Essential Standard 8.0Apply procedures for managing personal finance.

Objective 8.02 Students will understand personal financial planning

ESSENTIAL QUESTIONS

• What are the steps in financial planning?• What are the benefits of financial planning?• What are the basic types of financial

statements, and how is each used?• How do income and expense statements

compare with spending plans?• How do I utilize a spending plan?

What is Financial Planning?

• Used for planning ways to reach financial goals

• A continual, cyclical process of tracking, then anticipating, income and expenses

Make financial planning your road map on a trip to financial success!

Where are you going? (goal or destination)

What road will you use to get there? (I-85) Will you have changes along the way?

(Take a scenic byway or visit a state park) Will you move faster through some roads

than on others? (Rural or interstate) Will there be unexpected detours? (bridge

out) What tools might you need? (to change lat

tire) Where will you stop to get fuel? Where will you stop to eat? Where will you stay overnight?

Brainstorm Income Items

Income Items

Earned Income• Wages-hourly• Tips, Gratuity• Salary• Commission• Production/piece rate• Combination • Contract labor• Bonuses

Other Income Sources • Interest

– from savings

• Dividends– from stock

• Lottery/gambling– usually an expense!

• Tax refund– based on past overpayment

• Loans– Must be repaid

• Gifts• Inheritance

– wills

• Scholarships

Brainstorm Expense Items

Expense Items

• Housing– Rent/Mortgage– Maintenance – Utilities –gas, electricity,

garbage – Homeowner’s insurance – Furniture, appliances,

kitchen equipment

• Taxes– Income– Property– Sales

• Food– Restaurant, Grocery store

• Insurance – Health – Life – Disability

• Transportation– Auto/truck payments, lease– Fuel– Tires, oil, maintenance– Insurance– Public transport, parking

• Other Expenses– Entertainment– Movies, vacation, games– Cleaning & health supplies

What are the Steps in Financial Planning?

1. Identify financial goals

2. Prepare a balance sheet showing what you own and what you owe

3. Track income and expenditures for a set time period, usually a month, and record in an income and expense statement

4. Analyze amount of money earned and how it was spent

5. Prepare a spending plan (budget)with anticipated income and expenses to meet financial goals during the next time period

6. At the end of the time period, revise financial goals, if needed, and use the actual income and expenses to again analyze income and how it was spent

7. Prepare your next spending plan

Review: What are the Steps in Financial Planning?

What are Benefits of Financial Planning?

1. Learn to live “within one’s means”

2. Helps avoid financial difficulties

3. Have resources for one’s desired standard of living

4. Reduces the need to use credit

5. Increases sense of security

6. Lessens anxiety about money matters

7. Stay in control of finances

8. Become financially independent

Financial Statements• Three types of financial

statements, in bold on the previous slide, are needed for financial planning.

• Balance Sheet

• Income and Expense Statement

• Spending Plan– aka Budget

Balance Sheet• Shows assets, liabilities, and net worth of an individual, family,

business, or government entity

– Assets• things of value that you own

– Liabilities• Debts owed

– Owners Equity/Net Worth• Formula: Assets-Liabilities = Owner’s Equity/Net Worth• OE & NW are two names for the same thing!

Formula : Assets - Liabilities = Net Worth• Reason used: need to know financial status in order to plan finances

Sample Balance Sheet BALANCE SHEET*

Date

ASSETS LIABILITIES

Cash Credit card balance

Savings account Car Loan balance

Vehicle College Loan balance

Electronic Equipment   Other:

Total assets Total liabilities

Owner's equity (Net Worth)

(Total assets-Total liabilities)

•Both sides of the balance sheet must be equal •Assets = Liabilities + Owner’s Equity

Who is Wealthier?

Juanita – earns $35,000 per year

Assets

Home $60,000Retirement $24,000Automobile $8,000

Total Assets $92,000LiabilitiesCollege loan $6,000Mortgage $35,000Total Liabilities $41,000

Net Worth $51,000

Alexis – earns $100,000 per year

AssetsHome $75,000Retirement $35,000Automobile $8,000Total Assets $118,000LiabilitiesCollege loan $10,000Automobile loan $4,000Credit card debt $20,000Mortgage $65,000Total Liabilities $99,000Net Worth $19,000

Answer on your notes page before going to next slide.

