iwm - wk 1financial planning-overview

8/9/2019 IWM - WK 1Financial Planning-Overview

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1

Overview–

FIN 6253

Week 1

Islamic Financial Planningand Wealth Managment


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Total Financial Planning

There 4 components to total financial planning

1. Financial Independence

2. Accumulation

3. Protection4. Distribution


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3

Six steps in Islamic Financial Planning

1. Establish and defining client-planner relationship

2. Gathering information and setting financial goals

4. Analyze and evaluate the information

5. Execute the action plan

6. Monitor plan implementation and revise plan.


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Financial Planning and Its Benefits (adopted from Kapoor)• Personal financial planning - Process of managing

money to achieve personal economic satisfaction.

• Advantages of personal financial planning:

1) Increased effectiveness in obtaining, using, and

protecting your financial resources.2) Increased control of your financial affairs.

3) Improved personal relationships.

4) A sense of freedom from financial worriesobtained by looking to the future.


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The Financial Planning Process

Determine your current financial situation.

Develop your financial goals.

Identify alternative courses of action.

Evaluate your alternatives.

Create and implement your financial action plan.

Review and revise your plan.


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Consequences of Choices:

Opportunity Cost

•Opportunity cost - What you give up when you

make a choice

•The cost, or trade-off of a decision, cannotalways be measured in dollars. Sometimes

the cost is your time.

– What opportunity costs do you havefrom being a college student?


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Every Financial Decision

Involves Evaluating Types of Risk • Inflation risk .

– Rising prices cause lost buying power.

• Interest-rate risk.

– Effect costs of borrowing and rate of return.

• Income risk. – The loss of a job.

• Personal risk .

– Health, safety, or costs.• Liquidity risk .

– Higher return may mean less liquidity.


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Financial Planning Information Sources• Printed materials.

• Financial institutions.

• School courses and educational

seminars.

• The internet, online sources, computer

software.

• Financial specialists.

– Financial planners, bankers, accountants

insurance agents, lawyers and tax payers


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Developing Personal Financial Goals• Types of financial goals include those...

– Influenced by the time frame in which you want to

achieve your goals.

– Influenced by the financial need that drives your

goals.• Timing of goals.

– Short-term, intermediate and long-term goals.

• Goals for different financial needs – Consumer product goals, etc.


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Goal-Setting Guidelines

(SMART principle)

• Goals should be realistic

• Goals should be stated in specific terms

• Goals should have a time frame• Goals should indicate the action to be taken

• Discuss some of your goals


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Influences on Personal Financial Planning

• Adult life cycle stage.

• Marital status, householdsize, and employment.

• Major events. – Graduation, marriage, children, retirement, etc.

• Values.

– What values are important to you?

• Global influences• Economic conditions

Life cycle and personal values


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Changing Economic Conditions

Consumer The value of the dollar

prices changes in inflation.

Consumer The demand for goods and

spending services by individuals andhouseholds.

Interest rates The cost of money; cost of

credit when you borrow; returnon your money when you save

or invest.

1


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Changing Economic Conditions(continued)

Money Supply The dollars available for

spending in our economy.

Unemployment The number of individualswithout employment who are

willing and able to work.

Housing starts Number of new homes being built.

1


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Changing Economic Conditions(continued)GDP: Gross Total value of goods and

Domestic Product services produced in acountry.

Trade balance Difference between a

country’s exports andimports.

Market indexes The relative value of

stocks as represented bythe index, such as theDow Jones Average or theS&P 500.

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Opportunity Costs and Financial Results


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Opportunity Costs and Financial Results

Evaluated When Making Decisions

Personal

Opportunity Costs(time, effort, health)

Financial

Opportunity Costs

(Interest, liquidity,safety )

Financial

Acquisitions

(automobile,home, college

education,

investments,

insurance,

retirement fund)

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Time Value of Money

• Increases in an amount of money

as a result of interest earned.

– Saving today means more moneytomorrow. Spending means lost interest.

• Saving and spending decisions involve

considering the trade-offs. Current needscan make spending worthwhile.

