognize in your own family’s history? Were any stages skipped or repeated?


Aging Stage

• Retirement, earnings drop, “empty nest”, birth of grandchildren, caring for elderly parents, estate planning

• Expenses: medical costs, insurance, travel, costs of caring for elderly parents

• Security at this stage depends on earlier planning


Variations in the Cycle

• Singles and childless couples skip the expanding, developing, and launching stages

• Single parents who remarry may repeat stages with new spouses





• Single-parent female-headed families often have less income, less savings

• After separation and divorce, income often falls while expenses increase


Financial Decisions in a Changing World

• Other forces impacting financial decisions:– Economic factors– Social factors– Cultural factors– Technology factors

• Financial planning and saving help people cope with economic challenges


The Economy and Your Finances

• During good economic times,– consumers and business owners are

optimistic– most people who want jobs can find

them– income and savings rise– people save and invest for the future



• During a recession,– people are

pessimistic– people fear or

experience job loss

– incomes stagnate– people spend less;

save more



• During inflation,– prices rise faster than income– money buys less – people cannot buy or save as much


Demographics and Your Finances

• Demographic trends that impact the economy and people’s finances– An aging population – Changing job market– Rising educational requirements for

jobs – More young adults living with their

parents


Culture and Your Finances

• Greater ethnic, cultural, religious diversity, especially in urban areas

• More relationships and marriages between people of different backgrounds

• Cultural and ethnic traditions can affect financial decisions


Technology and Your Finances

• New technology can have financial impacts

• Example: medical advances led to longer lives and the need for more savings



• Positive impacts of advanced technology:– New markets in which to buy and

sell– Wider variety of goods and services– Less expensive goods and services– New jobs– New money management tools – Easy access to information



• Problems created by advanced technology:– Offshore outsourcing—businesses

move factories and jobs to other countries to benefit from cheap labor and weaker government regulations

– American workers competing for jobs with lower-paid workers may lose jobs, benefits, or take pay cuts


Working Through Financial Problems

• To minimize a financial crisis,– get the best education and job training

possible– keep debt under control– create emergency fund; save regularly– avoid taking excess risks– get insurance protection– discuss finances with household

members


Unexpected Crisis

• Some crises cannot be anticipated or prepared for in advance


Unexpected Crisis

• Causes of a family crisis include– job loss– separation and divorce– death– disability– serious illness– natural disaster


Unexpected Crisis

• To cope with a family crisis– discuss problem with adult members

of household– list your resources– minimize negative financial

consequences– get the help of professionals


Keeping Important Documents

• Keep documents and papers necessary for financial and legal transactions

• Develop a recordkeeping system


Key Lists to Keep Current and Available

• Savings and checking accounts• Credit card and charge accounts• PINs (personal identification

numbers)• Securities and investment records• Wills and trusts• Insurance policies• Loan contracts, including mortgage


Key Lists to Keep Current and Available

• Tax records• Property deeds and titles• Pension plans and employee benefits

documents• Social Security and Medicare records• Property, possessions, and valuables• Product information and warranties• Instructions for management of your

affairs


Scheduling Bills

• Set aside a specific place to put bills as they arrive

• If you don’t receive an expected bill, contact the business right away

• Keep track of due dates • Set a special time for bill paying• Pay bills in the order they are due


Keeping Budgeting Records

• Your files should contain records related to income, spending, and savings

• Keep receipts for – fixed expenses– purchases you may want to return– purchases that may need warranty

service


Central Ideas of the Chapter

• Enjoying financial security throughout life is an achievable goal.

• Budgets and other financial planning tools can help people achieve financial security.


Glossary of Key Terms

• budget. A spending plan for the use of money over time based on goals and expected income.

• cash flow statement. A summary of the amount of money received as well as the amount paid out for goods and services during a specific period.

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• demographics. The statistical characteristics of the population.

• expense. The cost of a good or service a person buys.

• family crisis. A major problem that impacts the future of the family and its lifestyle.

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• family life cycle. The stages of change a family passes through from formation to aging.

• financial literacy. The understanding of the basic knowledge and skills needed to manage financial resources.

• fixed expense. A set cost that must be paid each budged period.

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• income. Any form of money a person receives from various sources.

• liability. A financial obligation that a person currently owes or will owe in the future.

• net worth. The difference between what a person owns and owes.

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• net worth statement. A written record of a person’s current financial situation.

• philanthropy. The act of giving money, goods, or services for the good of others.

• recordkeeping. The process of setting up and maintaining an organized system for your financial affairs.

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• variable expense. A cost that changes both in the amount and time it must be paid.

• wealth. An abundance of assets that are accumulated over time.

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