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“Take Charge of Your Finances” Advanced Level

Financial Planning &Spending Plans

© Family Economics & Financial Education – Updated May 2011 – Spending Plan Unit – Spending Plans – Slide 2Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Typical Spending Plan Pie Chart Housing ;

Spending Plan Major Expen-ditures; 0.3;

30%

Transporta-tion; Spending

Plan Major Expenditures;

0.2; 20%

Food; Spend-ing Plan Major Expenditures;

0.15; 15%

Insurance; Spending Plan Major Expen-ditures; 0.07;

7%

Other; Spend-ing Plan Major Expenditures;

0.18; 18%

Saving and Invest-ing; Spending Plan

Major Expendi-tures; 0.1; 10%

Housing TransportationFoodInsuranceOtherSaving and Invest-ing

Provides guidance when creating a spending plan

What variables may cause these percentages to be different?


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Having a plan

Financial planning - a tool used for planning ways to achieve financial goals

A continual, cyclical process of tracking, then anticipating, income & expenses


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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?


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Steps in Financial Planning

1. Identify financial goals2. Prepare a balance sheet showing what you own & what

you owe3. 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


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Steps in Financial Planning5. Prepare a spending plan 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

Step 2– Creating

Personalized Income and

Expense Categories

Step 1- Track Current Income and Expenses

Step 5– Evaluate and

Make Adjustments

Step 4– Implement and

Control Step 3–

Allocate Money to Each

Category

Spending Plan Development

Process


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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 Increases sense of security Lessens anxiety about money matters Stay in control of finances Become financially independent


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Financial Statements Three types of

financial statements are needed for financial planning.

Balance Sheet

Income and Expense Statement

Spending Plan aka Budget


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Balance Sheet A financial statement that shows the assets, liabilities, and

net worth of an individual or family on a set date• Asset - Anything with monetary value that a person owns• Liability - Anything that is owed to someone else; a debt• Owner’s Equity/Net Worth - The amount of money remaining

when total liabilities are subtracted from total assets• Assets – Liabilities = Net Worth• OE & NW are two names for the same thing!

• Reason used: need to know financial status in order to plan finances


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Sample Balance Sheet BALANCE SHEET*

Date

ASSETS LIABILITIES

Cash Credit card balance

Savings account Car Loan balance

Vehicle College Loan balance

Electronic Equipment Other:

Total assets Total liabilities

Owner's equity (Net Worth)

(Total assets-Total liabilities)

• Both sides of the balance sheet must be equal • Assets = Liabilities + Owner’s Equity


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Who is Wealthier?Juanita – earns $35,000 per yearAssets

Home $60,000Retirement $24,000Automobile $8,000

Total Assets $92,000LiabilitiesCollege loan $6,000Mortgage $35,000Total Liabilities $41,000

Net Worth $51,000

Alexis – earns $100,000 per yearAssetsHome $75,000Retirement $35,000Automobile $8,000Total Assets $118,000LiabilitiesCollege loan $10,000Automobile loan $4,000Credit card debt $20,000Mortgage $65,000Total Liabilities $99,000Net Worth $19,000


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Net Worth Activity

Essential Question: What is the Net Worth Formula?_______________ - ________________ = Net

Worth/Owner’s EquityScenario 1

Taylor has assets of $189,750. Their total liabilities are $172,250. What is Taylor’s net worth?


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Net Worth Activity 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?


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Income & Expense Statement Shows income (revenue) and expenses (expenditures) for

a specified time period usually a month or a year• 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• Formula: Income – Expenses = Profit/Loss

IF Income > Expenses = PROFIT IF Expenses > Income = LOSS


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Income & Expense Statement A historical type of record that serves as the basis for a

spending plan Shows whether individual/family was able to live within

his/her/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


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Elana RoceraIncome Statement

For Month Ending November 30, 20xx

IncomeSalary $3,200 Commission $1,050 Interest $45 Dividends $35 Total Income $4,330

ExpensesUtilities $200 Car payment $350 Car maintenance $250 401-K $800 Insurance $750 Clothing $200

Entertainment 0Food $300 Total expenses $2,850 Net Surplus/Deficit $1,480

Is there a Surplus or a Deficit?

What is the formula to calculate surplus or a Deficit?

What could Elana do with this information?

Sample Income Statement


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Profit/Surplus or Loss/Deficit Business

What is the basic financial (profit) formula? ______________ - _______________ = Profit/LossBusiness 1Taylor’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? ________


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Profit/Surplus or Loss/Deficit Business

Business 2Harry’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 3Malinda’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? ________


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Profit/Surplus or Loss/Deficit Individual Family 4The Breck family had income of $71,250 this year. The family spent $81,000.

