Unit 2 Budgeting Financial Literacy Standard 4Budgeting Mrs. Morrey Riverton High School.
CHAPTER 3 MONEY MANAGEMENT STRATEGY: FINANCIAL STATEMENTS & BUDGETING Mrs. Jordan.
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Transcript of CHAPTER 3 MONEY MANAGEMENT STRATEGY: FINANCIAL STATEMENTS & BUDGETING Mrs. Jordan.
Chapter 3 Money Management Strategy:Financial Statements &Budgeting
Mrs. Jordan
Financial Plan
Is an orderly program for spending, saving, and investing the money you earn.
Financial planning helps you do the following:
Determine and evaluate how wisely you are using your money.Get the most from your income.Prevent careless and wasteful spending.Organize your financial resources so that you can maintain personal financial fitness.Avoid money worries and problems by understanding the proper methods of saving, spending and borrowing money.
Chapter 3 Learning Objectives:
1. Recognize relationships among financial documents and money management activities
2. Design a system for maintaining personal financial records
3. Develop a personal balance sheet and cash flow statement
4. Create and implement a budget
5. Relate money management and savings activities to achieve financial goals
Planning for SuccessfulMoney Management
Objective 1: Recognize relationships among financial documents and money management activities
Daily spending and saving decisions are the heart of financial planning
Decisions must be coordinated with needs, goals, and personal situations
Money management is the day-to-day financial activities needed to manage personal economic resources, while working toward long-term financial security
Opportunity Cost
OPPORTUNITY COST AND MONEY-MANAGEMENT
Spending money on current living expenses reduces the amount you can save and invest
Saving and investing for the future reduces the amount you can spend now
Buying on credit ties up future income
Using savings for purchases results in lost interest and depletes savings
Comparison shopping can save money but takes valuable time
Daily decision making is a fact of life, and trade-offs have to be made. -Selecting an alternative means you give up something else.
COMPONENTS OF MONEY MANAGEMENT
Creating and implementing
a plan forspending, and saving (budgeting)
Creatingpersonalfinancial
statements(balance
sheets andcash flow
statements of income
and outflow)
Storingand
maintainingpersonalfinancialrecords
anddocuments
Provide WrittenEvidence
Measure & AssessFinancial Position & Progress
Basis for effective money management
These three components are interrelated.
A System for Personal and Financial Records
Objective 2: Design a system for maintaining personal financial records
Benefits of an Organized System of Financial Records
• Handling daily business affairs, including payment of bills on time
• Planning and measuring financial progress• Completing required tax reports• Making effective investment decisions• Determining available resources for current and future buying
Items for your Home File
• Personal and employment records - Resume, Work History (current/past jobs) Company Name, Manager Name, Company Address, Length of Employment
• Money management records - Budget (Monthly/Yearly)
• Tax records - W-2’s, tax forms, pay stubs
• College Records - Essays, transcripts, college information, application copies.
• Financial services records
• Consumer purchase, auto and credit records
• Housing records
• Insurance records
• Investment records - Net Worth Statement, Personal Property Statement
• Estate planning and retirement records
Items in your Safe Deposit BoxRecords that would be hard to replace
• Birth, marriage and death certificates, copy of will• Citizenship and military papers• Adoption and custody papers• Serial numbers and photos of valuables• CDs and credit and banking account numbers• Mortgage papers and titles• List of insurance policy numbers• Stock and bond certificates• Coins and other collectibles
How Long Should Records Be Kept?
Birth certificates, wills, and Social Security information should be kept indefinitely
Keep records on personal property and investments as long as you own them
Keep documents related to the purchase and sale of real estate indefinitely
Copies of tax returns and supporting data should be kept seven years
Personal Financial StatementsMeasure Financial Progress
Objective 3: Develop a personal balance sheet and cash flow statement
Purpose of Personal 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
Balance Sheet: Where are you Now?