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How Simple Interest is Computed

• Simple Interest.Amount in savings x annual interest rate x time

period equals the interest.

$100 x 5% x 1 (1 year)

100 x .05 x 1 = $5.00

In one year you have $100 in principle plus$5.00 in interest for a total of $105 at the end of

the year. 1


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Future Value

• Future value is the amount to which current

savings will increase based on a certain interest

rate and a certain time period.

• Future value is also call compounding - earninginterest on previously earned interest.

• Future value can be computed for a single

amount or for a series of deposits.

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Present Value

• The current value for a future amount based on acertain interest rate and a certain time period.

• Present value calculations are also called discounting.

• The present value of the amount you want in the future

will always be less than the future value. (See Exhibit1-8C)

• Present value can be computed for a single amount or

for a series of deposits.


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Developing a Flexible Financial Plan

• A financial plan is a formalized report that...

– Summarizes your current financial situation.

– Analyzes your financial needs.

– Recommends future financial activities.• Your financial plan can be created by you, with

assistance from a financial planner, or made using a

money management software package.

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Implementing Your Financial Plan

• Develop good financial habits.

– Use a well conceived spending plan to help

you stay within your income, while allowing

you to save and invest for the future. – Have appropriate insurance protection to

prevent financial disasters.

– Become informed about tax and investment

alternatives.

– Study personal finance.1


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Implementing Your Financial Plan(continued)• Achieving your financial objectives requires

two things.

A willingness to learn.

Appropriate information sources (see Appendix A).

Current periodicals.

Financial institutions.

Courses and seminars.

Personal financial software.The World Wide Web.

Financial specialists.1


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How to you decide ?

• Suppose you just won a $100 million

lottery and you are given the choice

of taking a lump sum or paymentsover 20 years. Which would you do? Why?

1


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Components of Financial Planning (Kapoor)

• Obtaining (chapter 2)

• Planning (chapters 3, 4)

• Savings (chapter 5) - Accumulation

• Borrowing (chapters 6, 7) - Financing

• Spending (chapters 8, 9)• Managing risk (chapters 10,11,12) - Protection

• Investing (chapters 13-17)

• Retirement & estate planning (chap 18, 19)- Distribution

1


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Review BHLB C.D


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Shariah principles on Islamic financial planning

There are many verses from the Quran and Hadith that relates tofinancial planning :-

(i) A l Asr 103, 1-3 informed us on the importance of time and

thus implies that we need to set our goals in life:-

“ The t ime! Veri ly, Man is in loss , except th os e who bel ieve (in

Is lam) and do the r ighteous good deed and recommend one

another to the truth and recommend on e another to

pat ience .

(ii) According to Al Bukh ari and Mus l im our Prophet Muhammad

S.A.W (pbuh) mentioned .. “ Remember f ive thing s beforecom es f ive th ing s, heal thy before sick, youn g before old,

rich before poor, spacious before tight, life before death”


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Differences in financial planning approaches

Conventional Islamic

Wealthresources

Scarcity of resources Bounties of God, noscarcity

Ownership of

asset

Individual freedom-

- profit maximization

A trust

– profit sharing

Life style goals Personal satisfaction Prosperity (Falaah)


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Means in achieving financial goals

Conventional Islamic

Life – stylecreation

Luxurious. (no limit)Debt driven

Posses a limit .Not to beextravagant. Live by

means

Means of

achieving

profit

Risk avoidance Risk sharing

Profit

determination

Ex ante (predetermined)

up front

Ex post (unknown)

until the end of

investment


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“And We have sent you (O Muhammad) not


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Religion

Life

Intellect

Posterity

Wealth

Maqasid as-Shariah

(The Objectives of Shariah)

Preservation and Promotion

JusticeAlleviate Hardship Eliminate Prejudice

And We have sent you (O Muhammad) not

but a mercy to the whole universe”

(Al-Ambiya:107)


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Maqasid as-Syariah in Financial Transactions

“The origin of Muamalat matters is by understanding its

underlying wisdom” (Imam As-Syatibi, Al-Muwafaqat, 2/300)

