personal finance unit 2 manage your money how to control your money so it doesn’t control you

Personal Finance Unit 2

MANAGE Your MONEYHow to control your money so

it doesn’t control you.

Why are people so broke?

Some bad habits, like cracking knuckles, are gross but certainly not life-threatening

Bad spending habits, however, can easily destroy youHurt your marriageMake you drop out of schoolMake you turn to other vises to “escape”

Don’t let this be you…

Mary and Steven earn a good living, combined $100,000/year.

At the end of each month, however, they have NO MONEY left over – they are living “paycheck-to-paycheck”

Why? Because they don’t know basics of financial planning and budgeting.

Before we start the unit notes…

Let’s find out a little bit about how YOU view money…

www.themint.orgLifespan CalculatorWhat Kind of Spender are You? QuizDetermine Your Budget (shows us

how much you like to “live it up”)

The FINANCIAL PLANNING PROCESS

Make It, Keep It, Grow ItMake It, Keep It, Grow It

What can you do with money?

Spend ItSave ItInvest ItGive It Away

FINANCIAL PLANNING

Creating a roadmap for handling everything you do with money.

FINANCIAL PLANNING PROCESS

1. Set SMART Goals

2. Analyze your Financial Information

3. Create a Plan

4. Implement the Plan

5. Monitor and Modify the Plan

FINANCIAL PLANNING

STEP 1:

Set SMART Goals

SSpecific (be very clear and detailed)

MMeasurable (set in definable terms)

AAttainable (can it actually be done?)

RRealistic (can it actually be done by YOU?)

TTime Bound (set a date to achieve goal)

What is wrong with these goals?

I will have a net worth of one million dollars by the time that I reach my 30th

birthday.

I will learn how to speak and write

Mandarin.

I will be able to buy a house in 5 years.

I will lose 30 pounds by next Friday.

I will be nicer to my siblings.

Realistic

Time

Specific

Attainable

Measurable/Specific

FINANCIAL PLANNING PROCESS

1. Set SMART Goals

2. Analyze your Financial Information

3. Create a Plan

4. Implement the Plan

5. Monitor and Modify the Plan

FINANCIAL PLANNING

STEP 2:

Analyze your Financial Information

1.1. FINANCIAL FINANCIAL DOCUMENTS:DOCUMENTS:

Paycheck stubs, Paycheck stubs, statement of interest statement of interest earned, amounts of earned, amounts of cash gifts, tips, cash gifts, tips, bonuses, credit card bonuses, credit card statements, past tax statements, past tax returns, loan returns, loan agreements, W-2sagreements, W-2s

FINANCIAL PLANNING

STEP 2:

Analyze your Financial Information

2. NET WORTH:2. NET WORTH: ASSETSASSETS

(everything you (everything you OWN), OWN), minusminus

LIABILITIES LIABILITIES (everything you (everything you OWE money on)OWE money on)

See Net Worth Worksheet

Savings

Account

Cash

Car Loan

DVDCollection

Birthday

check

from Gram

Apartment Lease Car

(paid in

full)

Phone Bill

Paycheck

StudentLoans

GiftCards

$10 you oweyourfriend

House

(paid in f

ull) Mortgage

Assets and Liabilities

Savings

Account

Cash

Car Loan

DVDCollection

Birthday

check

from Gram

Apartment Lease Car

(paid in

full)

Phone Bill

Paycheck

StudentLoans

GiftCards

$10 you oweyourfriend

House

(paid in f

ull) Mortgage

Assets and Liabilities

Savings

Account

Cash

Car Loan

DVDCollection

Birthday

check

from Gram

Apartment Lease Car

(paid in

full)

Phone Bill

Paycheck

StudentLoans

GiftCards

$10 you oweyourfriend

House

(paid in f

ull) Mortgage

Assets and Liabilities

Who has the higher net worth?

JONES

Home: $300,000

Cars: $57,000

Savings Account: $21,000

Cash: $3,000

Mortgage: $275,000

Car Loans: $40,000

Student Loans: $56,000

Credit Card Debt: $6,000

SMITHS

Home: $125,000

Cars: $30,000

Savings Account: $45,000

Cash: $8,000

Mortgage: $75,000

Car Loans: $5,000

Student Loans: $6,000

Credit Card Debt: $0

FINANCIAL PLANNING

STEP 2:

Analyze your Financial Information

3. DISCRETIONARY 3. DISCRETIONARY (DISPOSABLE) (DISPOSABLE) Income:Income: The amount of

money you have to spend on non-essentials

Debt Ratio Example

Luke has a monthly NET income of $1700.

He spends…Rent and Utilities…………....

Food…………………………..

Gas and Car Insurance….....

Paying back Student Loans..

Paying back Credit Cards.....

Puts into Savings Account….

$850

$100

$220

$225

$75

$100

To calculate Discretionary Income:

1. Add up essential bills.850+100+220+225+75= $1470

2. Subtract this total from your net income.

$1700 – $1470 = $230

Your Discretionary Income would be $230.

FINANCIAL PLANNING

STEP 2:

Analyze your Financial Information

4. DEBT RATIO:4. DEBT RATIO: The amount of debt

you have compared to your income(the lower the better)

Monthly debt/monthly income

Debt Ratio Example

Luke has a monthly income of $1700.

He spends…Rent and Utilities…………....

Gas and Car Insurance….....

Food…………………………..

Paying back Student Loans..

Paying back Credit Cards.....

Puts into Savings Account….

$850

$220

$100

$225

$75

$100

To calculate Debt Ratio:

Divide the amount of debt by the amount of income.

Debt / Income = Debt Ratio

Total Debt = 225 + 75 = 300

(300 / 1700) = 17%

Your Debt Ratio is 17%.

