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Unit 3

Unit 3. Budgeting. Unit 3 Vocabulary. Financial Plan Fixed Expenses Inflation Inflation Rate Liabilities Negotiable Instrument Net Worth Purchasing Power Variable Expenses. Assets Budget Consideration Consumer Price Index (CPI) Contract Deflation Disposable Income

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Unit 3

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  1. Unit 3 Budgeting

  2. Unit 3 Vocabulary • Financial Plan • Fixed Expenses • Inflation • Inflation Rate • Liabilities • Negotiable Instrument • Net Worth • Purchasing Power • Variable Expenses • Assets • Budget • Consideration • Consumer Price Index (CPI) • Contract • Deflation • Disposable Income • Discretionary Income

  3. Unit Essential Question • What are your responsibilities in obtaining financial success?

  4. Essential Question 1Credit • How do you prepare a financial plan?

  5. Budgeting Expenses • Financial Plan: An orderly program for spending, saving, and investing your money. • Disposable Income: Money available to spend after taxes, social security, and optional deductions have been withheld from gross pay. • Discretionary Income: Money available after all bills and expenses have been paid.

  6. Budgeting Expenses • Helps determine and evaluate how wisely you are spending your money. • Helps get the most from your income. • Helps prevent careless and wasteful spending. • Helps organize your financial resources (sources of income) so that you can maintain a plan of personal financial fitness. • Helps avoid money worries and problems by understanding the proper methods of saving, spending, and borrowing money.

  7. Budgeting Expenses • Budget: An organized plan whereby you match your expected income to your expected expenses. • Purpose is to plan your spending and saving so that you won’t have to borrow money to meet your needs. • Careful planning will enable you to stretch your money to provide for present and future needs and also satisfy your wants.

  8. Purchasing Power • Purchasing Power: The amount of goods and services a dollar can buy. It is affected by: • Inflation: A continuous rise in prices caused by the expansion of paper money, or bank credit, which decreases the value of money. • Low inflation, less than 5%, is necessary for an economy to grow. • High inflation will cause economic stagnation or even shrinkage (recession). • Deflation: A decreasing of prices which results from a recession and a scarcity of money.

  9. Purchasing Power • Consumer Price Index: Measure of the price of over 400 specific goods and services used by the average urban household. • http://stats.bls.gov/news.release/cpi.t01.htm • Measured and published by the U.S. Bureau of Labor Statistics. • Used to determine the Inflation Rate: The percent prices change from month to month. • As the inflation rate goes up, purchasing power goes down.

  10. Purchasing Power • Calculating Inflation Rate: • Inflation Rate = (New – Old)  Old • In January the price of gasoline was $2.98 per gallon. At the end of September the price of gasoline was $3.58 per gallon. What was the inflation rate for gasoline? • ($3.58 – $2.98) / $2.98 • $0.60 / $2.98 • 0.2013423 • 20.1%

  11. Budgeting Expenses • Budgeting Process • Step 1:Estimate total expected income from all sources. • Step 2:Decide how much of your income to set aside for future needs (save). Experts suggest a minimum of 10% of your disposable income. • Step 3:Estimate your expenses. • Fixed Expenses: Expenses that remain constant from month to month. (Rent, insurance, loan payments, etc.) • Variable Expenses:Expenses that change from month to month. (Phone, gas, food, recreation, etc.)

  12. Budgeting Expenses • When estimating variable expenses, use the average of several months of the expense. • Example: • Over the last three months, you have spent $213, $191, and $228 on food. How much should be budgeted for food? • $213 + $191 + $228 = $632 • $632  3 = $210.6666666 • Budget $211 for food

  13. Budgeting Expenses

  14. Essential Question 2Credit • What personal records should be maintained to aid in the budgeting process?

  15. Personal Records • Well Kept Records • Make planning a budget easier. • Ensure improved long-range financial planning. • Form the basis for properly completed tax returns, credit applications, and other financial forms.

