© Family Economics & Financial Education—Revised May 2005—Spending Plans Unit—Introduction to Spending

Plans — Page 1 Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at

Montana State University—Bozeman

Introduction to Spending Plans

Family Economics & Financial Education

© Family Economics & Financial Education—Revised May 2005—Spending Plans Unit—Introduction to Spending Plans — Page 2

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Spending Plans Outline Financial Planning Types of Financial Statements

Balance Sheet Income and Expense Statement Spending Plan

Bathtub Analogy Conclusion

© Family Economics & Financial Education—Revised May 2005—Spending Plans Unit—Introduction to Spending Plans — Page 3

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Financial Planning Financial Planning

A process to achieve financial success Helps a person avoid financial difficulties

and save for the future An ongoing process; always updated to

meet the needs of an individual’s financial activity

Financial Goals Specific objectives to accomplish by

financial planning!

© Family Economics & Financial Education—Revised May 2005—Spending Plans Unit—Introduction to Spending Plans — Page 4

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University—Bozeman

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Financial Planning Each family or individual has their own

unique financial plan These vary with values, needs, wants,

and financial goals Value

Belief or practice about what is desirable and important to an individual or family

Need Thought to be a necessity

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Financial Planning Want

Unnecessary, but desired

Values, needs, and wants must be evaluated before a financial plan can be made

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Wealth

Having a large amount of money or valuable possessions

Can help a person achieve financial goals

© Family Economics & Financial Education—Revised May 2005—Spending Plans Unit—Introduction to Spending Plans — Page 7

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Bathtub Analogy

Water is money Income is water filling up a bathtub

from the top Wealth is amount of money in the

bathtub Expense is water draining out of the

tub from the bottom

© Family Economics & Financial Education—Revised May 2005—Spending Plans Unit—Introduction to Spending Plans — Page 8

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Bathtub Analogy

Income•Water filling

up the bathtub

Expenses

•Water draining from the bathtub

Wealth•Amount of water in the bathtub

© Family Economics & Financial Education—Revised May 2005—Spending Plans Unit—Introduction to Spending Plans — Page 9

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Bathtub Analogy Goal is to keep water in the bathtub

Enough to maintain desired standard of living during retirement

Water level raises and lowers with income and expenses

Must have water (or wealth) in the bathtub for financial planning

© Family Economics & Financial Education—Revised May 2005—Spending Plans Unit—Introduction to Spending Plans — Page 10

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Financial Statements Show financial data and

information regarding money Can show financial status of a

family or individual There are 3 types:

I. Balance sheet II. Income and expense statement III. Spending plan

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Balance Sheet A balance sheet is also called a net

worth statement Shows assets, liabilities, and net worth on

a particular date Assets-everything a person owns with monetary value Liabilities - debts or what is owed to others Net worth - money left when liabilities are subtracted from assets

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Balance Sheet

Shows financial status at one point in time

People need to know where they stand before they can create a financial plan

© Family Economics & Financial Education—Revised May 2005—Spending Plans Unit—Introduction to Spending Plans — Page 13

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Income and Expense Statement

Income and expense statements are also called cash-flow statements

Lists all monetary actions in a given time period

Foundation for the spending plan

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Income and Expense Definitions Income

Total income received Expenses

Total expenditures made Net gain

A person is making more than they are spending

Net Loss A person is spending more than they are

making

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Income and Expense Statement

Why is an income and expense statement important? Shows if a family or individual lived within

their income level over a certain time period Shows where a person’s money is going Shows if too much was spent on one

expense

© Family Economics & Financial Education—Revised May 2005—Spending Plans Unit—Introduction to Spending Plans — Page 16

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Spending Plan

Future oriented tool Assists in money

management Two main

componentsI. IncomeII. Expenses

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Spending Plan

Income and expense are estimated guidelines for monetary transactions for a specified time period

After the time period is over, the spending plan is evaluated and revised for next time period

Different from income and expense statement because it is an estimate for the next month’s spending

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Spending Plan Why is a spending plan important?

Can give a person a strong sense of where money is going

Allows for income and expense tracking Helps meet financial goals Helps a person live within their income Reduces need for credit and gaining

debt

© Family Economics & Financial Education—Revised May 2005—Spending Plans Unit—Introduction to Spending Plans — Page 19

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Comparing Statements Balance Sheet

Current financial standing Need to create a balance sheet before a family or

individual is able to create an income and expense statement

Income and Expense Statement Lists all monetary transactions Foundation for spending plan

Spending Plan A future estimate of how to manage money

based on the income and expense statement

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Conclusion Balance sheets, income and expense

statements, and spending plans are all forms of financial statements used in financial planning

The bathtub analogy shows a persons wealth

How full is your bathtub? Every family or individual must plan for

the future with financial statements!

© Family Economics & Financial Education—Revised May 2005—Spending Plans Unit—Introduction to Spending Plans — Page 21

Funded by a grant from Take Charge America, Inc. to the Department of Health and Human Development at Montana State University—Bozeman

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The End