To facilitate the needs of

human being (Al-Jumuah:10)

Ar-Rawaj or to ensure wealth

is circulated among as many

as possible in a fair way (Al-

Hasyr:7)

To promote transparency and

accountability (Al-Baqarah:282)

To uphold and promote justice in acquiring

wealth

“It is prohibited for a Muslim when he sellssomething which has defects to his brother

unless he informs his brother about it” (Al-

Hakim)

To avoid dispute and

ensure stability

To promote maslahah

and avoid harm

Free from Riba Free from Gharar


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Characteristicsof Islamic

Financial

System

Free from Riba Free from Gharar

FahishFree from Qimar or

Maysir (Gambling)

Free from Ikrah(coercion)Free from element ofexploitation of needs

(bay’ al-mudtarr-

) Free from Ihtikar

(hoarding)

Free from Najsh(Raising prices by

making false bids)

- bay’ muzayadah is

allowed

Free from jahl mufdi ila

al-niza` (lack of

information leading to

dispute)

Constructed upon theprinciple of brotherhoo

and cooperation

A system grounded on

moral and ethical

framework of Shariah

Community oriented and entrepreneur-friendly emphasizing on productivity

and physical expansion of economic

production and services

Conceptual Balance Sheet of an IFI

http://images.google.co.uk/imgres?imgurl=http://www.muslimtents.com/aminahsworld/ALHUSSAIN1.JPG&imgrefurl=http://www.muslimtents.com/aminahsworld/miscellaneous.html&h=369&w=320&sz=36&hl=en&start=7&tbnid=IwM3NNFHzDkKSM:&tbnh=122&tbnw=106&prev=/images%3Fq%3Dislamic%2Bbank%26svnum%3D10%26hl%3Den%26lr%3D%26sa%3DN


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Assets Liabilities

Trade Finance

(Mudarabah/ BBA)

Custodial Services(Amanah/Wadiah)

Asset-backed

Securities

(Ijarah/Salam/Istisna)

Deposits/Investments

(Mudarabah/ Wakalah)

Fund Management/Private Equity Venture

Capital

(Special Mudarabah/

Musyarakah)

Fund Management

(Mudarabah/ Special

Mudarabah/Musyarakah)

Fee-based Services/

Advisory(Wakalah/Jualah/

Kafalah)

Capital Owners’ Equity(Musyarakah)

Commercial

Bank

Commerci

Bank

Investment

Bank

InvestmenBank


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The Necessity

The Necessity Level

Interests of lives which people essentially depend upon comprising the five maslahah

(faith, life, intellect, posterity and wealth). These are absolutely necessary for the proper

functioning of religious and mundane affairs of individuals, such that their absence willprecipitate chaos and collapse of normal order in society. Within the scope of the

essentials, managers are expected to strive for the preservation and protection of the

essential needs (religion, life, intellect, posterity and property) of their stakeholders and

public interests in general.

1st

•Protect the welfare or basic needs of their employees such asproviding adequate prayer rooms and protecting the employees’

safety and health in the workplace, thus reflecting the

safeguarding of the faith and values of life respectively.

•Must confine their business operations to those that safeguard

the values of religion, life, intellect, posterity and property.

Accordingly, corporations have a moral and social responsibility to

avoid any business activities, albeit higher profits, which may

cause disruption and chaos to the society’s lives. The examplesinclude business activities which can endanger the lives and

disruption of people’s intellect as a result of environmental

degradation, and the manufacturing of illicit drugs for public

consumption


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Complementary2nd

As soon as the scope within the essentials has been fulfilled, the

corporations may strive for the second level, the complementary (hājiyyat )which is deemed beneficial to remove difficulties, even though it may not

pose a threat to the very survival of normal order

The Complementary

Level

•Eg. managers who have fulfilled their essentials level maywant to further extend their social responsibility commitmen

In this instance, the essential needs of employees such as

fair pay and a safe workplace can be further extended to

include continuous training and enhancing human quality

programmes. The latter is not really essential in the sense

that if managers neglect this kind of commitment, it will not

pose a severe destruction to the employees. However, if themanagers assume such a responsibility it is a fulfillment of

the complementary interest that will advance the intellectual

well-being (knowledge and skills) of the workers


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Embellishment

3rd

Embellishment refer to interests whose realization leads to perfection and

beautification of human affairs and conduct of life. Within the ambit of the

embellishments, the corporations are expected to discharge their socialresponsibilities by engaging in activities or programmes that may lead to

improvements and attainments of perfections of public life conditions.

