Essential Standard 8.0 - PowerPoint Presentation

Essential Standard 8.0Apply procedures for managing personal finance. Objective 8.02 Students will understand personal financial planning

ESSENTIAL QUESTIONSWhat 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? Used for planning ways to reach financial goals A continual, cyclical process of tracking, then anticipating, income and expenses 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?

Brainstorm Income Items

Income ItemsEarned Income Wages-hourly Tips, Gratuity Salary Commission Production/piece rate Combination Contract laborBonusesOther Income Sources Interestfrom savingsDividendsfrom stockLottery/gamblingusually an expense!Tax refundbased on past overpayment LoansMust be repaidGiftsInheritancewillsScholarships

Brainstorm Expense Items

Expense Items Housing Rent/Mortgage Maintenance Utilities –gas, electricity, garbage Homeowner’s insurance Furniture, appliances, kitchen equipmentTaxesIncomePropertySalesFoodRestaurant, Grocery store Insurance Health Life DisabilityTransportationAuto/truck payments, leaseFuelTires, oil, maintenanceInsurancePublic transport, parkingOther ExpensesEntertainmentMovies, vacation, gamesCleaning & health supplies

What are the Steps in Financial Planning? 1. Identify financial goals 2. Prepare a balance sheet showing what you own and what you owe3. 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 spentPrepare a spending plan (budget)with anticipated income and expenses to meet financial goals during the next time period6. 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 spent7. Prepare your next spending plan

Review: What are the Steps in 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 livingReduces the need to use credit5. Increases sense of security6. Lessens anxiety about money matters7. Stay in control of finances8. Become financially independent

Financial Statements Three types of financial statements, in bold on the previous slide, are needed for financial planning . Balance SheetIncome and Expense StatementSpending Planaka Budget

Balance Sheet Shows assets, liabilities, and net worth of an individual, family, business, or government entity Assets things of value that you own LiabilitiesDebts owedOwners Equity/Net WorthFormula: Assets-Liabilities = Owner’s Equity/Net WorthOE & NW are two names for the same thing!Formula : Assets - Liabilities = Net WorthReason used: need to know financial status in order to plan finances

Sample Balance Sheet BALANCE SHEET* Date ASSETS LIABILITIES Cash Credit card balanceSavings accountCar Loan balance Vehicle College Loan balance Electronic Equipment   Other: Total assets Total liabilities Owner's equity (Net Worth) (Total assets-Total liabilities) Both sides of the balance sheet must be equal Assets = Liabilities + Owner’s Equity

Who is Wealthier? Juanita – earns $35,000 per year Assets Home $60,000 Retirement $24,000Automobile$8,000Total Assets$92,000LiabilitiesCollege loan $6,000 Mortgage $35,000 Total Liabilities $41,000 Net Worth $51,000 Alexis – earns $100,000 per year Assets Home $75,000 Retirement $35,000 Automobile $8,000 Total Assets $118,000 Liabilities College loan $10,000 Automobile loan $4,000 Credit card debt $20,000 Mortgage $65,000 Total Liabilities $99,000 Net Worth $19,000 Answer on your notes page before going to next slide.

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 timeFlexible expenses---not due by a specified date; usually these are easier than fixed expenses to reduce or eliminateIncome – Expenses =Net Gain/Net LossNet gain -when one has more income than expenses, the difference between the twoaka net profit/surplusNet loss -when one has more expenses than income, the difference between the twoaka net deficit

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, dividendsExpenses Any expenditure; anything that costs money Includes utilities, food, entertainment, transportation costs, health care, shelter, clothing, taxesIF Expenses > Income = LOSSIF Income > Expenses = PROFITReason used: need to know financial status in order to plan finances

Sample Income Statement Elana Rocera Income Statement For Month Ending November 30, 20xx IncomeSalary$3,200 Commission $1,050 Interest $45 Dividends $35     Total Income $4,330 Expenses Utilities $200 Car payment $350 Car maintenance $250 401-K $800 Insurance $750 Clothing $200 Entertainment 0 Food $300 Total expenses $2,850 Net Surplus/Deficit $1,480 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 Statement The Clothing Store, Inc. Income Statement July 31, 20XX Revenue Sales 38,000 Interest earned 500 Total Revenue $38,500 Expenses Selling 1,000 Marketing 1,500 Wage payable 15,000 Income taxes 3,027 Mortgage 1,110 Loan expense 12,355 Deferred income taxes 1,485 Credit Card 1,500 Total Expenses $36,977 Net Income $1,523 Income Items Expenditure Items Answer on your notes page before going to next slide. List 5 income items an individual might have. List 5 expense items a family might have.

