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Chapter 4 Financial Decisions and Planning

Learn about needs and wants, measuring income and wealth, creating cash flow and net worth statements, making good financial choices, personal financial planning, and budgeting.

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Chapter 4 Financial Decisions and Planning

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  1. Chapter 4 Financial Decisions and Planning

  2. What Are Needs and Wants? • Needs are things you must have. • Examples: • Wants are things people desire. • Examples: • Financial resources are used to acquire goods and services. 4-1 Resources and Choices Slide 2

  3. How Are Income and Wealth Measured? • Personal cash flow statement: cash inflows and outflows • Inflows = income • Outflows = expenses • Inflows > Outflows • Outflows > Inflows 4-1 Resources and Choices Slide 3

  4. Personal Cash Flow Statement Cash Inflows Total cash inflows _______ Cash Outflows Total cash outflows _______ ____________ Net Cash Flow ________ Slide 4

  5. How Are Income and Wealth Measured? • Personal net worth statement: based on assets and liabilities • Assets = money or items of value • Liabilities = debts • Assets – Liabilities = Net Worth Slide 5

  6. How Is Wealth Measured? Net Worth 4-1 Resources and Choices Slide 6

  7. Personal Net Worth Statement • Create your own! • Use page 120 as a reference Slide 7

  8. How Can You Make Good Financial Choices? Decision-Making Process • Define the need. • List options for meeting the need. • Compare the options. • Consider the opportunity cost—the value of your next best option. • Make a decision. • Take action based on your decision. • Reevaluate your choice. 4-1 Resources and Choices Slide 8

  9. What Is Financial Planning? • Financial planning is a process of looking at your current financial situation and thinking about your future. • A financial plan has personal and financial goals along with steps and a timeline. 4-3 Personal Financial Planning Slide 9

  10. Steps of a Financial Plan • Step 1: Gather financial information • Step 2: Analyze information • Step 3: Set goals • Step 4: Develop a timeline and benchmarks • Step 5: Implement and evaluate the plan 4-3 Personal Financial Planning Slide 10

  11. Financial Plan (One Goal) 4-3 Personal Financial Planning Slide 11

  12. What Is the Purpose of Budgeting? • A budgetis a spending and saving plan. • It is based on estimated income and expenses. 4-2 Basics of Budgeting Slide 12

  13. How Do You Prepare a Budget? • Step 1: Estimate income • Step 2: Plan savings • Step 3: Estimate expenses • Variable expenses • Fixed expenses • Charitable giving • Step 4: Balance the budget 4-2 Basics of Budgeting Slide 13

  14. Personal Budget 4-2 Basics of Budgeting Slide 14

  15. Analyzing Your Budget • Variances: Differences between planned amounts and actual amounts • Reasons for variances? • Why should you analyze your budget? • Analyze budget on page 130 Slide 15

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