Transcript Chapter 6
© Goodheart-Willcox Co., Inc. 6 Personal Finance: An Overview 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. continued 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 continued Preparing Financial Statements • 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 continued Preparing Financial Statements • 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 seven steps 1. Establish Financial Goals • List your financial goals • Your goals will change over time 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 continued 3. Estimate and Total Your Expenses • 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 continued 3. Estimate and Total Your 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 • 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 continued 4. Analyze Current Income and Spending • 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 continued 4. Analyze Current Income and Spending • 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 • Shows real income and spending • Inflow is income; outflow is expenses • Prepare at end of budget period continued Preparing a Cash Flow Statement • 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 continued 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 • 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 continued 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 continued Variations in the Cycle continued Variations in the Cycle • 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 continued The Economy and Your Finances • During a recession, – people are pessimistic – people fear or experience job loss – incomes stagnate – people spend less; save more continued The Economy and Your Finances • 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 continued Technology and Your Finances • 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 continued Technology and Your Finances • 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 continued Unexpected Crisis • Causes of a family crisis include – – – – – – job loss separation and divorce death disability serious illness natural disaster continued 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 continued 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. Back Glossary of Key Terms Back • 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. Glossary of Key Terms Back • 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. Glossary of Key Terms Back • 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. Glossary of Key Terms • 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. Back Glossary of Key Terms • 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. Back