Also called the Net Worth Statement or Statement of Financial Planning
Preparation of Balance Sheet requires using the following Steps – -Balance Sheet Example on pg. 83 in textbook
STEP 1: LISTING ITEMS OF VALUE
• Assets - what you own
• Liquid assets - Cash and items that can easily be converted to cash.
• Real estate - Home, condo, vacation property, land.
• Personal possessions - Automobile, personal belongings.
• Investment assets - Funds set aside for long-term financial needs.
Balance Sheet (Continued)
STEP 2: DETERMINING THE AMOUNTS OWED
Liabilities - what you owe others
• Current liabilities (< 1 year) insurance premiums, charge accounts, tax payments.
• Long term liabilities - auto loans, student loans, mortgage.
STEP 3: COMPUTING NET WORTH
Assets – Liabilities = Net Worth
Assets = Net Worth + Liabilities
Insolvency: is the inability to pay debts when they are due
Balance Sheet (Concluded)
Net Worth is an indication of the financial position at any given date
Ways to increase Net Worth
•Increasing your savings
•Reducing spending
•Increasing the value of investments and other possessions
•Reducing the amounts you owe
Create a Balance Sheet
Use the following items to prepare a balance sheet. Determine the total assets, total liabilities, net worth, total cash inflows, and total cash outflows.
Rent for the month, $450 Auto insurance, $250
Monthly take-home salary, $1650 Household possessions, $4600
Cash in checking account, $770 Stereo equipment, $1500
Savings account balance, $2300 Payment for electricity, $75
Spending for food, $250 Lunches/parking for work, $220
Balance of educational loan, $3300 Donations, $50
Current value of automobile, $6500 Home computer, $1000
Telephone bill paid for month, $85 Value of stock investment, $1200
Credit card balance, $450 Clothing purchase, $ 100
Loan payment, $110 Entertainment, $250
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Cash Flow StatementCash Flow is the actual inflow, outflow for a given time period.
The Cash Flow statement is also called personal income and expenditure statement.
See example on page 86 in textbook.
The process of preparing cash flows statement follows these steps:STEP 1: RECORD INCOME
• Wages, salaries, and commissions• Self-employment business income• Savings and investment income• Gifts, grants, scholarships and educational loans• Government payments, such as Social Security, public assistance, and
unemployment benefits• Amounts received from pension and retirement programs• Alimony and child support payments
Cash Flow Statement (Continued)
STEP 2: RECORD CASH OUTFLOWS
• Fixed Expenses - Do not vary from month to month. Rent, Mortgage, Installment Loan, Student Loan, Cable,
Phone…
• Variable expenses - Flexible payments that change from month to month. Food, Clothing, Utilities, recreation, medical expenses…
• STEP 3: DETERMINE NET CASH FLOWS
• The difference between income and outflows can either be positive or negative (Surplus or Deficit)
• Cash flow statement provides the foundation for preparing and implementing a budget
Cash Flow Statement
Complete your own!
Budgeting for Skilled Money Management
Objective 4: Create and implement a budget
A budget is an organized spending plan that helps you plan your spending and saving so that you do not have to borrow money to meet your needs.
The main purposes of a budget are to help you
• Live within your income
• Spend your money wisely
• Reach your financial goals
• Prepare for financial emergencies
• Develop wise financial management habits
Starting the Budgeting Process
1. Set financial goals
2. Estimate income from all sources
3. Budget amount for an emergency fund – pay yourself first, periodic expenses and financial goals (Try to set aside 10%)
4. Budget Fixed Expenses that you are obligated to pay
5. Budget Variable Expenses—the amounts that are to be spent for household and living expenses
6. Record Spending Amounts—the actual amounts for inflows and outflows, comparing actual amounts with budgeted amounts to determine variances
7. Review Spending and Saving Patterns
8. Evaluate whether revisions are needed in your savings and spending plans
First you need income…
Where Does My Money Go?
