Essential Standard 8.0 Apply procedures for managing personal finance.

1. Essential Standard 8.0Apply procedures for managing personal finance. Objective 8.02 Students will understand personal financial planning

2. ESSENTIAL QUESTIONS • What are the steps in financial planning? • What are the benefits of financial planning? • What are the basic types of financial statements, and how is each used? • How do income and expense statements compare with spending plans? • How do I utilize a spending plan?

3. What is Financial Planning? • Make financial planning your road map on a trip to financial success! • Where are you going? (goal or destination) • What road will you use to get there? (I-85) • Will you have changes along the way? (Take a scenic byway or visit a state park) • Will you move faster through some roads than on others? (Rural or interstate) • Will there be unexpected detours? (bridge out) • What tools might you need? (to change lat tire) • Where will you stop to get fuel? • Where will you stop to eat? • Where will you stay overnight? • Used for planning ways to reach financial goals • A continual, cyclical process of tracking, then anticipating, income and expenses

4. Brainstorm Income Items

5. Income Items Earned Income Other Income Sources Interest from savings Dividends from stock Lottery/gambling usually an expense! Tax refund based on past overpayment Loans Must be repaid Gifts Inheritance wills Scholarships • Wages-hourly • Tips, Gratuity • Salary • Commission • Production/piece rate • Combination • Contract labor • Bonuses

6. Brainstorm Expense Items

7. Expense Items • Housing • Rent/Mortgage • Maintenance • Utilities –gas, electricity, garbage • Homeowner’s insurance • Furniture, appliances, kitchen equipment • Taxes • Income • Property • Sales • Food • Restaurant, Grocery store • Insurance • Health • Life • Disability • Transportation • Auto/truck payments, lease • Fuel • Tires, oil, maintenance • Insurance • Public transport, parking • Other Expenses • Entertainment • Movies, vacation, games • Cleaning & health supplies

8. What are the Steps in Financial Planning? 1. Identify financial goals 2. Prepare a balance sheetshowing what you own and what you owe 3. Track income and expenditures for a set time period, usually a month, and record in an income and expense statement 4. Analyze amount of money earned and how it was spent • Prepare a spending plan (budget)with anticipated income and expenses to meet financial goals during the next time period 6. At the end of the time period, revise financial goals, if needed, and use the actual income and expenses to again analyze income and how it was spent 7. Prepare your next spending plan

9. Review: What are the Steps in Financial Planning?

10. What are Benefits of Financial Planning? • Learn to live “within one’s means” • Helps avoid financial difficulties • Have resources for one’s desired standard of living • Reduces the need to use credit 5. Increases sense of security 6. Lessens anxiety about money matters 7. Stay in control of finances 8. Become financially independent

11. Financial Statements • Three types of financial statements, in bold on the previous slide, are needed for financial planning. • Balance Sheet • Income and Expense Statement • Spending Plan • aka Budget

12. Balance Sheet • Shows assets, liabilities, and net worth of an individual, family, business, or government entity • Assets • things of value that you own • Liabilities • Debts owed • Owners Equity/Net Worth • Formula: Assets-Liabilities = Owner’s Equity/Net Worth • OE & NW are two names for the same thing! Formula : Assets - Liabilities = Net Worth • Reason used: need to know financial status in order to plan finances

13. Sample Balance Sheet • Both sides of the balance sheet must be equal • Assets = Liabilities + Owner’s Equity

14. Answer on your notes page before going to next slide. Who is Wealthier? Juanita – earns $35,000 per year Alexis – earns $100,000 per year

15. Elements of Spending Plans • Income • money earned from wages, salaries, tips, withdrawals from savings and investments, interest earnings, scholarships, sales of properties, and gifts • Expenses • due by a specified date, often agreed upon in a contract; difficult to change in a short time • Flexible expenses---not due by a specified date; usually these are easier than fixed expenses to reduce or eliminate Income – Expenses = Net Gain/Net Loss • Net gain -when one has more income than expenses, the difference between the two • aka net profit/surplus • Net loss -when one has more expenses than income, the difference between the two • aka net deficit

16. Income Statement Shows income (revenue) and expenses (expenditures) for a family or business Formula: Income – Expenses = Profit/Loss • Income • Total earnings received • Includes wages, salary, tips, commission, gifts, bonuses, interest, dividends • Expenses • Any expenditure; anything that costs money • Includes utilities, food, entertainment, transportation costs, health care, shelter, clothing, taxes • IF Expenses > Income = LOSS • IF Income > Expenses = PROFIT • Reason used: need to know financial status in order to plan finances

17. Sample Income Statement Is there a Surplus or a Deficit? What is the formula to calculate surplus or a Deficit? What could Elana do with this information? Answer on your notes page before going to next slide.

