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COURSE
Personal Finance 8726
UNIT: D
Managing and Protecting Resources
ESSENTIAL
STANDARD:
8.00
C3
11%
Apply procedures for managing personal finances.
OBJECTIVE:
8.01
B2
4%
Understand options for saving and investing.
ESSENTIAL QUESTIONS:
 How are saving and investing similar, and how are they different?
 Why do some people find it so difficult to save and invest?
 What “rules” can help build smart saving and investing habits?
 What factors should be considered when selecting saving and investing options?
UNPACKED CONTENT
Saving and investing
Saving
Investing
 Investing is purchasing assets that
earn interest over time.
 Investments are assets purchased
with the goal of increasing income.
To make a profit over time
Volatility
 Saving is setting aside present
income for future use.
 Savings is the portion of income
not spent on consumption.
To make money available for
future needs
* To prepare for emergencies
* To prepare for major purchases
purchases
* To achieve financial goals
A bonus or side-benefit
Usually earns lower rates of
interest
Money may be withdrawn at any
time
Usually not volatile; rates are fixed
Risk
Usually little risk of losing money
Definition
Primary purpose
Reasons for saving
and investing
Interest earnings
Return
Liquidity
* To pay recurring expenses
* To prepare for future
* To prepare for retirement
The main focus
Usually earns higher rates of interest
Money may not be easily accessible
Rate of return and value may change
suddenly and significantly
Usually more risk, but risks may be
necessary to make a profit
Reasons individuals may fail to save/invest
 Not being able to meet current needs and wants
 Not being aware of how much needs to be saved for future goals
 Over-relying on credit for emergencies
 Over-relying on job security and insurance
OBJECTIVE:
8.01
B2
4%
Understand options for saving and investing.
UNPACKED CONTENT
“Rules” for saving and investing
 View saving and investing as a fixed expense
 Rule of Saving: Pay yourself first; take a portion of earnings for saving/investing before
spending any of your paycheck
 70-20-10 Saving and Investing Rule: For any money earned, spend 70%, save 20%, and
invest 10%
 Saving and Investing Plan: For those whose values or lifestyle make saving 30% unrealistic,
start a saving and investing plan in order to continually save a fixed amount
 Rule of 72: Divide 72 by the rate of interest earned on an investment to find the number of
years needed to double an amount of money invested
Factors to consider when choosing saving and investing options
 Liquidity
 Minimum deposit/balance
 Interest rates/rate of return
 Risk factors
 Transactions
 Security
Saving and investing options
 Savings accounts
 Money market accounts
 Certificates of deposit
 Savings bonds
 Individual retirement accounts (IRAs)
 Stocks
 Bonds
 Mutual funds
Comparison: Saving and Investing
Criteria for Comparison
Saving
Investing
Definition
 Saving is setting aside
 Investing is putting money to
present income for future
work so that it earns interest
use.
over time.
 Savings is the portion of
Primary purpose
 Investments are assets
income not spent on
purchased with the goal of
consumption.
increasing income.
To make money available for
To make a profit over time
future needs
Reasons for . . .
* To prepare for emergencies
* To pay recurring expenses
* To prepare for major
purchases
* To
prepare for future purchases
* To achieve financial goals
* To prepare for retirement
Interest earnings
A bonus or side-benefit
The main focus
Return
Usually earns lower rates of
Usually earns higher rates of
interest
interest
Money may be withdrawn at
Money may not be easily
any time
accessible
Usually not volatile; rates are
Rate of return and value may
fixed
change suddenly and
Liquidity
Volatility
significantly
Risk
Usually little risk of losing
Usually more risk; risks may be
money
necessary to make a profit
Options for Saving and Investing
Certificates
Savings Accounts
Money Market
of Deposit
Savings Bonds
Definition
An account in a
bank/financial
institution that allows
one to make deposits
and withdrawals
A type of savings
account in which
deposits are invested
by the bank/financial
institution to yield
additional earnings
A certificate issued by a
bank/other institution to
show that money has
been deposited for a
certain term
Nontransferable debt
certificates issued by
the U.S. Treasury
Minimums
Minimum deposits
usually lower than
other savings options
Minimum opening
deposit usually
higher than with
savings accounts
Minimum opening
deposit varies
Smallest denomination
purchased is generally
$50 or $500,
depending on series
of bond
Withdrawals
and liquidity
Usually the most
liquid savings option
Usually allows
person to write a
limited number of
checks per month
Usually must pay a
substantial penalty to
withdraw money early
Most can be cashed after
6 months; some may
carry penalties if
cashed before 5 years
Interest rates
and rates of
return
Usually lower interest
rates than other
savings options, but
may vary
Usually higher
interest rate than
savings accounts,
but may vary
Interest rate is usually
fixed until the end of
the term
Fixed and variable rates;
interest earnings subject
to state, but not federal,
taxes. Federal taxes can
be deferred until cashed
or stops earning interest.