1. How much profit or loss? ________2. How do you think they took care of this financial situation in the short term?

Family 5Mr. 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?


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Profit/Surplus or Loss/Deficit Individual Family 6Last year Jimmy earned $54,000 in salary and commission @ 2%

of $185,000 salesJimmy 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?


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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

A financial statement used to plan income and expenses for a future time period; also known as a budget or financial plan

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


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Everyone has a unique spending plan Based upon

the following elements:

ValueA fundamental

belief about what is desirable,

worthwhile, and important to an

individual

NeedAn essential

item required for

life

WantSomething

unnecessary, but desired

What does the Brown Family value? How will these values affect their spending?


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Components of a Spending Plan Gumball machine

represents components of the financial planning process

Income - money earned Gumballs going into the

machine Wages from a job, allowance,

gifts


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Components of a Spending Plan Expense - money spent Money going out of the gumball

machine Fixed expenses -may have a fixed

amount due each month and are contractual

Flexible expenses -can vary each month in the amount owed and are not contractual


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Spending Plan Activity Decide if each item would be income, a fixed

expense, or a flexible expense Indicate a response by holding up the

corresponding activity card


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Spending Plan ActivityPaying Rent

Fixed expense

Wages

Income


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Spending Plan ActivityGroceries

Flexible expense

Internet bill

Fixed expense


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Spending Plan ActivityTips

Income or Flexible Expense

Utilities

Fixed expense


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Spending Plan ActivityGift from family

Income

Savings

Fixed expense or Income


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Spending Plan ActivityAutomobile registration

Fixed expense

Eating out/Snacks

Flexible expense


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Spending Plan ActivityScholarships

Income

Hobbies

Flexible expense


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How to Develop and Maintain a Spending Plan

Steps 1-3 help develop a spending plan

Steps 4-5 help maintain a spending plan Evaluate and adjust to

meet personal needs and adapt to life changes

Spending Plan Development

Process Step 2– Creating Personalized Income and

Expense Categories


Step 5– Evaluate and Make

Adjustments


Control Step 3– Allocate Money to Each

Category


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Step 1: Track Current Income and Expenses

Step 2– Creating Personalized Income and

Expense Categories



Adjustments

Step 4– Implement and Control

Step 3– Allocate Money to Each

Category

What period of time will your spending plan include?

Usually concurrent with payday

How much money am I earning?

Income

How much money am I spending?

Expenses

Necessary to creating a realistic spending plan


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Tracking Methods Carrying a small notebook and writing down all

expenses Keep all receipts Use a debit card if your depository institution

creates spending reports for your account Input information into a cell phone Cell phone applications

Must work for the individual! There is not one right method!


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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


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Gross vs. Net Income

• Total amount of money earned during a pay period (salary or hourly wage x hours worked)

Gross Income

• Taxes• Retirement• Health Benefits

Payroll Deductions • Take home pay

(the amount of the paycheck)

Net Income


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Payroll Deductions Taxes

Required by local, state, and federal governments Provide public goods and services Account for approximately 30% of an individual’s gross

income

Payroll deductions: Federal Taxes (mandatory) State Taxes (If applicable) Federal Insurance Contribution Act (FICA tax) (mandatory) Retirement (depends upon the employer) Health care benefits (depends upon the employer)

What are two items or services you use that are paid for by taxes?


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Saving and Investing Savings- Current income not spent on

consumption Pay Yourself First!

Save then spend Recommend saving 10-20 % of net income Save at least 6 months worth of expenses for

emergencies Continue to invest


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Housing -Typically 30% of net income Possible expenses associated with housing:

Monthly payment – a fee charged each month to live in a home

Utilities – includes electricity, water, and garbage fees

Home or renters insurance – purchased to protect the home and possessions inside from loss

Property taxes – paid by the owner of the home Maintenance – Repairs, cleaning, and care Household furnishings - furniture, decorations, etc.


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Transportation-Typically 20% of net income Possible expenses associated with transportation:

Monthly payment – if a loan is taken out to purchase an automobile

License and registration – required by law to own an automobile

Insurance – required by law to protect the vehicle and individuals if involved in an accident

Repairs and maintenance Fuel Public transportation fees – including bus, metro pass,

taxis, or parking fees


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Food-Typically 15% of net income

Possible expenses associated with food: Food at the grocery store Meals at restaurants Snacks eaten out (coffees, treats) Party and entertainment foods Non-food kitchen supplies (plastic wrap, dish

soap)


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Insurance-Typically 7% of net income

Arrangement between an individual and an insurance company to protect the individual against risk

Home/renters AutomobileHealth – 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


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Other Expenses-Typically 18% of net income

Family member care (childcare)

Communication and computers (Internet,

cell phone, cable television)

Medical costs not covered by

insuranceClothing

Personal careEducational

expensesPet care Entertainment

Gifts and charitable

contributions

Credit costs (loan payments)


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Step 2: Create Personalized Income and Expenses Categories Categories are based

upon the individuals/families income and expenses

Reference tracking from Step One Step 2– Creating

Personalized Income and

Expense Categories



Adjustments


Control Step 3– Allocate Money to Each

Category


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Step 3: Allocate Money to Each Category

Reference tracking from Step One

Use categories created in Step Two

Refer to goals and determine if any changes in spending needs to be made

A spending plan is now developed!


