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BUDGETING YOUR MONEYPART 1
Mr. Stasa – Willoughby-Eastlake City Schools ©
http://www.youtube.com/watch?v=OiMs5qblQGQ
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Review… (It’s back…!)
What is the 70-20-10 rule? What are short-term, intermediate,
and long-term goals? What are SMART goals?
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What do you spend money on? Cell phone Soda Snacks Food Clothing Gasoline Car Insurance School supplies Gifts
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Why Budget?
A spending plan (budget) is a paper or electronic document used to record planned and actual income through expenditures over a period of time
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Income
Food
SavingsInsurance
Housing
Transportation
Taxes/Deductions
Communication
MedicalClothing/Other
Entertainment
Categories
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6-Step Spending Plan
Process
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Step 1:Set
Financial Goals
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Step 1: Set Financial Goals Set financial goals for the present
and the future.
Use the SMART goal process.
Have short-term, intermediate, and long-term goals
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Step 2:Estimate
Your Income
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Step 2: Estimate Your Income Estimate the amount of income you
expect to earn for the month Paycheck Interest Investment earnings
Do not list income sources that you may not receive Gifts, lottery, etc.
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What is Earned Income?
Earned income is income earned through a paycheck or labor provided.
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What is Unearned Income?
Unearned income is income received other than through a paycheck or wages.
Examples include: Interest Gifts Investments
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Step 3: Plan for Unexpected Emergencies
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Step 3: Plan for Unexpected Emergencies
Always save at least 8 months of living expenses at all times for emergencies.
http://www.youtube.com/watch?v=E_ctwPiDgHk
http://www.youtube.com/watch?v=rGGLmoCWJbI
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P.Y.F. PYF (Pay Yourself First)
Always set aside money to save for emergencies and goals before spending.
http://www.youtube.com/watch?v=NKjFhUkf42o
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Emergency Fund
An emergency fund is money that is saved for unexpected emergencies.
Unexpected emergencies may include: Car repairs Job loss Health problems
http://www.youtube.com/watch?v=E_ctwPiDgHk
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Step 4: Budget Fixed Expenses
Fixed expenses are monthly expenses which do not change in price.
Examples include: Mortgage payments Student loan payments Car payments Car insurance Health insurance
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Step 5:Budget Flexible Expenses
Flexible expenses are monthly expenses which change in price each month.
Examples include: Gas Electricity Water Groceries
http://www.monkeysee.com/play/6313-what-is-the-difference-between-a-fixed-and-variable-expense
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Step 6: Record Actual Spending List how much you actually earned
and spent.
You will sometimes spend exactly what you estimated, more, or less.
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Step 6: Record Actual Spending
A budget variance is the difference between your estimated spending amounts and actual amounts.
A budget surplus is when you spend less than you estimated
A budget deficit is when you spend more than you estimated.
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Budgeting Part II
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Ian Mitchell
Income - $30,000
Net Worth - $50,000
Income - $85,000
Net Worth - $35,000What is your definition of financial wealth? How is it that Ian is wealthier than Mitchell, yet Mitchell makes more than double the income than Ian? What factors do you think could cause such a difference?
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ASSETS LIABILITIES
Checking acct
$800 Credit card $1,200
Savings Account
$4,000 Car loan $3,500
Pepsi stock $6,500 House mortgage
$123,000
Retirement fund
$16,000 Computer payments
$500
House $140,000 Student loans $23,000
Furniture $8,000 TOTAL LIABILITIES
$151,200
Car $14,500 NET WORTH:
Loan to brother
$3,000 Assets – Liabilities = Net worth
Jewelry $400 193,200-151,200 = $42,000
TOTAL ASSETS
$193,200
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Personal Balance Sheet
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What’s a personal balance sheet?
A personal balance sheet is a current snapshot of your financial situation.
A personal balance sheet lists Current assets (amounts you own) Current liabilities (amounts you
owe) Net worth (measure of your
wealth)
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To determine exactly how much money you own and owe
To track progress towards goals Lenders will ask at the time of
applying for loans, accounts, life insurance, etc.
Provides a financial report card that allows you to evaluate your current financial health
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Why do you need a personal balance sheet?
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What Should My Net Worth be Doing? Your net worth should increase
as you age because…. You gain more assets as you age Your debts are gradually paid off as
you age Once you retire, your net worth
will gradually decrease
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How Much Should it be?
Net Worth Estimation Formula
Example: At the age of 22, earning $35,000 per year…
22 x 35,000 / 10 = $77,000
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http://video.cnbc.com/gallery/?video=3000164039
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What About Beth? Calculate if Beth’s net worth of $307,111 is on track from the
Suze Orman clip: http://video.cnbc.com/gallery/?video=3000164039
Beth’s current age:
Beth’s monthly income:
Beth’s annual household income (multiply her monthly income by 12)
What should Beth’s estimated net worth be?
Is Beth’s current net worth on track or off track of where she should be?
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43 years old
$3,100
$3,100 x 12 = $37,200
43 x $37,200 / 10 = $159,960
Beth’s current net worth is $307,111Her current net worth is more than on track of where it should be.
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Categories of a Balance Sheet
1. An asset is any item of value that you own
Examples: Cash Property Collectibles Investments
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How much is it worth?
You should list assets at their current value, not the value they were purchased at.
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Use fair market value!
The fair market value is the price at which a willing and rationale buyer would pay.
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Derek purchased a car for $12,000 two years ago
Today’s current market value = $8,500
Example:
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Categories of a Balance Sheet Liabilities: Debts you owe that have not
been fully paid
Examples: Loans Mortgage Credit card bills Medical bills
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What’s net worth
Net worth is a true measure of your wealth.
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Assets Liabilities
Net Worth
http://video.cnbc.com/gallery/?video=3000164039
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Net Worth vs. Income
Net Worth Income
A person may have high income and low net worth or vice versa
Depends on how a person manages their
income
Money received such as wages earned from
working for pay
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Figure this out…
What is your current net worth if you have $4,000 in assets and $1,250 in liabilities?
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ASSETS - LIABILITIES = NET WORTH
$4,000 - $1,250 = $2,750
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So who is wealthier?
Ian’s Statement of Financial Position Mitchell’s Statement of Financial PositionAssets Assets
Home 60,000 Home 100,000Retirement Savings
20,0005,000
Retirement Savings
20,0007,000
Automobile 10,000 Automobile 20,000Total Assets $95,000 Total Assets $147,000
Liabilities LiabilitiesMortgage (house loan) 40,000 Mortgage (house loan) 80,000College loan 5,000 College loan 20,000Automobile loan 0 Automobile loan 10,000Credit card debt 0 Credit card debt 2,000Total Liabilities $45,000 Total Liabilities $112,000Net Worth $50,000 Net Worth $35,000
Income - $30,000Net Worth - $50,000
Income - $85,000Net Worth - $35,000
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ASSETS LIABILITIES
Checking acct
$800 Credit card $1,200
Savings Account
$4,000 Car loan $3,500
Pepsi stock $6,500 House mortgage
$123,000
Retirement fund
$16,000 Computer payments
$500
House $140,000 Student loans $23,000
Furniture $8,000 TOTAL LIABILITIES
$151,200
Car $14,500 NET WORTH:
Loan to brother
$3,000 Assets – Liabilities = Net worth
Jewelry $400 193,200-151,200 = $42,000
TOTAL ASSETS
$193,200
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Personal Balance Sheet