Transcript Measuring Your Financial Health and Making a Plan

Enrichment Night
BYU 162nd Ward
Budgeting
(is a “good” word not a “bad” word)
and the Financial Crisis
November 13, 2008
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Abstract
Some think that budgeting is a bad word,
that it is something that is hard and
restrictive. I submit that budgeting is not
only a smart thing, but a critical part of
becoming financially self-reliant and
something we have all been commanded
to do. In addition, one of the reasons for
this financial crisis has been because of
our lack of financial discipline.
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Objectives
A. The Top 10 Reasons Why I Don’t
Budget
B. Understand Budgeting
C. Understand the Budgeting Process
D. Understand the Financial Crisis and
What You Should Do
E. Understand the Principles of Personal
Finance
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A. The Top 10 Reasons
Why I Don’t Budget
 1. I don’t have any money
• I plan to stay that way
 2. I like being poor
• The meek will inherit the earth, right?
 3. I love my credit cards
• I want to spend my money before I earn it
 4. I don’t want more money at retirement
• I want to flip burgers for the rest of my life
 5. I want to have money stress in my life
• It makes life more interesting
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Top 10 Reasons Why I Don’t Budget
(continued)
 6. I don’t want to spend time managing my money
• I want my money to manage me
 7. I don’t want to be happy
• I want to be miserable like everyone else
 8. I hate paying taxes
• If I budget I will have more and pay more taxes
 9. I like being in debt to other people
• I don’t like being different
 10. I don’t have to have a budget
• The prophets have not said I must have one
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Top 10 Reasons I Should Budget
1. I will have more money
2. I will be responsible for my spending
3. I will spend less on things I don’t
need
4. I will have more money at retirement
5. I will have less stress
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Top 10 Reasons I Should Budget (continued)
6. I will know where my money goes
7. I will be happier
8. I will pay more taxes
9. I will be out of debt
10. I will be following the Savior’s and
the prophet’s counsel
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B. Understand Budgeting
 What is a Budget?
• It is the single most important tool in helping you
attain your personal goals.
• It is the process of planning your spending
• It’s making sure your resources are used for the
things that matter most—your personal goals
• Budgeting is a star to set your sights by, not
a stick to beat yourself with
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Budgeting (continued)
President Spencer W. Kimball said:
• Every family should have a budget. Why, we would
not think of going one day without a budget in this
Church or our businesses. We have to know
approximately what we may receive, and we
certainly must know what we are going to spend.
And one of the successes of the Church would have
to be that the Brethren watch these things very
carefully, and we do not spend that which we do
not have. (Conference Report, April 1975, pp. 166167.)
 If the brethren watch these things very carefully,
shouldn’t we?
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C. Understand the Budgeting Process
• The Budgeting Process
• 1. Know what you want to accomplish
(your goals)
• 2. Track your spending (your expenses)
• 3. Develop your cash budget
• 4. Implement your budget
• 5. Compare it to actual expenses, then make
changes where necessary to achieve your
goals
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1. Know What You Want to
Accomplish
 Know and write down your goals
• What do you want to accomplish
• Do you want to:
• Graduate from college
• Prepare to be a worthy spouse
• Get a great job
• Send kids to college and on missions
• Return to your Heavenly Father
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2. Track Your Spending
 There are different methods to track spending:
• Checks and credit cards
• These expenditures leave a paper trail
• Cash
• Record expenditures in a notebook
• Computer programs, i.e., Quicken, Money
• These are very useful, especially if tied to bank
and credit card companies
• The goal is to generate a monthly income and
expense statement
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3. Develop your Cash Budget
(the better way)
 What is a Cash Budget?
• A plan for controlling cash inflows and outflows
• Its purpose--To help you spend money for what is
really important to you
 Income:
• Examine last year’s after-tax total income and make
adjustments for the current year.
 Expenses:
• Identify all fixed (“must have”) and variable
(“would be nice to have”) expenditures
• Look for ways to reduce your variable expenses
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Budgeting: The Old Way
Income
Tithing
Expenses
Personal Goals
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Available for
Savings
Budgeting: The Better Way
Income
Pay the
Lord
Pay
Yourself
Expenses
Personal Goals
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Other
Savings
The Better Way
Before
• You paid the Lord first, lived on the rest,
and whatever money was left at the end of
every month went into savings.
Now
• You pay the Lord first, yourself second, and
then live on the rest--your priorities are now
in order
• And now you have twice the chance of
achieving your personal goals
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The Better Way
(continued)
Elder L. Tom Perry affirmed this when he said:
• After paying your tithing of 10 percent to the Lord,
you pay yourself a predetermined amount directly
into savings. That leaves you a balance of your
income to budget for taxes, food, clothing, shelter,
transportation, etc. It is amazing to me that so many
people work all of their lives for the grocer, the
landlord, the power company, the automobile
salesman, and the bank, and yet think so little of
their own efforts that they pay themselves nothing.
(L. Tom Perry, “Becoming Self-Reliant,” Ensign,
Nov. 1991, 64.)