FINANCIAL PLANNING

STEP 2:

Analyze your Financial Information

5. SPENDING 5. SPENDING HABITS:HABITS: Keep track of what

you buy EVERYDAY

Needs or wants Does the purchase

help you reach your goals?

YOUR TASK!YOUR TASK!

Use the handout provided in class to keep a spending log of all your cash inflow and outflow during the next 7 days.

I will collect it for a grade on Thursday, October 4.

FINANCIAL PRINCIPLES TO HELP YOU…

NEEDS VS. NEEDS VS. WANTSWANTS

Let’s go PLAY Let’s go PLAY in the hall!!!in the hall!!!

Needs – Essential living expenses

Wants – everything else

FINANCIAL PRINCIPLES TO HELP YOU…

OPPORTUNITY OPPORTUNITY COSTCOST

The cost of making one choice over another

Example: Jan turns down an afterschool job because she has to be at soccer practice.

Opportunity Cost: $ she would have made at job

Example: Jan quits the soccer team to get an afterschool job.

Opportunity Cost: enjoyment of sport she likes

FINANCIAL PRINCIPLES TO HELP YOU…

COST-BENEFIT COST-BENEFIT ANALYSISANALYSIS

Method of weighting the costs and benefits of an action.

Example: You are going on vacation in another state. It will cost you $200 to drive, but take 10 hours. It will cost you $400 to fly, but will take 3 hours.

Cost-Benefit: Is 7 hours of your time worth $200?

FINANCIAL PRINCIPLES TO HELP YOU…

MARGINAL MARGINAL BENEFITBENEFIT

The change in benefit of using one additional unit of something

Example: You are hungry and buy a slice of pizza. It tastes so good you buy another, but this one does not satisfy you as much as the first did.

ALSO CALLED: LAW OF DIMINISHING MARGINAL UTILITY

FINANCIAL PLANNING PROCESS

1. Set SMART Goals

2. Analyze your Financial Information

3. Create a Plan

4. Implement the Plan

5. Monitor and Modify the Plan

FINANCIAL PLANNING

Step 3:

Make a

BUDGET and stick to it!

A plan for managing your money during a given period of time

Always based on SMART goals

Will change as your income grows and your goals and priorities change

Parts of a BUDGET:

INCOMEINCOMESAVINGSSAVINGSEXPENSESEXPENSES

Parts of BUGET:

INCOMEINCOME is any money that you receive during a certain period of time

PaycheckAllowanceCash giftsInterest you

earn on savings and investments

Others

Parts of BUGET:

SAVINGSSAVINGS is money that you put aside and don’t spend

P.Y.F.P.Y.F.PAY YOURSELF

FIRST!

Philosophy of setting aside a certain amount of money as soon as you receive it

Supports LONG TERM goals

This is the money you use to invest

EMERGENCY FUND!3-6 MONTHS EXPENSES

Parts of a BUDGET:

EXPENSESEXPENSES are everything you spend your money on

FIXED EXPENSESVARIABLE EXPENSESPERIODIC/OCCASIONAL EXPENSES

Types of EXPENSES

FIXED FIXED EXPENSESEXPENSES

cost the same amount every time you pay them (usually once a month)

Examples:MortgageUtilities (if you are on

budget billing)Student loanCar loanCell phone planCable TV/InternetEtc…

Types of EXPENSES

VARIABLE VARIABLE EXPENSESEXPENSES

amount changes depending on how much you use

Examples:Utilities (if NOT on

budget billing)GroceriesCredit card billGas for your carEtc…

Types of EXPENSES

PERIODIC/ PERIODIC/ OCCASIONAL OCCASIONAL EXPENSESEXPENSES ones you don’t pay every month (could be fixed or variable).

Examples:Car insurance

(F)Auto Repairs (V)Clothing (V)Entertainment

(V)Gifts for others

(V)Etc…

FINANCIAL PLANNING FINANCIAL PLANNING PROCESSPROCESS

1. Set SMART Goals

2. Analyze your Financial Information

3. Create a Plan

4. Implement the Plan

5. Monitor and Modify the Plan

FINANCIAL PLANNING PROCESS

Step 4:

Implement the Plan

Put reminders all around you

Set up a system that will work for you

Practice DELAYED GRATIFICATION

Only spend in accordance with the plan

Methods of Staying on Track with Your BUDGET:

The Envelope System

The Tally System

Tracking with your Checkbook Register

The Budget Spreadsheet

Personal Finance Software

The ENVELOPE System

1. Label envelopes with each of your expenses categories

2. When $ comes in, distribute it among envelopes

3. Spend $ out of envelopes, when it’s gone – STOP SPENDING!

The TALLY System

1. Keep a notebook tally of everything you spend throughout day within categories (with receipts)

2. At end of day, add it up

Track with your CHECKING ACCOUNT REGISTER1. Use your updated

checking account register and statements to keep track of all income and expenses

2. Don’t forget to add cash withdrawals from ATMs

The BUDGET SPEADSHEET

1. Use spreadsheet software (like MS EXCEL) to track all your spending on the computer

2. We’ll practice this in class

PERSONAL FINANCE SOFTWARE

1. Purchase special software programs (like Quickbooks) to help you track your income and expenses

2. FREE = mint.com

3. The programs are easy to use and create reports for you

FINANCIAL PLANNING FINANCIAL PLANNING PROCESSPROCESS

1. Set SMART Goals

2. Analyze your Financial Information

3. Create a Plan

4. Implement the Plan

5. Monitor and Modify the Plan

FINANCIAL PLANNING PROCESS

STEP 5:

Monitor and Modify the Plan

Track your progress weekly, monthly or yearly and make changes as needed