Interest paid when bond
is cashed, or every 6
months by direct
deposit to checking or
savings account
Transactions
Use bank teller, ATM,
phone, online; no
checks; get monthly
statement
Withdrawals and
transfers limited
Usually cannot make
additional deposits
during the term, but can
add to it when you
renew
Usually can be cashed after
6 months. Some carry a
penalty if cashed
before 5 years, but pay
current value (higher than
face value) after 5 years.
Security and
risk factors
Protected by FDIC or
NCUA insurance
Generally protected
by FDIC or NCUA
insurance
Generally protected by
FDIC or NCUA
insurance
Since generally backed by
the federal government,
these are relatively safe.
Options for Saving and Investing
Definition
Minimums
Withdrawals
and liquidity
IRA
Stocks
Bonds
Personal savings
plan used to set
aside money for
retirement
Shares of ownership
and interest in assets
and earnings of a
company
Debt issued by a
government or
company for a
specified time
A group of investments (stocks
and bonds) held in common
with shares owned by many
investors
Vary
Vary
Vary
Vary
Traditional IRAscontributions taxdeductible; taxed
when withdrawn
Stockholders may buy
and sell stocks when
they wish
Liquidate when
mature; vary from
short-term (days,
weeks) to longterm (years)
Management fees must be paid
when you sell or redeem shares,
even if earnings are low
Roth IRA- not taxdeductible;
earnings tax-free
Mutual Funds
Can be liquidated at any time;
no term or maturity dates
Interest on
municipal bonds
exempt from
federal income tax
Tax-deferred plans:
*Keogh Planretirement plan for
the self-employed
401k-employersponsored
retirement plan
Interest rates
and rates of
return
Vary with type and
status
Transactions
Purchased through
financial institution
Security and
risk factors
A reasonably safe
investment when
the economy is
stable
When directors
approve, dividends paid
from net profits;
interest rates vary
Bought on securities
exchanges (stock
markets), over-thecounter markets, initial
public offerings, or
directly from company
Earnings based on how
well company does
Common or preferred?
*Common-more risk,
more potential for gains
*Preferred-paid first,
fixed earnings, low risk
Type of company?
*Blue chip-from big
companies, less risk
*Growth-from growing
companies, more risk
*Penny-from high-risk
companies, less than $1
per share, very risky
Interest earnings
vary according to
type of bond and
level of risk
Corporate and
municipal, usually
bought/sold
through brokers;
US government,
issued by Treasury
Generally protected
by FDIC or NCUA
insurance;
generally
considered safe and
reliable
Fixed and variable rates;
interest earnings subject to
state, but not federal, taxes
Bought and sold through
investment brokers
Funds are diversified in various
investments so losses in one
fund may be offset by
gains in another
A reasonably secure investment
when the economy is stable
Money markets are not FDICinsured
Term
Definition
General Terms
save
To set aside present income for future use
invest
To put money to work earning interest over time
profit
Money remaining in a business after expenses are paid
interest
Money paid for the use of someone else’s money over a period of time
return
The income that can be made on an investment
liquidity
How easily an asset can be converted into cash
volatility
How easily the interest or cash value of an investment can change
risk
The possibility of earning or losing money from an investment
transaction
A saving/investing activity---e.g., deposits, withdrawals, and transfers
Saving and Investing Options
savings account
An account in a bank/financial institution for saving, making deposits/withdrawals
money market
A savings account in which deposits are invested to yield additional earnings
CD
A certificate of deposit stating money has been deposited for a specific time
savings bond
A debt certificate issued by the U. S. Treasury that is not transferable
IRA
An Individual Retirement Account used to save money for retirement
Koegh plan
A tax-deferred retirement plan for self-employed people
Roth IRA
A personal savings plan; contributions are not tax-deductible; earnings are tax-free
stock
A share of ownership and interest in the assets and earnings of a company
common stock
Stock in a public corporation; returns vary, but higher risk
preferred stock
Stock with fixed dividends, less risk
blue chip stock
Stock from large companies, less risk
growth stock
Stock from growing companies, more risk
penny stock
Stock that costs less than $1 per share; extremely high risk
bond
A certificate of debt given by a company or government that entitles the
bondholder to the original amount plus interest paid by a set date
mutual fund
A group of investments held in common with shares owned by individual investors
COURSE
Personal Finance 8726
UNIT D
Protecting and Managing Resources
ESSENTIAL
STANDARD:
8.00
C3
12%
Apply procedures for managing personal finances.
