personal finance: an overview c. p. financial literacy
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Personal Finance:An Overview
C. P. Financial Literacy
Objectives
• Prepare a budget tailored to income and needs.
• Prepare cash flow and net worth statements.
• Plan family finances for different stages in the life cycle.
• Give examples of economic, demographic, cultural, and technological factors that can impact financial planning.
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Objectives
• Explain ways to deal with a financial crisis.
• Identify important financial and legal documents to keep on hand.
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Preparing Financial Statements
• Financial planning enables you to– reach important goals– achieve a sense of financial security
for life
• Financial security is the ability to meet essential needs without taking on more debt than you can repay
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Preparing Financial Statements
• Financial literacy is – having a basic understanding of
knowledge and skills needed to manage financial resources
– being aware of and knowledgeable about financial management options
– feeling secure in your ability to make your resources work for you
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Preparing Financial Statements
• Financial statements include– budget– cash flow statement– net worth statement
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Tailoring a Budget to Income and Needs
• A budget helps you manage– income and spending– day-to-day expenses
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Creating a basic budget involves these seven steps:
1. Establish Financial Goals2. Estimate and Total Your Income3. Estimate and Total Your Expenses4. Analyze Current Income and
Spending5. Prepare a Trial Budget6. Put Your Budget into Action7. Evaluate Your Budget Periodically
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1. Establish Financial Goals• List your financial goals• Including Short-, Medium-, and Long-
Term Goals.– Short-Term Goals may include buying a dress for
Prom or a new bathing suit for summer. (within a few months)
– Medium-Term Goals may include going on a camping trip next summer with friends. (within a few years)
– Long-Term Goals may include buying a house. (planning for many years usually 5 or more)
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1. Establish Financial Goals• Your goals will change over time;
the following chart helps you see the difference between each type of financial goals.
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2. Estimate and Total Your Income
• Period is how often you receive most of your money, for example: weekly, biweekly, or monthly.
•Income is any form of money you receive, such as an allowance, a paycheck, and gains from an investment.
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2. Estimate and Total Your Income
• Determine a budget period• Estimate income from each source• Total the estimated income
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3. Estimate and Total Your Expenses
• Fixed expenses – must be paid each budget period– are often the same or nearly the
same amount from month to month– include payments for rent,
mortgage, tuition, insurance premiums, and auto and other loans
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3. Estimate and Total Your Expenses
• Variable expenses – can change from month to month,
both in amount and time to pay– can often be pared down or cut– include payments for food, clothing,
medical expenses, discretionary expenses
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3. Estimate and Total Your Expenses
• Use a form to estimate and total expenses
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Building Savings into Your Budget
• Build savings into a budget for – unexpected emergencies: medical
expense, car repair, a possible period of unemployment
– medium- and long-term goals– investments to improve your
financial circumstances
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Charitable Giving as an Expense
• Budget for philanthropy by giving to reputable charities
• Philanthropy is the act of giving money, goods, or services for the good of others.
• Making donations may lower taxes
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4. Analyze Current Income and Spending
• Subtract expenses from income• If the number is positive, you
have money left over for goals• If the number is 0 or negative,
find ways to increase income or cut expenses
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4. Analyze Current Income and Spending
• Ways to increase income:– Handle more responsibilities at
home to possibly increase your allowance
– Get a part-time job – If you work, negotiate a raise or
increased hours
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4. Analyze Current Income and Spending
• Ways to reduce spending:– Reduce or cut discretionary
expenses– Reduce fixed and variable expenses– Cut expenses unrelated to goals and
priorities
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5. Prepare a Trial Budget • Use goals, income, and expenses• Use estimated expenses
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6. Put Your Budget into Action
• Fill in actual amounts for income and expenses
• If actual amounts exceed budgeted amounts, identify the cause
• Revise budget using actual costs • Study budget before making
financial decisions
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7. Evaluate Your Budget Periodically
• Is your budget working? • Are you reaching important goals
and setting new ones?• Are you controlling your spending? • Has your income or spending pattern
changed? • Do life changes call for adjustments?
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Preparing a Cash Flow Statement
• Cash Flow Statement – a summary of the amount of money received as well as the amount paid out for goods and services during a specific period.
• A cash flow statement is also called an income and expense statement.
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Preparing a Cash Flow Statement
• Shows real income and spending
• Inflow is income; outflow is expenses
• Prepare at end of budget period
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Preparing a Cash Flow Statement
• By recording income and expenses, you get a good picture of your spending patterns
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Preparing a Net Worth Statement
• Net worth = assets – liabilities– Positive net worth lets you meet
your financial obligations and goals, and accumulate wealth
– Negative net worth can be eliminated by reducing expenses or increasing income
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Preparing a Net Worth Statement
• This measures your financial standing at a specific point in time
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Assets
• Liquid assets are easily converted to cash– Cash, money in savings
• Investment assets are invested funds set aside for long-term goals– Stocks, bonds
• Use assets are durable goods – Auto, furniture
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Liabilities• Liability is a financial obligation that
you currently owe or will owe in the future.