The Embellishment

Level

•Involving in charity or giving donations to the poorand needy; providing scholarships to the less

fortunate students and providing sufficient, correct

and clear information or advertisement regarding

products offered to customers are some of the

examples of Corporate Social Responsibility (CSR)

commitment with respect to achieving the

embellishments for society

“Severe damage is avoided by“To repel a public harm a


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“Do not Inflict Harm nor reciprocate harm”

“Harm is repelled as far aspossible”

“Harm is put to an end”

“Severe damage is avoided by

a l ighter damage “

“To repel a public harm a

private damage is preferred”

“ The repeal ing of harm is

preferred to the

attainments of benef i ts ”

“Harm must not besusta ined ” “Harm cannot put to an

end to by its like”

Islamic Legal Maximas a Framework to

Manage CSR



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1. Prohibition of r iba ( usury)

2. Avoidance of gharar (ambiguity)

3. Prohibition of mais i r (gambling)

4. Forbidding of non permissible transactions


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Retirement fund need

En Johari, age 30 years is currently earning RM 20,000 per

month (RM 240,000 p.yr) .He plans to retire at 55 years. He estimatedthat his retirement income needed for the first year is 90% of his

last drawn salary.

Assuming that his salary increment grows at 5% p.a.

Compute the amount needed upon retirement ?


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Retirement fund need

En Johari, age 30 years is currently earning RM 20,000 per

month (RM 240,000 p.yr) .He plans to retire at 55 years. He estimatedthat his retirement income needed for the first year is 90% of his

last drawn salary.

Assuming that his salary increment grows at 5% p.a.

Compute the amount needed upon retirement ?

Present value (PV) = - RM 240,000

Profit rate (i) = 5%

Tenure (n) = 25 years (55 years-30years)

Future value (FV) = RM 812,725.18 x 90% = RM 731,452.66

Children education plan


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p

Mr. Kelvin has a daughter whose education plan requires

RM 500,000 to finance her tertiary education 10 years from

today.

He has set as set aside RM 200,000 for this purpose. He wants to

know the rate of return on investment (ROI) that is required over

10 years that will enable him to meet his financial goal.

Compute the ROI ?

Children education plan


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p

Mr. Kelvin has a daughter whose education plan requires

RM 500,000 to finance her tertiary education 10 years from

today.

He has set as set aside RM 200,000 for this purpose. He wants to

know the rate of return on investment (ROI) that is required over

10 years that will enable him to meet his financial goal.

Compute the ROI ?

Present value (PV) = - RM 200,000

Tenure (n) = 10 years

Future value (FV) = RM 500,000

Profit rate (i) = 9.6 % p.a


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Purchase of property (fixed rate)

Puan Sharifah wish to purchase a completed house costingRM 200,000

She paid 10% down payment and signed the Sale and Purchase

Agreement with the vendor

Compute her monthly installment if the bank charge her 10% p.a

profit rate for 20 years tenure under BBA financing ?

What is the bank’s selling price ?What is its profit margin ?

Is there an alternative financing ?


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The formula for computing monthly installment for BBA Home financing is the same as

conventional home financing i e by means of present value of annuities as indicated below


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nii

Pmt PV

)1(

11

1)1()1(n

n

i PV ii Pmt

Computed using the standard formula for present value of annuities, i.e.

which gives

.

conventional home financing i.e. by means of present value of annuities as indicated below

i.e. -

Example if financing amount is RM 180,000. Profit rate is (10% APR ) Tenure for 20 years,

the detail computation will be as follows:-

Hence, Present value (PV) = RM 180,000

Annual Percentage Rate (APR) - i = 10 p.a

Tenure (n) = 240 months (20 years)Monthly installments = RM 1,737.04 per month.