• Almost 31% of an individual’s paycheck is deducted
• Taxes are the largest expense most individuals will have
• Therefore, it is important to understand the systematic deductions
• U.S. tax system operates on an ongoing payment system
• Taxes are immediately paid on income earned
Starting a New Job
To receive a paycheck, an employee must:
• Complete a Form W-4 - Employee’s Withholding Allowance
Certificate• Complete a Form I-9 –
Employment Eligibility Verification
Form W-4
Employee’s Withholding Allowance Certificate
• Determines the percentage of gross pay which will be withheld for taxes
Allowances
• Used to determine the amount of federal taxes withheld from the paycheck
• A person may claim a personal allowance if no one else claims the person as a dependent
• Dependent – a person who relies on the taxpayer for financial support
Form W-4Employment form that lets the employer know how much money to take out of your paycheck. Exempt if make less than $6,200 in 2014.
Form I-9
Employment Eligibility Verification Form
Used to verify the eligibility of individuals to avoid hiring undocumented workers or others who are not eligible to work in the United States
Must provide documentation which establishes identity and employment eligibility
• Examples include driver’s license, passport, Social Security card, and birth certificate
Form W-2
Wage and Tax Statement
States the amount of money earned and taxes paid throughout the previous year
Used to file income taxes
By January 31, an employer should mail a Form W-2 to each employee for the previous year
Paying EmployeesThree methods employers may use to pay employees:
1. Paycheck- • Most common method
• Employee responsible for handling the paycheck
• Immediately see payroll stub and deductions
Paying Employees continued
2. Direct Deposit-• Employers directly deposit employee’s paycheck into the
authorized employee’s bank account
• Employee receives the paycheck stub detailing the paycheck deductions
• Most secure because there is no direct handling of the check
• Employee knows exactly when paycheck will be deposited and available
Paying Employees continued
3. Payroll Card-• A payroll card electronically carries the balance of the employee’s
net pay• Funds are directly deposited by an employer into an account at a
financial institution that is linked to the payroll card
• Parties involved:• Employer• Employee• Financial institution
• Use the payroll card for ATM withdrawals or to make purchases
Payroll Card
There are numerous fees associated with payroll cards
• Number of fees depends upon the financial institution• Examples:
• Monthly or annual fee• ATM fee• Inactivity fee• Fee after a specific number of transactions have been used• Replacement fee if the card is lost, stolen , or destroyed• Load fee (when funds are placed on the card account)• Point of sale (POS) fee for using the card at a POS terminal,
or an electronic payment processor
Benefits of Using Payroll Cards
Employers
• Lower internal costs• Costs associated with
producing, handling, and distributing pay checks is eliminated
Financial Institutions
• Profit from the fees charged to employees, employers, and merchants
Employees• Safer than carrying large amounts
of cash• Unbanked employees do not have
to pay check cashing fees• Americans roughly spend $8
billion annually in check cashing fees
• Can access electronic monthly statement of transactions
• Can receive a second card• Give allowances to children• Send money internationally
• Easily make online purchases
Consumer Protection with Payroll Cards
Regulation E – Electronic Fund Transfer Act
• Protects payroll card holder from fraudulent charges on lost or stolen cards
• Card holder is only liable for $50 if a lost or stolen card is reported within 48 hours
• Over four million paychecks are stolen annually with no protection to employees
• Regulation E provides exceptional safety and protection for payroll card holders
Gross Pay
Gross Pay – amount of money you make before taxes
• Hourly: hours worked x rate of pay
• Ex: 40 * 5.85 = $234• Salary: annual salary/number of pay periods in year
• Ex: 48,000/12 = 4,000 (if paid monthly)Weekly: 52Bi-monthly: 24 timesBi-weekly: 26
