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Essential Standard 8.0 Apply 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?

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essential standard 8 0 apply procedures for managing personal finance

Essential Standard 8.0Apply procedures for managing personal finance.

Objective 8.02 Students will understand personal financial planning

essential questions
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
What is Financial Planning?
  • 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?
  • Used for planning ways to reach financial goals
  • A continual, cyclical process of tracking, then anticipating, income and expenses
income items
Income Items

Earned Income

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

  • Wages-hourly
  • Tips, Gratuity
  • Salary
  • Commission
  • Production/piece rate
  • Combination
  • Contract labor
  • Bonuses
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
What are the Steps in Financial Planning?

1. Identify financial goals

2. Prepare a balance sheetshowing 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

  • 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

what are benefits of financial planning
What are Benefits of Financial Planning?
  • Learn to live “within one’s means”
  • Helps avoid financial difficulties
  • Have resources for one’s desired standard of living
  • 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
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
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
Sample Balance Sheet
  • Both sides of the balance sheet must be equal
  • Assets = Liabilities + Owner’s Equity
who is wealthier

Answer on your notes page

before going to next slide.

Who is Wealthier?

Juanita – earns $35,000 per year

Alexis – earns $100,000 per year

elements of spending plans
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 statement
Income Statement

Shows income (revenue) and expenses (expenditures) for a family or business

Formula: 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
Sample Income Statement

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 statement1
Sample Income Statement

Answer on your notes page

before going to next slide.

Income Items

List 5 income items an individual might have.

Expenditure Items

List 5 expense items a family might have.

profit surplus or loss deficit
Profit/Surplus or Loss/Deficit

Essential Question: What is the basic financial (profit) formula?

______________ - _______________ = Profit/Loss

Business 1

Taylor’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 2

Harry’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 3

Malinda’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 3
Key Businesses 1-3

Did you get the right answers before you looked?

Business 1

Taylor’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 2

Harry’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 3

Malinda’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)

profit surplus or loss deficit1
Profit/Surplus or Loss/Deficit

Family 4

The 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 5

Mr. 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 6

Last year Jimmy earned $54,000 in salary and commission @ 2% of $185,000 sales

Jimmy 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
Net Worth Activity

Essential Question: What is the Net Worth Formula?

_______________ - ________________ = Net Worth/Owner’s Equity

Scenario 1

Taylor 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
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
gumball analogy
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 analogy1
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 analogy2
Gumball Analogy

Always have more money coming in than out!

Work towards building wealth!

  • Income(money in)
  • Net Worth (wealth)
  • Flexible Expenses (money out)
  • Fixed Expenses (money out)
spending plan
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
Typical Spending Plan Pie Chart

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
Steps to Create a Personal Budget
  • Track your current income and expenses
  • Create personalized income & expense categories
  • Allocate money to each category
  • Implement and control
  • Evaluate & make adjustments

Answer on your notes page before going to next page!

What does allocate mean?

Step 1- Track Current Income and Expenses

Step 5– Evaluate and Make Adjustments

Step 4– Implement and Control

Step 2– Creating Personalized Income and Expense Categories

Step 3– Allocate

Money to Each

Category

creating a personal budget
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
Step 1: Track Current Income and Expenses

Necessary to creating a realistic spending plan

payroll deductions
Payroll Deductions

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

  • 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 does RSDHI stand for?

What does mandatory mean?

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

gross income vs net income

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

Gross income vs. Net Income

Question: Which of the above payroll deductions are mandatory?

calculating gross income wages pay
Calculating Gross Income/Wages/Pay

Hourly wages

Example

Calculate gross wages for:

43 hours a week

40 hours x $8.00=$320.00 regular pay

3 x $12.75 = $38.25 OT wages

Total gross wages = $358.25

($320.00 + 38.25)

  • # 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 rate

Fair Labor Standards Act (FLSA) regulates:

Minimum wage, maximum hours, child labor, minimum wage rate

calculate commission wages
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%

$3254.25

Practice:

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

Answer questions 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?
allocate to each category
Allocate $ to Each Category

Graphs can be easily created from spreadsheet

Programs. What are the other types of graphs?

anticipated expenses
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 expenses1
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 between

anticipated 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 using

a spreadsheet program! See next slide.

variations in budget categories
Variations in Budget Categories

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 bad

the bill was $1150.

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

sales only generated $1950.

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
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
Review: Which Items are Income?

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

Scholarships

Gift from family

Groceries

Utilities

Automobile registration

Internet bill

Eating out/Snacks

Hobbies

Wages

Paying Rent

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

spending plan template
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
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
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
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
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
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
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 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)
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!

What is the Long-term Positive impact of a spending plan?

Who is in control of your finances?

YOU ARE!