OBJECTIVE:
8.02
B2
3%
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?
UNPACKED CONTENT
Financial Planning
 Used for planning ways to reach financial goals
 A continual, cyclical process of tracking, then anticipating, income and expenses
 Steps in the process of financial planning
 Identify financial goals
 Prepare a balance sheet showing what you own and what you owe
 Track income and expenditures for a set time period, usually a month, and record in an
income and expense statement
 Analyze amount of money earned and how it was spent
 Prepare a spending plan with anticipated income and expenses to meet financial goals
during the next time period
 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
 Prepare your next spending plan
Note that three types of financial statements, shown above in bold font, are needed for
financial planning.
 Benefits
 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
 Increases sense of security
 Lessens anxiety about money matters
 Stay in control of finances
 Become financially independent
Financial Statements
 Balance sheet
 Shows assets, liabilities, and net worth of an individual or family
 Reason needed: need to know financial status in order to plan finances
OBJECTIVE:
8.02
B2
3%
Understand personal financial planning.
UNPACKED CONTENT
Financial Statements, continued
 Income and expense statement
 Also known as cash flow 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 his/her/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
 Spending plan
 Also known as a budget or a 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
 Comparison of income and expense statement with spending plan
Criteria
Income and expense
statement
Spending plan
Time
orientation
Past---a historical record of
what was earned and spent
Future ---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
Is used to develop a spending
plan
Where fits in
financial
planning
 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
Becomes the income and
expense statement at end of
specified time period
Balance Sheet
Scenario:
Jessica Dalton is a full-time student at State University. She rents an apartment near campus with three other students;
her share of the monthly rent is $300. When the weather is good, she enjoys walking to class, which saves on her
gasoline expenses. She spent $90 this month on gas and auto upkeep. She spent $625 this month on food, clothing,
entertainment, and student expenses. She currently has $200 in current bills due and owes her credit card company
$650. She still owes $2,000 on her car and owes her older brother $500.
Jessica works weekends as a server at a nearby restaurant and earned $450 this month in wages and tips. Jessica has
$1,200 in her checking account and $400 in savings. Her grandfather gave her stock valued at $500 for her birthday.
The value of her car is $5,000. She has other assets totaling $800.
Balance Sheet for Jessica Dalton as of _____________________________________ (Date)
Assets
Wages and tips
Checking account
Liabilities
$450 Apartment rent
$
300.00
$1200 Gas & upkeep
$90
Savings account
$400 Food, clothing,
entertainment, and
student expenses)
$625
Stock
$500 Current bills due
$200
Car
$5000 Credit card
Other assets
$650
$800 Car
$2000
Owes brother
$8350
TOTAL ASSETS>
$500
$4065
TOTAL
LIABILITIES>
NET WORTH = Total Assets minus Total Liabilities =
$4285
Jessica has been invited to move to a larger apartment where she would only share space with one
person. Her monthly cost for rent would be $750 and she would have to pay a security deposit of one
month’s rent when she moves in. What advice would you give Jessica and why?