Customer’s share

RM 20 000

Financier’s

share

Bank’s equity

reduces


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RM 20,000

(10%) –(ii)

share

RM 180,000

(90%) –(ii)

by RM 389.58

Customer’s Profit

RM 100 (10%)

Amt. used to redeem

share

Bank’s ProfitRM 900 (90%)

based on actual

rental value

Customer buys back share

at par valuevalue RM 289.58

Actual rental

RM 1,000

Share purchase

RM 289.58

Monthly rental

payment RM 1,289.58

(iii)

Diminishing Partnership

using variable rental rate

(i) Customer and Bank jointly

invest RM 200,000 to purchase

the house

Customer’s

equity increases

by RM 389.58

RM 100 (customer’s share of rental ) + RM 289.58 (additional

redemption sum) = RM 389.58 will be used to buy bank’s share.

• Payment Schedule for Diminishing Partnership Home Financing Model


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Month/ Monthly/ Additional /Total Payment/ Customer’s/ Rental Division/ Customer’ s/ Bank’s / Bank’s

Rental Contribution ratio(%). Customer- Bank Equity Equity Cash Flow

• A B C= A+B D E F G H

0 - - - 10.000 20,000.0 180,000.0 (180,000)

1 1,000 289.58 1,289.58 10.195 100.00* 900.00 20,389.6 179,610.4 1,289.58

2 1,000 289.58 1,289.58 10.391 101.95** 898.05 20,781.1 179,218.9 1,289.583 1,000 289.58 1,289.58 10.587 103.91 896.09 21,174.9 178,825.1 1,289.58

4 1,000 289.58 1,289.58 10.785 105.87 894.13 21,570.0 178,430.0 1,289.58

5 1,000 289.58 1,289.58 10.984 107.85 892.15 21,967.5 178,032.5 1,289.58

6 1,000 289.58 1,289.58 11.183 109.84 890.16 22,366.9 177,633.1 1,289.58

---- ------ ------- ---------- -------- ---------- ----------- ------------ ------------ ----------

240 1,000 289.58 1,289.58 100.00 993.59 6.41 200, 000.0 0 1,289.58

Total RM 309,499.20 Rental rate = 6%

Rental DistributionE-1 (Customer’s) = RM 20,000 X 1,000 = RM 100.00* -- F-1 (Bank’s) RM 180,000 X 1,000 = RM 900

200,000 200,000

E-2 (Customer’s) = RM 20,389.6 X 1,000 = RM 101.95** - F-2 (Bank’s) RM 179, 610.4 X 1,000 = RM 898.05

200,000 200,000

Equity Sharing

G-1 = Customer’s Equity = RM 20,000 + RM 100 + RM 289.58 = RM 20,389.60

H-1 = Bank’s Equity = RM 200,000 – RM 20,389.6 = RM 179,610.40

Rental rate - IRR 6 % = RM 1,000 x12 / RM 200,000 RM 289.58 = 0.005 (200,000-(1.005)240 x 20,000(1.005) 240-1

Definition Financial Planning ?


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Personal financial planning can be defined as

(i) “ the developm ent and im plementat ion of a plan of act ion

to ef fic ient ly m ake the most of available resou rces to meet you r

financial objectives or goals”

(ii) “ the process of determining whether and how an individual

can meet l i fe goals thro ugh p roper management o f f inancial

resources


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Financial Independence

• It involves a plan for medium - to- long term

investment, with the sole purpose of creating

earnings which will support you/your family to

continue living the current lifestyle or lives thedesired lifestyle, when you decide not to work

anymore


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Accumulation

• It involves short-to-medium term savings or

investment for a planned expenditure in the

future.

• It is about creating funds in advance for

purposes such as vacation, deposits/down

payments for car or house, children’seducation, renovation etc.


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Protection

• Protection is about risk management or

insurance planning. There are many kinds of

risks that can affect you life and cost you a

fortune e.g. untimely death, disability, terminalillnesses, fire, flood.

