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