Elements of Spending Plans• Income

– money earned from wages, salaries, tips, withdrawals from savings and investments, interest earnings, scholarships, sales of properties, and gifts

• Expenses– due by a specified date, often

agreed upon in a contract; difficult to change in a short time

– Flexible expenses---not due by a specified date; usually these are easier than fixed expenses to reduce or eliminate

Income – Expenses =Net Gain/Net Loss

• Net gain -when one has more income than expenses, the difference between the two– aka net profit/surplus

• Net loss -when one has more expenses than income, the difference between the two– aka net deficit

Income StatementShows income (revenue) and expenses (expenditures) for a family or

businessFormula: Income – Expenses = Profit/Loss• Income

• Total earnings received• Includes wages, salary, tips, commission, gifts, bonuses,

interest, dividends• Expenses

• Any expenditure; anything that costs money • Includes utilities, food, entertainment, transportation costs,

health care, shelter, clothing, taxes– IF Expenses > Income = LOSS– IF Income > Expenses = PROFIT

• Reason used: need to know financial status in order to plan finances

Sample Income

Statement

Elana Rocera

Income Statement

For Month Ending November 30, 20xx

Income

Salary $3,200

Commission $1,050

Interest $45

Dividends $35

Total Income $4,330

Expenses

Utilities $200

Car payment $350

Car maintenance $250

401-K $800

Insurance $750

Clothing $200

Entertainment 0

Food $300

Total expenses $2,850

Net Surplus/Deficit $1,480

Is there a Surplus or a Deficit?

What is the formula to calculate surplus or a Deficit?

What could Elana do with this information?

Answer on your notes page before going to next slide.

Sample Income StatementThe Clothing Store, Inc.

Income StatementJuly 31, 20XX

RevenueSales 38,000Interest earned 500Total Revenue $38,500

ExpensesSelling 1,000Marketing 1,500Wage payable 15,000Income taxes 3,027Mortgage 1,110Loan expense 12,355Deferred income taxes 1,485Credit Card 1,500Total Expenses $36,977Net Income $1,523

Income Items

Expenditure Items

Answer on your notes page before going to next slide.

List 5 income items an individual might have.

List 5 expense items a family might have.

Profit/Surplus or Loss/Deficit

Essential Question: What is the basic financial (profit) formula? ______________ - _______________ = Profit/LossBusiness 1Taylor’s Grocery Store revenue for this year is $91,750. The owner noticed an increase of

$3,000 in the store’s expenses. She determined that total expenses equal $81,000? Will this business net a profit or loss? _______ How much profit or loss? ________

Business 2Harry’s Shoe Store has noticed a significant increase of revenue of $123,000. The

manager has also determined that the total expenses equal to $128,000. Will this business net a profit or loss? _______ How much profit or loss? ________

Business 3Malinda’s Auto Dealership of Imported Cars made $895,000 in revenue. The accountant

determined total expenses equal to $598,000. Will business net a profit or loss? _____ How much profit or loss? ________

Answer questions on your notes page before going to next page!

Key Businesses 1-3Business 1Taylor’s Grocery Store revenue for this year is $91,750. The store manager noticed an

increase of $3,000 in the store’s expenses. She has determined that the total expenses equal to $81,000? Will this business net a profit or loss? Profit

• How much of a profit or loss? +$10,750 ( 91750-81000) Business 2Harry’s Shoe Store has noticed a significant increase of revenue of $123,000. The

manager has also determined that the total expenses equal to $128,000. Will this business net a profit or loss? Loss How much of a profit or loss? -$5,000 ( 123000-128000)

Business 3Malinda’s Auto Dealership of Imported Cars made $895,000 in revenue. The manager

has determined that the total expenses equal to $598,000. Will this business net a profit or loss? Profit How much of a profit or loss? +$297,000 (895000 – 598000)

Did you get the right answers before you looked?