18. Sample Income Statement Answer on your notes page before going to next slide. Income Items List 5 income items an individual might have. Expenditure Items List 5 expense items a family might have.

19. Profit/Surplus or Loss/Deficit Essential Question: What is the basic financial (profit) formula? ______________ - _______________ = Profit/Loss Business 1 Taylor’s Grocery Store revenue for this year is $91,750. The owner noticed an increase of $3,000 in the store’s expenses. She determined that total expenses equal $81,000? Will this business net a profit or loss? _______ How much profit or loss? ________ Business 2 Harry’s Shoe Store has noticed a significant increase of revenue of $123,000. The manager has also determined that the total expenses equal to $128,000. Will this business net a profit or loss? _______ How much profit or loss? ________ Business 3 Malinda’s Auto Dealership of Imported Cars made $895,000 in revenue. The accountant determined total expenses equal to $598,000. Will business net a profit or loss? _____ How much profit or loss? ________ Answer questions on your notes page before going to next page!

20. Key Businesses 1-3 Did you get the right answers before you looked? Business 1 Taylor’s Grocery Store revenue for this year is $91,750. The store manager noticed an increase of $3,000 in the store’s expenses. She has determined that the total expenses equal to $81,000? Will this business net a profit or loss? Profit • How much of a profit or loss? +$10,750 ( 91750-81000) Business 2 Harry’s Shoe Store has noticed a significant increase of revenue of $123,000. The manager has also determined that the total expenses equal to $128,000. Will this business net a profit or loss? Loss How much of a profit or loss? -$5,000 ( 123000-128000) Business 3 Malinda’s Auto Dealership of Imported Cars made $895,000 in revenue. The manager has determined that the total expenses equal to $598,000. Will this business net a profit or loss? Profit How much of a profit or loss? +$297,000 (895000 – 598000)

21. Profit/Surplus or Loss/Deficit Family 4 The Breck family had income of $71,250 this year. The family spent $81,000. 1. How much profit or loss? ________ 2. What will the Breck’s need to do next year? 3. How do you think they took care of this financial situation in the short term? Family 5 Mr. Hennessee earned $72,000 and Mrs. Hennessee earned $44,000 last year. Their stock earned $1000 in dividends. Mr. Hennessee totaled all expenses for the family equal to $109,000. 1. What is their total family income ? 2. How much is the surplus or deficit? Family 6 Last year Jimmy earned $54,000 in salary and commission @ 2% of $185,000 sales Jimmy spent $45,987. 1. What is Jimmy’s total income? 2. How much Surplus or Deficit does Jimmy have? 3. What changes might Jimmy make to his budget (spending plan) because of this information?  Essential Question: Which accounts appear on an income statement? Answer on your notes page before going to next page!

22. Net Worth Activity Essential Question: What is the Net Worth Formula? _______________ - ________________ = Net Worth/Owner’s Equity Scenario 1 Taylor has assets of $189,750. Their total liabilities are $172,250. What is Taylor’s net worth? Scenario 2 • Harry Stevens has assets as follows: cash in bank $18,500, IBMstock $25,000, vehicles $32,000, record collection $2,500 and artwork $1,000. Harry owes $12,500 to MasterCard, $21,750 for his mortgage. What is Harry’s net worth? Scenario 3 • Malinda has the following assets: cash $32,000, savings $15,000, car $13,000. Malinda’s has the following liabilities: college loan $35,000, car loan $3,000, and Visa card $2400. What is her net worth? • Essential Question: Which type of accounts appear on a balance sheet? Answer on your notes page before going to next page!

