Download 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