• Overtime is calculated at 1.5 the rate of pay for hours worked over 40 hours in a 1 week period
• Ex: 5.85 * 1.5 = 8.775 (new rate of pay)8.775 * 8 (overtime hours) = 70.2
If regular hourly pay was $234, you would add $70.2 to get total gross pay amount:
$234 + 70.2 = $304.20 (gross pay)
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Paycheck
Pay Period 6/11/2004-7/11/2004
$1,502.10$250.35Totals
$503.46$117.72$636.00$244.92$0.00$0.00
$106.00$40.82$83.91$19.62$0.00$0.00
Federal WithholdingState WithholdingFed OASDI/ EE or Social SecurityFed MED/ EE or MedicareMedical401K
$1,353.33
Year-to-dateCurrentDeductionsPay Type-Gross Pay
Employee Address293 Michael GroveBillings, MT 59102
Check Amount$1,102.98
Check #164
SSN201-92-4856
EmployeeBeakens, Joe
On-The-Go
Pay Period 6/11/2004-7/11/2004
$1,502.10$250.35Totals
$503.46$117.72$636.00$244.92$0.00$0.00
$106.00$40.82$83.91$19.62$0.00$0.00
Federal WithholdingState WithholdingFed OASDI/ EE or Social SecurityFed MED/ EE or MedicareMedical401K
$1,353.33
Year-to-dateCurrentDeductionsPay Type-Gross Pay
Employee Address293 Michael GroveBillings, MT 59102
Check Amount$1,102.98
Check #164
SSN201-92-4856
EmployeeBeakens, Joe
On-The-Go
Pay Period
– The length of time for which an employee’s wages are calculated; most are weekly, bi-weekly, twice a month, or monthly
Deductions
The amount of money subtracted from the gross pay earned for mandatory systematic taxes, employee sponsored medical benefits, and/or retirement benefits.
Federal Tax• The amount required by law for employers to withhold from earned wages to pay
taxes
• The amount of money deducted depends on the amount earned and information provided on the Form W-4
• Largest deduction withheld from an employee’s gross income
State Tax• The percentage deducted from an individual’s paycheck to assist in funding
government agencies within the state
• The percentage deducted depends on the amount of gross pay earned
Local & City Tax – Many cities require an earnings tax
36
• Social Security Tax – also called FICA
This tax includes two separate taxes: Fed OASDI/EE or Social Security and Fed MED/EE or Medicare
These two taxes can be combined as one line item or itemized separately on a paycheck stub
Currently: 7.65% of gross pay
Social Security– Nation’s retirement program, helps provide retirement
income for elderly and pays disability benefits– Based upon a percentage (6.2%) of gross income, employer
matches the contribution made by the employeeMedicare
– Nation’s health care program for the elderly and disabled, provides hospital and medical insurance to those who qualify
– Based upon a percentage (1.45%) of gross income
Optional deductions: union dues, healthcare, uniform, retirement, etc.
Net Pay
Net Pay: the amount of money AFTER all deductions have been taken out of your gross pay
• Also called “take home” pay or “disposable income” – it is the amount you have available to spend from your paycheck
• Calculated: gross pay – deductions = net pay
Discretionary Income: money left over AFTER paying for housing, food and other necessities
38
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Characteristics of Successful Budgeting
• Well-planned• Realistic• Flexible • Clearly communicated
40
Selecting a Budgeting System
Mental budget – it is all in your head
Physical budget-use envelopes for your expenses such as food, rent, etc.
Written budget – use spreadsheets
Computerized budget – use software such as Quicken (www.quicken.com)
41
Money Management and Achieving Financial Goals
Objective 5: Relate money management and savings activities to achieve financial goals
IDENTIFYING SAVING GOALS…
• To set aside money for irregular and unexpected expenses• 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
42
Money Management and Achieving Financial Goals (continued)
SELECTING A SAVINGS TECHNIQUE
Payroll deductions into savings 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
43
Money Management and Achieving Financial Goals (continued)
Balance Sheet reports current financial position (Net Worth)
Cash Flow Statement shows cash you have received and spent in the past
Budget helps you to spend and save to achieve financial goals
Sample Budget
Personal Property Inventory
Net Worth Statement