Profit/Surplus or Loss/Deficit Family 4The Breck family had income of $71,250 this year. The family spent $81,000. 1. How much profit or loss? ________2. What will the Breck’s need to do next year?3. How do you think they took care of this financial situation in the short term?

Family 5Mr. Hennessee earned $72,000 and Mrs. Hennessee earned $44,000 last year. Their stock earned

$1000 in dividends. Mr. Hennessee totaled all expenses for the family equal to $109,000. 1. What is their total family income ? 2. How much is the surplus or deficit?

Family 6Last year Jimmy earned $54,000 in salary and commission @ 2% of $185,000 salesJimmy spent $45,987. 1. What is Jimmy’s total income? 2. How much Surplus or Deficit does Jimmy have? 3. What changes might Jimmy make to his budget (spending plan) because of this information?

Essential Question: Which accounts appear on an income statement?Answer on your notes page before going to next page!

Net Worth Activity Essential Question: What is the Net Worth Formula?_______________ - ________________ = Net Worth/Owner’s Equity

Scenario 1Taylor has assets of $189,750. Their total liabilities are $172,250. What is Taylor’s net worth?

Scenario 2• Harry Stevens has assets as follows: cash in bank $18,500, IBMstock $25,000,

vehicles $32,000, record collection $2,500 and artwork $1,000. Harry owes $12,500 to MasterCard, $21,750 for his mortgage. What is Harry’s net worth?

Scenario 3• Malinda has the following assets: cash $32,000, savings $15,000, car $13,000.

Malinda’s has the following liabilities: college loan $35,000, car loan $3,000, and Visa card $2400. What is her net worth?

• Essential Question: Which type of accounts appear on a balance sheet? Answer on your notes page before going to next page!

Income and Expense Statement

• A list of all income and expenses for a specified time period

• A historical type of record that serves as the basis for a spending plan

• Shows whether individual/family was able to live within their means

• Shows where income was spent

• Shows when expenses exceed income and areas of excess expense

• Shows if income was sufficient to meet expenditures

Criteria Income and Expense Statement

Spending plan

BUDGET

Time orientation

Past---a historical record of what was earned and spent

Future forecast---a projection of anticipated earnings and expenditures

Basic use Used as a foundation for planning one’s finances

Used to estimate finances for a future time period

Specific uses Shows if living within means Shows where money was

spent Shows when too much is being

spent on a certain category of expenses

Shows if additional income is needed to meet necessary expenses

Helps one live within means Helps plan where to spend

money Helps track income and

expenditures Reduces the likelihood of

having to use credit and go into debt

Where fits in financial planning

Is used to develop a spending plan

Becomes the income and expense statement at end of specified time period

Comparison of Income and Expense Statement with Spending Plan

Gumball Analogy

• Gumball machine represents components of the financial planning process

• Income - money earned– Gumballs going into the

machine– Wages from a job, allowance,

gifts, interest, dividends

Gumball Analogy • Expense - money spent • Money going out of the gumball

machine• Fixed expenses -may have a

fixed amount due each month and are contractual – Ex: rent, insurance, car payment

• Flexible expenses -can vary each month in the amount owed and are not contractual – Ex: food, auto fuel, entertainment

Gumball Analogy

• Income (money in)

• Net Worth (wealth)

• Flexible Expenses (money

out)

• Fixed Expenses (money out)

Always have more money coming in than out!Work towards building wealth!

Spending Plan

• Also known as “aka”- budget or financial plan

• A tool used to plan income and expenses for a future time period

• Used to track income and expenditures

• Used to evaluate spending at the end of a time period

Typical Spending Plan Pie Chart

30%

20%15%

7%

18%

10%

Housing

Transportation

Food

Insurance

Other

Saving andInvesting

Provides guidance when creating a spending plan

1. What variables may cause these percentages to be

different?2. How does the family life

cycle affect the percentages?

Answer on your notes page before going to next page!

Steps to Create a Personal Budget

1. Track your current income and expenses

2. Create personalized income & expense categories

3. Allocate money to each category

4. Implement and control 5. Evaluate & make

adjustments

Step 2– Creating Personalized Income and Expense

Categories

Step 1- Track Current Income and ExpensesStep 5– Evaluate and Make

Adjustments

Step 4– Implement and Control

Step 3– Allocate Money to Each

Category Answer on your notes page before going to next page!What does allocate mean?