23. Income and Expense Statement • A list of all income and expenses for a specified time period • A historical type of record that serves as the basis for a spending plan • Shows whether individual/family was able to live within their means • Shows where income was spent • Shows when expenses exceed income and areas of excess expense • Shows if income was sufficient to meet expenditures

24. Comparison of Income and Expense Statement with Spending Plan

25. Gumball Analogy • Gumball machine represents components of the financial planning process • Income- money earned • Gumballs going into the machine • Wages from a job, allowance, gifts, interest, dividends

26. Gumball Analogy • Expense- money spent • Money going out of the gumball machine • Fixed expenses -may have a fixed amount due each month and are contractual • Ex: rent, insurance, car payment • Flexible expenses -can vary each month in the amount owed and are not contractual • Ex: food, auto fuel, entertainment

27. Gumball Analogy Always have more money coming in than out! Work towards building wealth! • Income(money in) • Net Worth (wealth) • Flexible Expenses (money out) • Fixed Expenses (money out)

28. Spending Plan • Also known as “aka”- budget or financial plan • A tool used to plan income and expenses for a future time period • Used to track income and expenditures • Used to evaluate spending at the end of a time period

29. Typical Spending Plan Pie Chart Provides guidance when creating a spending plan 1. What variables may cause these percentages to be different? 2. How does the family life cycle affect the percentages? Answer on your notes page before going to next page!

30. Steps to Create a Personal Budget • Track your current income and expenses • Create personalized income & expense categories • Allocate money to each category • Implement and control • Evaluate & make adjustments Answer on your notes page before going to next page! What does allocate mean? Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 4– Implement and Control Step 2– Creating Personalized Income and Expense Categories Step 3– Allocate Money to Each Category

31. Creating a Personal Budget Step 1: Track your current income and expenses • Use income statement as your tool • Estimate $ income & expense • Designate a time period • Be as accurate as possible • Be realistic • If you don’t know how much you spend, • Carry a small notebook and write down everything you spend for a few weeks or • Keep receipts and input into a cell phone

32. Step 1: Track Current Income and Expenses Necessary to creating a realistic spending plan

33. Payroll Deductions What are two items or services you use that are paid for by taxes? • Taxes • Required by local, state, and federal governments • Provide public goods and services • Take out approximately 30% of an individual’s gross income • Payroll deductions: • Federal Taxes (mandatory) • State Taxes (If applicable) • Federal Insurance Contribution Act (FICA tax) (mandatory) • R S D HI • Retirement (depends upon the employer) • Health care benefits (depends upon the employer) • Other optional deductions What does RSDHI stand for? What does mandatory mean? Answer questions on your notes page before going to next page!

34. Answer questions on your notes page before going to next page! Gross income vs. Net Income Question: Which of the above payroll deductions are mandatory?

35. Calculating Gross Income/Wages/Pay Hourly wages Example Calculate gross wages for: 43 hours a week 40 hours x $8.00=$320.00 regular pay 3 x $12.75 = $38.25 OT wages Total gross wages = $358.25 ($320.00 + 38.25) • # of hours x regular rate of pay= gross wages • 40 hours x $8.00=$320.00 • Overtime rate = 1.5 x regular rate of pay • 1.5 x $8.50 = $12.75 OT rate Fair Labor Standards Act (FLSA) regulates: Minimum wage, maximum hours, child labor, minimum wage rate

36. Calculate Commission Wages • Commission rate x amount of sales= commission $ earned • Zach sold $650,850 in the electronics department. He earns 5% commission on all sales. • How much did Zach earn? $650,850 X 5% $3254.25 Practice: How much did Zach earn if his commission rate is only 3%? Answer question on your notes page before going to next page!

37. Answer questions on your notes page before going to next page! Practice Calculations • Alex earns 2% commission on sales. His sales for this month were $760,550. • What did Alex earn in commissions? • Katie earns $10.40 per hour. Katie worked 43 hours this week? • What are her regular wages? • How much is her rate for overtime (OT)? • What are her overtime wages? • What are her total wages?

38. Allocate $ to Each Category Graphs can be easily created from spreadsheet Programs. What are the other types of graphs?