  16. Personal Records • Records of Income and Expenses • Keep W-2 statements. • Shows money earned and deductions. • Shows amount of taxes and social security withheld • May be required to collect benefits. • Bank statements that show interest earned on savings. • Receipts listing charitable contributions. • Medical bills. • Receipts and statements of work-related expenses.

  17. Personal Records • Statement of Net Worth • Lists assets: Items of value that a person owns. • Lists liabilities: Monies owed to others. • If assets are greater than liabilities then you solvent and in a favorable financial position. • If liabilities are greater than assets, then you are insolvent and in a poor financial position. • This information is required for credit or loans.

  18. Personal Records • Personal Property Inventory • List of all one’s personal belongings: Clothing, Furniture, Appliances, etc. • Is useful in the event of a fire, theft, or property damage, as proof of possession and value. • For added protection, photograph your possessions.

  19. Personal Records • Tax Records • Keep a copy of all your tax returns and supporting documentation for a minimum of three years. • The IRS may audit your records up to three years from the date of filling. • If fraud or intentional wrong doing on your part can be proved, there is no limit to the time the IRS may go back.

  20. Essential Question 3Credit • How do you prepare a personal net worth statement and a personal property inventory?

  21. Net Worth Statement

  22. Personal Property Inventory

  23. Essential Question 4Credit • What are the elements of a legal contract and negotiable instruments?

  24. Legal Documents • Contracts and Agreements • Contract: A legally enforceable agreement between two or more parties to do or not to do something.

  25. Legal Documents • Elements of an enforceable contract • Agreement: An offer and an acceptance of the offer. • Formal Agreement – Either by signing your name or through oral statement you consent to the conditions of the agreement. (Charge accounts, Rental agreements, Mortgage, etc.)

  26. Legal Documents • Informal Agreement – Agreements that exist because of your conduct. (Driver’s license, Car registration, School, Work responsibilities, Parenting, etc.) • When you receive something of value in exchange for something of value, you are making promises. (Drive safely, Obey laws, Follow rules & regulations, Do your best, Take proper care of those in your charge)

  27. Legal Documents • Elements of an enforceable contract • Consideration:Something of value, that both parties receive, used in the exchange. • Money • An object of value • A promise • A performed act

  28. Legal Documents • Elements of an enforceable contract • Contractual Capacity: The competence or legal ability of the parties to enter the contract. • Minors are not considered competent parties and cannot enter contracts without consent. • All persons eighteen or older are considered competent unless declared incompetent by a court of law or are mentally deficient as defined by law. • Married persons under the age of eighteen are considered competent.

  29. Legal Documents • Elements of an enforceable contract • Legality: The contract must be for a purpose that is of a lawful nature. • Genuineness of Assent: • Both parties have freely entered into the agreement. • Genuine assent does not exist if there is: • Misrepresentation • A mistake • One or both parties are under duress • Undue influence is being applied to one or both parties

  30. Legal Documents • Elements of an enforceable contract • Legal Form: Some contracts, as a matter of law, must be in writing to be enforceable. • Purchase or sale of real estate • Contracts that cannot be performed in less than one year • Purchase and sale of goods over a certain price (varies with state law)

  31. Legal Documents • Contract classifications: • Valid Contracts: Contains all of the required elements. • Void Contracts: Contracts that are missing one or more of the required elements. • Voidable Contracts: Contains elements that allow one or both parties to choose enforcement or avoidance of the contract. If one party decides to withdraw from the contract then it is void.

  32. Legal Documents • Negotiable Instruments • Negotiable Instruments: A document that contains a promise to pay monies and is legally collectable.

  33. Legal Documents • Negotiable Instruments are legally collectable if the following conditions are met: • Must be in writing (not oral) and signed by the maker. • Must contain an unconditional promise to pay a definite amount of money. • Must be payable on demand or on a fixed or determinable date. • Must be payable to a particular person or holder of the note. • Must be delivered to the payee.

  34. Legal Documents • Examples: • Currency – cash or coin • Checks / Money Orders • Promissory notes (IOUs) • Stocks / Bonds / Mutual Funds

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