Creating a Personal Budget

Step 1: Track your current income and expenses – Use income statement as your tool

• Estimate $ income & expense• Designate a time period• Be as accurate as possible• Be realistic• If you don’t know how much you spend,

– Carry a small notebook and write down everything you spend for a few weeks or

– Keep receipts and input into a cell phone

Step 1: Track Current Income and Expenses

Necessary to creating a realistic spending plan

What period of time will your spending plan include?

Usually concurrent with your payday

How much money am I earning?

Income

How much money am I spending?

Expenses

Payroll Deductions

• Taxes – Required by local, state, and federal governments– Provide public goods and services – Take out approximately 30% of an individual’s gross income

• Payroll deductions: • Federal Taxes (mandatory)• State Taxes (If applicable) • Federal Insurance Contribution Act (FICA tax) (mandatory)

– R S D HI• Retirement (depends upon the employer)• Health care benefits (depends upon the employer)• Other optional deductions

What are two items or services you use that are paid for by taxes?

Answer questions on your notes page before going to next page!

What does RSDHI stand for?What does mandatory mean?

Gross income vs. Net Income

• Total amount of money earned during a pay period (salary or hourly wage x hours worked)

Gross Incomeaka gross pay

• Taxes• Retirement• Health Benefits• Voluntary deductions

Payroll Deductions • Take home pay

(the amount of the paycheck)

Net Incomeaka net pay

Answer questions on your notes page before going to next page!

Question: Which of the above payroll deductions are mandatory?

Calculating Gross Income/Wages/Pay

Hourly wages• # of hours x regular rate of

pay= gross wages– 40 hours x $8.00=$320.00

• Overtime rate = 1.5 x regular rate of pay– 1.5 x $8.50 = $12.75 OT rateFair Labor Standards Act (FLSA)

regulates:Minimum wage, maximum

hours, child labor, minimum wage rate

ExampleCalculate gross wages for:

43 hours a week40 hours x $8.00=$320.00

regular pay3 x $12.75 = $38.25 OT wages Total gross wages = $358.25($320.00 + 38.25)

Calculate Commission Wages

• Commission rate x amount of sales= commission $ earned

• Zach sold $650,850 in the electronics department. He earns 5% commission on all sales.

• How much did Zach earn?

$650,850 X 5%$3254.25Practice:How much did Zach earn if

his commission rate is only 3%?Answer question on

your notes page before going to next page!

Practice Calculations• Alex earns 2%

commission on sales. His sales for this month were $760,550.

• What did Alex earn in commissions?

• Katie earns $10.40 per hour. Katie worked 43 hours this week?

• What are her regular wages?

• How much is her rate for overtime (OT)?

• What are her overtime wages?

• What are her total wages?

Answer questions on your notes page before going to next page!

Allocate $ to Each Category

30%

20%15%

7%

18%

10%

Housing

Transportation

Food

Insurance

Other

Saving andInvesting

Graphs can be easily created from spreadsheetPrograms. What are the other types of graphs?

Anticipated Expenses

• Housing 30%– Monthly rent/mortgage, utilities,

homeowners insurance, property taxes, maintenance, furnishings

• Transportation- 20%– Monthly payment/lease, license,

registration, vehicle insurance, maintenance, fuel, public transport fees, parking fees

• Food -15%– Food from grocery store, meals at

restaurants, snacks eaten out (coffees, treats), Party and entertainment foods, non-food kitchen supplies

• Insurance 7% – Arrangement between an individual

and an insurance company to protect the individual against risk

– Health- pays a portion of health care expenses if one is sick or injured

– Disability- provides financial support if an individual is injured and cannot work

– Life- provides financial support to an individual’s beneficiaries upon death

• Saving & Investing-10%– Keep 3-6 months $ liquid (cash

available)• Other – 18%

– Gifts, vacations, contributions, childcare, grooming, education, entertainment, medical costs, clothing, pet care, communication costs

Anticipated Expenses• Budgets are estimates of forecasted income/expense• Budgets must be flexible to adjust for change

Q: Why are we interested in the difference betweenanticipated amounts and actual spending/income?A: we will need to change the next budget period to reach our financial goals

Differences/Variances are easy to calculate usinga spreadsheet program! See next slide.