39. Anticipated Expenses • Housing 30% • Monthly rent/mortgage, utilities, homeowners insurance, property taxes, maintenance, furnishings • Transportation- 20% • Monthly payment/lease, license, registration, vehicle insurance, maintenance, fuel, public transport fees, parking fees • Food -15% • Food from grocery store, meals at restaurants, snacks eaten out (coffees, treats), Party and entertainment foods, non-food kitchen supplies • Insurance 7% • Arrangement between an individual and an insurance company to protect the individual against risk • Health- pays a portion of health care expenses if one is sick or injured • Disability- provides financial support if an individual is injured and cannot work • Life- provides financial support to an individual’s beneficiaries upon death • Saving & Investing-10% • Keep 3-6 months $ liquid (cash available) • Other – 18% • Gifts, vacations, contributions, childcare, grooming, education, entertainment, medical costs, clothing, pet care, communication costs

40. Anticipated Expenses • Budgets are estimates of forecasted income/expense • Budgets must be flexible to adjust for change Q: Why are we interested in the difference between anticipated amounts and actual spending/income? A:we will need to change the next budget period to reach our financial goals Differences/Variances are easy to calculate using a spreadsheet program! See next slide.

41. Variations in Budget Categories Noah expected to earn $300 wages at his part-time job. He received a A $.50 per hour raise. His gross wages were $325. 2. Steve budgeted $500 for transportation. When his transmission went bad the bill was $1150. 3. Joe budgeted $2300 in commission at his job. Due to the recession, his sales only generated $1950. Todd and Noel celebrated his big promotion with a weekend in Vegas. They spent $2000, but had only budgeted $300 for entertainment.

42. The Costs Add Up • Eating lunch out 5 days per week • $5-$10 daily • $1,300-$2,600 per year • Daily sport drink • $2.00 daily • $730 per year • Weekly date night at the movies with popcorn • $30 per week • $1,560 per year • Daily Latte • $3.75 every day • $1,369 per year

43. Review: Which Items are Income? If an expense, which of these items are fixed/variable? Scholarships Gift from family Groceries Utilities Automobile registration Internet bill Eating out/Snacks Hobbies Wages Paying Rent Answer questions on your notes page before going to next page!

44. Spending Plan Template • Everyone uses a different program to create a spending plan • Paper and pencil • Online software • Electronic programs such as Microsoft Excel and Word • Must be something that an individual can manage effectively carmen's budget estimator

45. Check Register System • Track expenditures in check register • Note beside check written- type of expenditure • Advantage: • Process only by authorized signatures at the bank • Forged documents are not your legal responsibility • Disadvantage • You can spend more money than is in your checkbook • “Bounced check”, Not sufficient funds (NSF) • NSF charges from the bank $25-40 per item

46. Implement & Control • Confirmation of expense tracking is accurate • Continued monitoring of spending helps to adjust spending to meet goals • How can you monitor and control? • Envelope system • Check register system • Electronic spending plan system

47. Envelope System • Put actual budget amount of cash from paycheck into envelope labeled for that purpose • Write actual withdrawals on envelope • Could also put receipts inside envelope • Evaluate during month or at end • Disadvantage • If theft occurs, no reimbursement for lost cash • Banks and credit cards have reimbursements options • Advantage • You cannot spend $ not in envelope!

48. Electronic Spending Plans • Computer spreadsheet programs • Specialized software available • Use Online options, downloaded programs • Excel style formulas help calculate costs • Disadvantage • Only recording information after the fact • Does not keep you from spending • Cash envelope system • Advantage • Software Calculates totals for you • Can compare actual to estimated • Can create graphs

49. How will you keep track? • Carry a small notebook to write down expenses? • Keep a check register showing expenditures? • Keep all receipts in folders or envelopes? • Use a debit card if your depository institution creates spending reports for your account? • Input info into a cell phone application? • Use an Excel spreadsheet? • Purchase specialty budget software packages? Must work for the individual! There is not one right method!

50. Evaluate & Make Adjustments • Review previous steps & evaluate how actual compares to budget • surplus/deficit • Adjust next time period for changes • Use gumball analogy for income and expenses 1. Did I have money to pay bills? 2. Was there money left over? 3. Did I spend more than I earned? 4. Can I increase my income? 5. Can I reduce expenses? 6. What do I need to change?