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Understanding Personal Finance: Budgeting Essentials in FIN 200

This module in FIN 200: Personal Finance, led by Instructor Lawrence Schrenk, focuses on budgeting fundamentals. Students will learn to explain the elements of personal cash flow statements and balance sheets. By the end, participants will be able to construct their own cash flow statements and balance sheets, essential tools in managing personal finances effectively. Understanding cash flow categorization will empower students to make informed financial decisions and achieve their financial goals.

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Understanding Personal Finance: Budgeting Essentials in FIN 200

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  1. FIN 200: Personal Finance

    Topic 5-Budgeting Lawrence Schrenk, Instructor
  2. Learning Objectives Explain the elements contained in a personal cash flow statement and balance sheet. ▪ Construct a personal cash flow statement and balance sheet. ▪

  3. Cash Flows

  4. Cash Flow Categorization I Inflow versus Outflow Pay Period versus Pro Rated Single versus Repeated Expected versus Unexpected Voluntary versus Involuntary Cyclical versus Non-Cyclical
  5. Cash Flow Categorization II Inflow versus Outflow Positive–Salary, Interest, etc, Negative–Groceries, Car Payments Pay Period versus Pro Rated Pay Period–Groceries, Recreation Pro-Rated Cash Flows that Extend beyond One Pay Period–Water Duration: Monthly, Quarterly, Annual
  6. Cash Flow Categorization III Single versus Repeated Bonus, Lottery Salary, Rent Expected versus Unexpected Lottery Salary, Rent Involuntary versus Voluntary Salary, Rent Recreation ▪
  7. Cash Flow Categorization IV Cyclical/Seasonal Gas (Winter–Heating) Heating Oil (Winter–Heating) Electricity (Summer–Air Conditioning) Non-Cyclical/Non-Seasonal Salary Water* Recreation* Food Telephone Insurance * May vary.

  8. Cash Inflows

  9. Salary Paycheck versus Direct Deposit Pay Stub (Proof Monthly Earnings) Salary Estimation Bureau of Labor Statistics (BLS) Data Salary Wizard (CNNMoney.com)
  10. Salary and Wealth Cycles College Career Retirement Cash Flows Age ▪ Savings

  11. Cash Outflows

  12. Withholdings Employee’s Earnings Statement (Pay Stub) Federal Tax FICA/Med FICA/Med (Social Security) Medicare State Taxes Insurance (Medical and Life) Flexcomp (Flexible Spending Plan) Medical Dependent Care Retirement Contribution
  13. Typical Cash Outflows Rent/Mortgage Monthly, Constant Utilities (Some minimally voluntary) Insurance Auto Expenses Miscellaneous Food, Recreation, Clothing

  14. Balance Sheet

  15. Assets Market Value versus Price Paid Liquid Assets Immediate Liquidity No Selling Loss Day-to-Day Expenses Household Assets Very Little Liquidity High Selling Loss Investments Moderate Liquidity No Selling Loss, but Commissions, etc.
  16. Software I Packages Quicken Money Yodlee MoneyCenter Free service, but registration required Uses data from your bank accounts, credit cards, mortgage, etc. Categorizes by type, not payee Shell and Citco payments both go under ‘gas’ Net-worth statement Bill reminders Should be safe: used in major banks' online products
  17. Software II Mint.com Free service, but registration required Less sophisticated than MoneyCenter No investment accounts But more user friendly Online community Budget Calculator (CNNMoney.com)
  18. Potential Problems Cash Leakage You cannot Easily Monitor or Analyze Cash Payments Going beyond your Financial Limits Spending, Borrowing Thinking of Luxuries as Necessities Jimmy Choo shoes are not necessities. Nothing made by Ferrari is a necessity. Spending More than You Make Spending Creep Misusing ‘Windfalls’, e.g., Bonuses Relying on ‘Windfalls’

  19. Changing Statements

  20. Current Cash Flows
  21. Current Balance Sheet
  22. New Balance Sheet
  23. New Cash Flows
  24. Project Notes
  25. Ethical Dilemma Dennis and Nancy do not have sufficient money for a down payment on a house. Nancy's Uncle Charley has agreed to loan them the money, but requests a personal balance sheet and cash flow statement as well as tax returns for the last two years. While Dennis has been working substantial overtime, the overtime will not continue, so Uncle Charley may not loan them the money. They choose to provide the last two years' personal cash flow statements and tax returns, but not to provide any additional information unless he asks. a. Comment on Nancy and Dennis' decision not to provide the information underlying their cash flow statement. What potential problems could result from their decision? b. Discuss in general the disadvantages of borrowing money from relatives.
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