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 2Harry’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 3Malinda’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 1-3Business 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 2Harry’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 3Malinda’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) Did you get the right answers before you looked?

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 5Mr. 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 6Last year Jimmy earned $54,000 in salary and commission @ 2% of $185,000 salesJimmy 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 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 2Harry 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 3Malinda 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 StatementA 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 spentShows when expenses exceed income and areas of excess expenseShows if income was sufficient to meet expenditures

Criteria Income and Expense Statement Spending plan BUDGET Time orientation Past---a historical record of what was earned and spent Future forecast- --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 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 Where fits in financial planning Is used to develop a spending plan Becomes the income and expense statement at end of specified time period Comparison of Income and Expense Statement with Spending Plan

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 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 paymentFlexible expenses -can vary each month in the amount owed and are not contractual Ex: food, auto fuel, entertainment

Gumball Analogy Income (money in) Net Worth (wealth) Flexible Expenses (money out)Fixed Expenses (money out) Always have more money coming in than out! Work towards building wealth!

Spending Plan Also known as “aka”- budget or financial planA tool used to plan income and expenses for a future time period Used to track income and expendituresUsed to evaluate spending at the end of a time period

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 Track your current income and expenses Create personalized income & expense categories Allocate money to each category Implement and control Evaluate & make adjustments Step 2– Creating Personalized Income and Expense Categories Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 4– Implement and Control Step 3– Allocate Money to Each Category Answer on your notes page before going to next page! What does allocate mean?

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 possibleBe realisticIf you don’t know how much you spend, Carry a small notebook and write down everything you spend for a few weeks orKeep receipts and input into a cell phone

Step 1: Track Current Income and Expenses Necessary to creating a realistic spending plan

Payroll Deductions 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 HIRetirement (depends upon the employer)Health care benefits (depends upon the employer)Other optional deductionsWhat are two items or services you use that are paid for by taxes?Answer questions on your notes page before going to next page!What does RSDHI stand for?What does mandatory mean?

Gross income vs. Net Income Answer questions on your notes page before going to next page! Question: Which of the above payroll deductions are mandatory?

Calculating Gross Income/Wages/PayHourly wages # 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 ExampleCalculate gross wages for:43 hours a week40 hours x $8.00=$320.00 regular pay3 x $12.75 = $38.25 OT wages Total gross wages = $358.25($320.00 + 38.25)

Calculate Commission WagesCommission 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 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?Answer questions on your notes page before going to next page!

Allocate $ to Each Category Graphs can be easily created from spreadsheet Programs. What are the other types of graphs?

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 Expenses Budgets are estimates of forecasted income/expense Budgets must be flexible to adjust for changeQ: Why are we interested in the difference betweenanticipated amounts and actual spending/income?A: we will need to change the next budget period to reach our financial goalsDifferences/Variances are easy to calculate usinga spreadsheet program! See next slide.

Variations in Budget Categories Income Expenses Anticipated Actual Difference Anticipated Actual Difference (Cell 1) (Cell 2) (Cell 3) (Cell 4) (Cell 5) (Cell 6) 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 UpEating 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 yearDaily Latte$3.75 every day$1,369 per year

Review: Which Items are Income? Gift from family Scholarships Groceries Utilities Automobile registrationIf an expense, which of these items are fixed/variable?Eating out/Snacks Internet bill Wages Paying Rent Hobbies Answer questions on your notes page before going to next page!

Spending Plan TemplateEveryone 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 SystemTrack 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 DisadvantageYou 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 & ControlConfirmation 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 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 cashBanks and credit cards have reimbursements optionsAdvantageYou cannot spend $ not in envelope!

Electronic Spending PlansComputer 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 spendingCash envelope systemAdvantage Software Calculates totals for youCan compare actual to estimatedCan create graphs

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 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/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! Who is in control of your finances? YOU ARE!