• Current liabilities are items that must be paid soon, usually within a year– Medical bill, taxes, credit card bill
• Long-term liabilities are obligations paid over a longer period of time– Mortgage, student loan
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Planning Family Finances
• Factors affecting adult budgeting decisions are– age– stage in the family life cycle
• Families can skip, overlap, or repeat family life cycle stages
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Planning Family Finances
• Family life cycle stages– Beginning – Expanding – Developing – Launching – Aging
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Beginning Stage
• Move away from parents, obtain higher education, marry, start jobs and careers
• Expenses: education, college loans, home down payment, auto, home furnishings, insurance
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Expanding Stage
• Job advancement, increasing income, increasing responsibilities, childbirth, and parenting
• Expenses: child-related costs, increased insurance protection, increased housing expenses
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Developing Stage
• Parenting school-age children and adolescents, climbing income and expenses
• Expenses: child- and school-related costs, second car, retirement planning
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Launching Stage
• Departure of children from home, peaking earnings, aging parents
• Expenses: college, retirement savings, costs of caring for aging parents
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In Your Opinion
• Which stages of the family life cycle can you recognize in your own family’s history? Were any stages skipped or repeated?
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Aging Stage
• Retirement, earnings drop, “empty nest”, birth of grandchildren, caring for elderly parents, estate planning
• Expenses: medical costs, insurance, travel, costs of caring for elderly parents
• Security at this stage depends on earlier planning
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Variations in the Cycle
• Singles and childless couples skip the expanding, developing, and launching stages
• Single parents who remarry may repeat stages with new spouses
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Variations in the Cycle
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Variations in the Cycle
• Single-parent female-headed families often have less income, less savings
• After separation and divorce, income often falls while expenses increase
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Financial Decisions in a Changing World
• Other forces impacting financial decisions:– Economic factors– Social factors– Cultural factors– Technology factors
• Financial planning and saving help people cope with economic challenges
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The Economy and Your Finances
• During good economic times,– consumers and business owners are
optimistic– most people who want jobs can find
them– income and savings rise– people save and invest for the future
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The Economy and Your Finances
• During a recession,– people are
pessimistic– people fear or
experience job loss
– incomes stagnate– people spend less;
save more
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The Economy and Your Finances
• During inflation,– prices rise faster than income– money buys less – people cannot buy or save as much
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Demographics and Your Finances
• Demographic trends that impact the economy and people’s finances– An aging population – Changing job market– Rising educational requirements for
jobs – More young adults living with their
parents
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Culture and Your Finances
• Greater ethnic, cultural, religious diversity, especially in urban areas
• More relationships and marriages between people of different backgrounds
• Cultural and ethnic traditions can affect financial decisions
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Technology and Your Finances
• New technology can have financial impacts
• Example: medical advances led to longer lives and the need for more savings
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Technology and Your Finances
• Positive impacts of advanced technology:– New markets in which to buy and
sell– Wider variety of goods and services– Less expensive goods and services– New jobs– New money management tools – Easy access to information
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Technology and Your Finances
• Problems created by advanced technology:– Offshore outsourcing—businesses
move factories and jobs to other countries to benefit from cheap labor and weaker government regulations
– American workers competing for jobs with lower-paid workers may lose jobs, benefits, or take pay cuts
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Working Through Financial Problems
• To minimize a financial crisis,– get the best education and job training
possible– keep debt under control– create emergency fund; save regularly– avoid taking excess risks– get insurance protection– discuss finances with household
members
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Unexpected Crisis
• Some crises cannot be anticipated or prepared for in advance
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Unexpected Crisis
• Causes of a family crisis include– job loss– separation and divorce– death– disability– serious illness– natural disaster
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Unexpected Crisis
• To cope with a family crisis– discuss problem with adult members
of household– list your resources– minimize negative financial
consequences– get the help of professionals
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Keeping Important Documents
• Keep documents and papers necessary for financial and legal transactions
• Develop a recordkeeping system
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Key Lists to Keep Current and Available
• Savings and checking accounts• Credit card and charge accounts• PINs (personal identification
numbers)• Securities and investment records• Wills and trusts• Insurance policies• Loan contracts, including mortgage
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Key Lists to Keep Current and Available
• Tax records• Property deeds and titles• Pension plans and employee benefits
documents• Social Security and Medicare records• Property, possessions, and valuables• Product information and warranties• Instructions for management of your
affairs
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Scheduling Bills
• Set aside a specific place to put bills as they arrive
• If you don’t receive an expected bill, contact the business right away
• Keep track of due dates • Set a special time for bill paying• Pay bills in the order they are due
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Keeping Budgeting Records
• Your files should contain records related to income, spending, and savings
• Keep receipts for – fixed expenses– purchases you may want to return– purchases that may need warranty
service
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Central Ideas of the Chapter
• Enjoying financial security throughout life is an achievable goal.
• Budgets and other financial planning tools can help people achieve financial security.
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Glossary of Key Terms
• budget. A spending plan for the use of money over time based on goals and expected income.
• cash flow statement. A summary of the amount of money received as well as the amount paid out for goods and services during a specific period.
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Glossary of Key Terms
• demographics. The statistical characteristics of the population.
• expense. The cost of a good or service a person buys.
• family crisis. A major problem that impacts the future of the family and its lifestyle.
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Glossary of Key Terms
• family life cycle. The stages of change a family passes through from formation to aging.
• financial literacy. The understanding of the basic knowledge and skills needed to manage financial resources.
• fixed expense. A set cost that must be paid each budged period.
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Glossary of Key Terms
• income. Any form of money a person receives from various sources.
• liability. A financial obligation that a person currently owes or will owe in the future.
• net worth. The difference between what a person owns and owes.
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Glossary of Key Terms
• net worth statement. A written record of a person’s current financial situation.
• philanthropy. The act of giving money, goods, or services for the good of others.
• recordkeeping. The process of setting up and maintaining an organized system for your financial affairs.
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Glossary of Key Terms
• variable expense. A cost that changes both in the amount and time it must be paid.
• wealth. An abundance of assets that are accumulated over time.
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