No, liquid assets are less than current bills. She does not have enough to pay the deposit and
insufficient monthly income to cover her current rent (which is less than ½ the new)and expenses
Appendix 8.02D
Key Terms: Financial Planning
Term
Definition
Financial Planning
financial planning
A process of tracking and anticipating income and expenditures
financial goal
A specific aim to be accomplished with the use of financial planning
continual
Ongoing, without ending
cyclical
Occurring in a cycle, with steps repeated in sequence over and over
wealth
Having a large amount of money or property
living within one’s
means
Being able to pay all expenses with available income
Financial Statements
financial statement
A document or tool that shows personal financial information/data
balance sheet
A financial statement that shows the assets, liabilities, and net worth of an
individual or family on a set date
asset
Anything with monetary value that a person owns
liability
Anything that is owed to someone else; a debt
net worth
The amount of money remaining when total liabilities are subtracted from total
assets
income and expense
statement
A financial statement that shows all income and expenses of an individual or
family during a specific time period, usually a month or a year
cash flow
The income and expenses of an individual or family during a time period
income
Total earnings received
expense
Any expenditure; anything that costs money
net gain
The amount of money one has after subtracting expenses from income
net loss
The amount of additional money needed when expenses are greater than income
spending plan
A financial statement used to plan income and expenses for a future time period;
also known as a budget or financial plan
COURSE
Personal Finance 8726
UNIT D
Protecting and Managing Resources
ESSENTIAL
STANDARD:
8.00
C3
12%
Apply procedures for managing personal finances.
OBJECTIVE:
8.03
C3
5%
Apply procedures to manage personal income and
expenses.
ESSENTIAL QUESTIONS:
 What are the principles of financial planning?
 What are the elements of spending plans?
 What are the steps in the spending plan process, and how is each used?
UNPACKED CONTENT
Principles of financial planning (JumpStart Coalition)
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Money doubles by the “Rule of 72”
Your credit past is your credit future
Start saving young
Stay insured
Budget your money
Don’t borrow what you can’t repay
Map your financial future
Don’t expect something for nothing
High returns equal high risks
Know your take-home pay
Compare interest rates
Pay yourself first
(The JumpStart Coalition, http://www.jumpstartcoalition.org/files2010/2010_J$_Calendar.pdf)
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
 Fixed 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
 Net gain---when one has more income than expenses, the difference between the two
 Net loss---when one has more expenses than income, the difference between the two
OBJECTIVE:
8.03
C3
5%
Apply procedures to manage personal income and
expenses.
UNPACKED CONTENT
The spending plan process
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
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Set SMART financial goals
 Specific
 Measurable
 Attainable
 Realistic
 Time-bound
Organize
 Determine format to use
 Select categories for the spending plan
 Select a time period
Decide
 Make realistic decisions and estimates for categories of spending.
 If income is less than expenses, decide whether to earn more income, decrease expenses,
or a combination of these.
Implement---put the spending plan into action
Note: Implement and control are to be done at the same time.
Control
 Records kept as the spending plan is implemented reveal potential problems early, such as
overspending in one category.
 Use a computer or calculator to check records for accuracy.
 Keep a credit spreadsheet to log all credit transactions, including both charges and
payments.
 Types of control systems
1. Envelope system
2. Spending plan
3. Check register system
Evaluate
 Determine if the spending plan process has worked
 Compare estimated income and expenses to actual
 Assess progress toward financial goals
 Revise the spending plan (including financial goals) as needed and recycle to beginning of
process
Key Terms: Managing Income and Expenses
Term
Definition
Elements of Spending Plans
income
Money earned---from wages, salaries, tips, withdrawals from savings, interest
earnings, scholarships, sales of properties or possessions, gifts, etc.
expense
Money spent---for both fixed and flexible expenses; an expenditure
anticipated
An amount of income or expense that is expected, planned, or projected
actual
An amount of income or expense that was really earned or spent
fixed expense
An expense that is due by a certain date, often agreed upon in a contract, and
difficult to change in a short time
flexible expense
An expense that is not due by a certain date and is easy to reduce or eliminate
The Spending Plan Process
specific financial
goal
A financial goal that states exactly what is to be done with money
measurable financial
goal
A financial goal that gives an exact dollar amount
attainable financial
goal
A financial goal for which one can determine how to reach it
realistic financial
goal
A financial goal that is affordable and doable
time-bound financial
goal
A financial goal that states exactly WHEN the goal needs to be reached
organize spending
plan
Determine appropriate recordkeeping format, select categories and time period
decide
Make realistic decisions and estimates for categories of the spending plan
implement
Put the spending plan into effect
control
Keep accurate records while the spending plan is being implemented
evaluate
Determine how well the spending plan process has worked
envelope system
Placing exact amount of cash for an expense in a labeled envelope
spending plan
A financial statement used to track expenses from day to day
check register
system
Tracking expenses in a checkbook register divided into spending plan categories