• Insurance can be used as a vehicle of

protection to protect your dependents fromfinancial losses


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Distribution

• Distribution is about estate planning.

It is a lifelong process of evaluating one’s

financial position and plans which involve the

accumulation, preservation and distribution ofassets to ensure that they

reach the beneficiaries according to the

desired proportion.

What are your financial goals ?


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Although this question may be personal, it can be predicted

based on the stage of ones life cycle. i.e. how it affect

you and your family members i.e.

1. Young (20s – 30s)

2. Mid-life ( 40s)

3. Pre-retirement (50s)

4. Retirement (6Os)

Can we predict ones financial needs based on the above life

cycle ?

Re: BHLB CD on products

We can plan to achieve our personal financial

goals ?


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goals ?

There are five basic steps:-

1. Set your priorities and establish your goals

2. Look at what you have

3. Protect what you already have

4. Increase and grow what you have and wants in future

5. Put it all together and do an annual review whether

you have achieved your set goals


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Case Study 2- refer to pg 11 of your notes

Analysis of Personal Financial Statement


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Analysis of Personal Financial Statement –

Encik Husni Lim (Overview of B/S)

1. Analysis of personal Balance Sheet (Table 2.1)

2. Analysis of Income and Expenditure Statement Table 2.3)

Why we need to analyze the above statements ?

(I) Measure his present financial standing

(ii) Compare his current financial position with his desired goals

(iii) Keep track changes in En Husni Lim’s financial positionovertime

Case Study: 2



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Encik Husni Lim

In order to understand Encik Husni Lim’s financial position,

compute the following financial ratios

(i) Solvency ratio = Net worth/Total assets (B/S)

(ii) Liquidity ratio = Liquid assets/Current Liabilities (B/S)

(iii) Savings ratio = Cash Surplus/Income (I/S)

(iv) Debt service ratio = Loan payments/Income (I/S)

(v) Gearing ratio = Long-term liabilities/Total assets (B/S)

Case Study: 2



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Encik Husni Lim

Compute the following ratios and give your comments on the

Balance sheet:-

(i) Solvency ratio = Net worth/Total assets

626,000/1,367,000 = 0.46

SOR is the ratio of your personal net worth to your total assets.

The higher the ratio, the stronger is your financial position. As

you reach your retirement age, the solvency ratio should

ideally converge to 1.0 i.e. you are debt-free

Case Study: 2



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Encik Husni Lim

Compute the following ratios and give your comments on the

Balance sheet:-

(ii) Liquidity ratio = Liquid assets/Current Liabilities

5,000/1,000 = 5.0

L.R measure your ability to pay off the short-term liabilities. It

should be above 1.0. It is advisable to maintain 3-6 months

of your salary in a emergency fund to tide over unforeseen

events

Case Study: 2



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Encik Husni Lim

Compute the following financial ratios and comments on the

Balance sheet

(v) Gearing ratio = Long-term liabilities/Total assets

740,000/1,367,000 = 0.54

G.R measures how much leverage you have undertaken to

acquire your assets. The higher the G.R, the higher the

probability of bankruptcy.

Case Study: 2



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Encik Husni Lim (Overview of I.S)

Compute on the following ratios and comments on the Income

Statement:-

(iii) Savings ratio = Cash Surplus/Income

6,500/55,600 = 0.12

SAR measures the proportion of your income saved in a year.

A positive savings ratio indicates that you are saving while a

negative savings ratio indicates that you are overspending.

You may encounter negative ratio due to big-ticketpurchases. However, you have to manage your personal

finance well and remain positive in most years

Case Study: 2



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Encik Husni Lim

Compute on the following ratios and comments on the Income

Statement:-

iv) Debt service ratio = Loan Payments/Income

(12,000 + 5,000)/55,600 = 0.31

DSR measures your ability to service loan payments in a prompt

and timely manner. A ratio larger than 0.4 indicates that

your are too highly leveraged and you may encounter

difficulties in servicing your loan obligation in future

Purpose of Personal


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Financial Statements

• Report your current financial position in relation to

the value of the items you own and the amounts you

owe.