Expense Categories

Step 1- Track Current Income and

Expenses


Adjustments



Category


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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


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Spending Plan TemplateIncome Amount

Wages $

Total Income $

Expenses Amount Percentage of income used for each expenditure

Housing Rent or mortgage Utilities Maintenance Insurance

$

Food Eating out Groceries

$

Total Expenses $

Total Income – Total Expenses $


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Net Gain or Net Loss?

Net gain - there is remaining money to either save, spend or invest

Net loss - an individual is spending more money that he/she is earning and has to use credit (borrowed money) to meet their financial obligations

A spending plan should have income and expense matching one another (reach zero)

Income Expenses Net gain or loss


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The Brown Family

Complete Step 2• Review spending plan categories• Answer taxes question

Complete Step 3• Complete the spending plan with the Brown families income

and expenses• Analyze the pie chart

- Similarities - Differences - Adjustments


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Step 4: Implement and Control


Expense Categories


Expenses


Adjustments



Category

Implement: Put plan into action!

Control: Determine what was actually spent Continued monitoring of spending allows an

individual to know if they are spending too much in a category

Helps avoid credit and savings use Utilize control systems


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Control Systems Envelope systems – place the actual budget amount

of cash from a paycheck into a specific envelope system for the expense

Check register system –track all expenditures in a checkbook register which has been divided into spending plan categories

Electronic spending plan systems – Multiple types of software are available Cell Phone Applications


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Step 5: Evaluate and Make Adjustments


Expense Categories


Expenses


Adjustments



Category

Assess if spending plan is working Are goals being met? Are the dollar amount allocations in each

category accurate? Is money being saved or invested? Is credit being used? If so, then the spending

plan needs to be adjusted (by increasing income or decreasing expenses)

Make changes to spending plan if necessary Begin the process again!


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The Brown Family

Complete Step 4• Identify control systems for the Brown family• Analyze the purpose of a control system• Brainstorm advice for a family who does not have a control

system in place

Complete Step 5• Identify expenses encountered, but not included• Identify ways to adjust their spending plan• Create a new spending plan


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WHAT IS THE LONG-TERM POSITIVE IMPACT OF A SPENDING PLAN?

To know where your money is going!To build long-term wealth!To create long-term financial security!


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Net Worth Statement

Net worth statement - describes an individual or family’s overall financial condition on a specified date

The components include: Assets – Everything a person owns with monetary value Liabilities – Debts or what is owed to others Net Worth – the amount of money left when liabilities are

subtracted from assets (indicates wealth)

Assets Liabilities Net Worth


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Who is Wealthier?Juanita – earns $35,000 per yearAssetsHome $60,000Retirement $24,000Automobile $8,000

Total Assets $92,000LiabilitiesCollege loan $6,000Mortgage $35,000

Total Liabilities $41,000Net Worth $51,000

Alexis – earns $100,000 per yearAssets

Home $75,000

Retirement $35,000

Automobile $8,000

Total Assets $118,000

Liabilities

College loan $10,000

Automobile loan $4,000

Credit card debt $20,000

Mortgage $65,000

Total Liabilities $99,000

Net Worth $19,000


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Gumball Analogy

Income (money in) Net Worth (wealth) Flexible Expenses

(money out) Fixed Expenses

(money out)

Always have more money coming in than out!Work towards building wealth!


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Criteria Income and Expense Statement

Spending plan

BUDGET

Time orientation

Past---a historical record of what was earned and spent

Future forecast---a projection of anticipated earnings and expenditures

Basic use Used as a foundation for planning one’s finances

Used to estimate finances for a future time period

Specific uses Shows if living within means Shows where money was

spent Shows when too much is being

spent on a certain category of expenses

Shows if additional income is needed to meet necessary expenses

Helps one live within means Helps plan where to spend

money Helps track income and

expenditures Reduces the likelihood of

having to use credit and go into debt

Where fits in financial planning

Is used to develop a spending plan

Becomes the income and expense statement at end of specified time period

Comparison of Income and Expense Statement with Spending Plan


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ANY QUESTIONS

8.02b pf

Economy & Finance

spending plan step

plan financial planning

financial goals

financial difficulties

financial success

financial status

g1 financial statements

norton school of family