Variations in Budget CategoriesIncome Expenses

Anticipated Actual Difference Anticipated Actual Difference

(Cell 1) (Cell 2) (Cell 3) (Cell 4) (Cell 5) (Cell 6)

1. Noah expected to earn $300 wages at his part-time job. He received a A $.50 per hour raise. His gross wages were $325.

2. Steve budgeted $500 for transportation. When his transmission went badthe bill was $1150.

3. Joe budgeted $2300 in commission at his job. Due to the recession, his sales only generated $1950.

4. Todd and Noel celebrated his big promotion with a weekend in Vegas. They spent $2000, but had only budgeted $300 for entertainment.

The Costs Add Up

• Eating lunch out 5 days per week – $5-$10 daily– $1,300-$2,600 per year

• Daily sport drink– $2.00 daily– $730 per year

• Weekly date night at the movies with popcorn– $30 per week– $1,560 per year

• Daily Latte– $3.75 every day– $1,369 per year

Review: Which Items are Income?

Gift from family

Scholarships

Groceries

Utilities

Automobile registration

If an expense, which of these items are fixed/variable?

Eating out/Snacks

Internet bill

Wages

Paying Rent

Hobbies

Answer questions on your notes page before going to next page!

Spending Plan Template

• Everyone uses a different program to create a spending plan– Paper and pencil– Online software– Electronic programs such as Microsoft Excel and

Word• Must be something that an individual can

manage effectively

carmen's budget estimator

Check Register System

• Track expenditures in check register– Note beside check written- type of expenditure

• Advantage:– Process only by authorized signatures at the bank – Forged documents are not your legal responsibility

• Disadvantage– You can spend more money than is in your checkbook

• “Bounced check”, Not sufficient funds (NSF)• NSF charges from the bank $25-40 per item

Implement & Control• Confirmation of expense tracking is accurate

– Continued monitoring of spending helps to adjust spending to meet goals

• How can you monitor and control?– Envelope system– Check register system– Electronic spending plan system

Envelope System

• Put actual budget amount of cash from paycheck into envelope labeled for that purpose– Write actual withdrawals on envelope– Could also put receipts inside envelope

• Evaluate during month or at end• Disadvantage

– If theft occurs, no reimbursement for lost cash– Banks and credit cards have reimbursements options

• Advantage– You cannot spend $ not in envelope!

Electronic Spending Plans

• Computer spreadsheet programs– Specialized software available

• Use Online options, downloaded programs

– Excel style formulas help calculate costs• Disadvantage

– Only recording information after the fact– Does not keep you from spending

• Cash envelope system

• Advantage – Software Calculates totals for you– Can compare actual to estimated– Can create graphs

How will you keep track?

• Carry a small notebook to write down expenses?• Keep a check register showing expenditures?• Keep all receipts in folders or envelopes?• Use a debit card if your depository institution creates

spending reports for your account?• Input info into a cell phone application?• Use an Excel spreadsheet?• Purchase specialty budget software packages?

Must work for the individual! There is not one right method!

Evaluate & Make Adjustments • Review previous steps &

evaluate how actual compares to budget– surplus/deficit

• Adjust next time period for changes

• Use gumball analogy for income and expenses

1. Did I have money to pay bills?2. Was there money left over?3. Did I spend more than I earned?4. Can I increase my income?5. Can I reduce expenses?6. What do I need to change?

Net Gain or Net Loss?

• Net gain/profit/surplus- there is remaining money to either save, spend or invest

• Net loss/deficit - an individual is spending more money that he/she is earning and has to use credit (borrowed money) to meet their financial obligations

• A spending plan should have income and expense matching one another (reach zero)

Income Expenses Net gain or loss

WHAT IS THE LONG-TERM POSITIVE IMPACT OF A SPENDING PLAN?

To know where your money is going!To build long-term wealth!To create long-term financial security!

Who is in control of your finances?YOU ARE!