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5. Compare Your Budget
to Actual Expenses
 Compare your budget to actual expenses
 Learn what you can do better next month
 Make changes where necessary to achieve
your goals
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Final Remarks on Budgeting
Elder Marvin J. Ashton stated:
• Some claim living within a budget takes the fun out
of life and is too restrictive. But those who avoid
the inconvenience of a budget must suffer the pains
of living outside of it. The Church operates within a
budget. Successful business functions within a
budget. Families free of crushing debt have a
budget. Budget guidelines encourage better
performance and management. (italics added,
Marvin J. Ashton, “It’s No Fun Being Poor,”
Ensign, Sept. 1982, 72.)
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D. Understanding the Financial Crisis
• The financial crisis was the result of four key
events
• Individually, the events would have had an impact,
but not as major an impact as they have
• Collectively, they all hit at near the same time,
magnifying the results of each of the individual
events
1. Excessive Individual
and Corporate Debt
 There has been a reduction in financial
discipline
• Instead of budgeting and saving, individuals
borrowed to get what they wanted
• When credit card’s limits were reached,
individuals borrowed from their home’s equity
(i.e., home equity loans) to finance their
spending
• As individuals borrowed more , the value of their
home equity declined, eliminating their ability to
borrow
• As debt levels increased, this put individuals and
families at risk should a major economic crisis
occur—which happened
2. A Major Downturn in the
US Housing Market
 The US housing bubble burst
• Home prices had risen, due to increased demand
from two-income households
• Borrowers believed that housing prices would
not decline, because they hadn’t in 70 years
• They were wrong
• Borrowers took out loans larger than they could
afford, hoping that an increase in the value of the
home would bail them out
• When credit contracted and debt levels increased,
people could not pay their mortgages, many
defaulted, few would (or could) could purchase
houses, resulting in a major housing price decline
3. Risky Lending Practices
 1. Mortgage brokers
• Made money on originating loans
• They were not held accountable after the loan
was made
• As long as the buyers of these mortgages,
Fannie Mae and Freddie Mac, would
continue to buy all the loans Mortgage
Bankers would originate, Mortgage Brokers
would originate as many loans as they could,
regardless of the riskiness of the borrowers
Risky Lending Practices (continued)
 2. Freddie Mac and Fannie Mae
• These are private sector companies with a
government mandate to “expand home ownership”
• Private sector but public sector ownership—not
a good combo
• The company’s goals were to encourage
home ownership—almost at any cost
• Political pressure was on to lend to low-credit
borrowers even though they were risky
• Political pressure caused Fannie and Freddie
to lower their lending standards and not
account for the risk of these loans
4. Risky Borrowing Practices
 1. Investment bankers
• Had financial incentives to process loans regardless
of risk
• Did not evaluate the riskiness of the loans they
sold—they trusted others to evaluate the loans
• In addition, they packaged these risky loans with
a credit derivative, and sold them to investors as
investment grade
4. Risky Borrowing Practices (continued)
 2. Investors
• Relied on sellers and third-parties to determine
riskiness of loans they purchased
• Did not evaluate the riskiness of the loans
themselves
 3. Mortgage brokers
• Were driven by financial incentives or originate as
many loans as they could
• In addition, they encouraged borrowers to take
out larger loans as they made more fees
• Moreover, they encouraged lower-credit
borrowers to take out loans beyond normal
prudence limits, putting borrowers at risk should
economic conditions deteriorate
4. Risky Borrowing Practices (continued)
 4. Borrowers
• Did not understand the riskiness of the loans they
took out
• They borrowed more than they should have
• They borrowed beyond traditional income
limits, from 28% in 1995 to over 50% in
2008
• Having borrowed so much, they were not
prepared for the problems that would come
The Impact
 1. Shrinking credit markets
• Credit has become harder to obtain
 2. Derivatives curse
• Credit derivatives have become a bad name
 3. Loss of confidence
• What started small event has mushroomed to major
proportions as these four events hit at the same time
 4. Stock market meltdown
• Loss of confidence in the market and fears of an
economic recession has had a major impact on
financial markets
What Should You Do?
 1. Keep your grades up
• School will help you prepare for life.
• Life will still be around when you are done
 2. Do not go into debt
• Debt is acceptable for only an education and a
modest home
 3. Do not use credit cards as loans
• Remember credit card money is not your money
• Credit card debt is still debt
 4. Save a minimum 20% of what you earn
• It will make a difference in your life
Ten Principles of Personal Finance
1.
2.
3.
4.
5.
Its not what you earn, but what you save, that helps
you acquire wealth
Its not what you save, but what you become, that
makes you more like the Savior Jesus Christ
Your priorities are critical, so keep them in order:
pay the Lord first, yourself second, and then pay
your other bills
Nothing you have is your own—it is all God’s: live
by the principles of ownership, stewardship, agency,
and accountability
You make a living by what you earn, but a life by
what you give—learn to give more
Ten Principles of Personal Finance
(continued)
6.
Knowledge is critical to survival, so stay up-to-date about
economic conditions and financial laws and vehicles
7. Use marginal costs, opportunity costs and time value of
money calculations when making financial decisions:
then overlay those with the gospel of Jesus Christ
8. Plan your financial future early by prayerfully
establishing goals and plans to achieve them, and then
achieving them with God’s help
9. Take advantage of government-given opportunities to taxshelter income: be wise with what God and man has given
you
10. Develop expertise in financial matters then heed your
own advice: you are responsible for your spiritual and
financial success
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