• Measure your progress toward your financial goals.• Maintain information on your financial activities.

• Provide data you can use when preparing tax forms

or applying for credit.

3

Components of a Balance Sheet


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(net worth statement)• Assets - what you own.

– Liquid assets.

– Real estate.

– Personal possessions.

– Investment assets.• Liabilities - what you owe

– Current liabilities (< 1 year).

– Long term liabilities.

• Compute your net worth.

– Assets minus liabilities. 3

Where Did Your Money Go? Components of a Cash Flow


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Statement• Shows inflow, outflow for a given time period.

– Record inflow.• Net income from employment.

• Savings and investment income.

• Other sources.

– Record cash outflows.• Fixed and variable expenses.

• Net cash flow can be a surplus or a deficit.

• Use this statement as a basis for creating aspending, saving and investment plan.

3

Ratios for Evaluating Financial


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Progress

• Debt ratio = total liabilities/net worth; compares debt tonet worth; lower debt ratio is best

• Current ratio – liquid assets/current liabilities; showshow well short term assets cover short term debt; higher

ratio is good• Liquidity ratio = liquid assets/monthly expenses; shows

# of months that living expenses can be paid; higher ratiois good

• Debt payments ratio = monthly credit payments/take-

home pay; try to keep ratio below 20%• Savings ratio = monthly savings/gross income;

Americans tend to be poor savers; shoot for at least 10%3

Purposes of a Budget


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Purposes of a Budget

• In contrast to cash flow, which was a record of

how you spent money in a past time period, a

budget is a plan for spending in the future, such

as for the next month. A budget helps you… – Live within your income.

– Spend your money wisely.

– Reach your financial goals.

– Prepare for financial emergencies.

– Develop wise financial management habits.

Creating and Implementing a Budget


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Creating and Implementing a Budget• Assessing your current situation.

– Measure your current financial position. – Determine your needs, values and life situation.

• Steps in the budgeting process.1 Set financial goals.

2 Estimate income from all sources.3 Budget amount for an emergency fund, periodic

expenses and financial goals.

4 Budget set amounts that you are obligated to pay.

These are your fixed expenses. BE SURE TOBUDGET FOR SAVINGS.

Creating and Implementing a Budget


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Creating and Implementing a Budget• Steps in the budgeting process (continued).

5 Estimate amounts that are to be spent for household andliving expenses. These are your variable expenses.

6 Record actual amounts for inflows and outflows,

comparing actual amounts with budgeted amounts to

determine variances. Deficits and surpluses.

7 Review your spending and savings

patterns and evaluate whether

revisions are needed in your

savings and spending plans.

Characteristics of Successful Budgeting


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• Well planned.

• Realistic.

• Flexible.• Clearly communicated.

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Selecting a Budgeting System


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Selecting a Budgeting System

1) Mental budget – it is all in your head

2) Physical budget-use envelopes for

your expenses such as food, rent.

3) Written budget – use spreadsheets

4) Computerized budget – use

software such as Quicken

(www.quicken.com)

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Saving to Achieve Financial Goals

http://www.quicken.com/http://www.quicken.com/


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Saving to Achieve Financial Goals• Common reasoning for saving include…

– To set aside money for irregular and unexpectedexpenses.

– To pay for the replacement of expensive items, such as

cars or a down payment on a house.

– To buy special items like recreational equipment or to pay for a vacation.

– To provide for long-term expenses such as retirement or

the education of children.

– To earn income from the interest on savings for use in paying living expenses.

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Savings Techniques-If I don’t see it, I


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won’t spend it

• Payroll deductions into saving accounts

• Automatic payments from checking into

savings accounts or mutual funds

• Saving regularly in 401(k) plans

• Also save coins, make periodic deposits

• Write a check each payday as a % of

income and deposit into savings

3

Money Management & Achieving


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Financial Goals

• Balance Sheet reports current financial position

• Cash Flow Statement shows cash you have

received and spent in the past

• Budget helps you to spend and save to achievefinancial goals

3


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