HACE 3200 1nd Edition Lecture 3 Outline of Last Lecture I Financial Planning a Why Should You Develop a Financial Plan II Life Cycle of Financial Planning III Personal Financial Planning Process Outline of Current Lecture I Evaluate your Financial Health II Assets III Liabilities IV Expenditures V Developing a Budget Current Lecture Measuring Your Financial Health and Making a Plan o Step 1 Evaluate your Financial Health You can t get to where you want to be financially until you know exact y where you are Balance Sheets Income Statements Budget o Incorporate Weekly Using a Balance Sheet to Measure Your Wealth o Personal Balance Sheet A statement of your financial position on a given date the financial Polaroid or snap shot of The Present Lists 1 your assets and 2 your liabilities Debt 1 Your Assets What You Own o Monetary o Investment o Retirement Plans o Real Estate Likely to have debt attached to it o Automobiles and other vehicles o Personal Property These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Monetary Assets o Cash or other assets that can be easily Liquidated o Examples cash checking accounts savings accounts Investment Assets o Assets that are invested for the future o Examples Stocks bonds mutual funds cash value life insurance Retirement Plans o Investment by you or your employer to save for retirement o Examples pensions IRAs 401 k Keogh or SEP IRA plans Tangible Assets o A physical asset something you can use feel and touch o Example once you buy a car and leave the lot the value of the car depreciates There is a drop in value Real Estate o Tangible asset such as land or a dwelling o Represents most of your savings and normally appreciates in value o Examples primary residence vacation home rental property Automobiles and Other Vehicles o Tangible assets that must be inspected and licensed o Reported as Fair Market Value Street Worth but normally depreciates in value o Examples cars trucks motorcycles and recreational vehicles Personal Property o Tangible assets that represent your lifestyle o Reported as Fair Market Value Street Worth but normally depreciates in value o Examples boats furniture electronics clothing jewelry 2 Your Liabilities What You Owe o Current liabilities are liabilities that must be paid off within the next year o Examples credit cards and utility bills Credit Cards need to be paid off MONTHLY o Long Term Liabilities are liabilities that extend beyond one year Examples home mortgage and auto loans Your Net Worth A Measure of Your Wealth o Assets Own Liabilities Owe NET WORTH Definition o Insolvent The condition in which you owe more money than your assets are worth Most people file for bankruptcy at this point Using a Personal Income Statement to Trace Your Money o Personal Income statement tells where your money comes from and where it has gone o the financial motion picture of The Past o Cash Basis statement based entirely on actual cash flows Expenditures Where Your Money Goes o The two major expenditure categories taxes and living expenses o Fixed Expenses Expenses you don t directly control Examples mortgage rent cable tv o Variable Expenses expenses you can control Examples food entertainment clothing Where Does Your Money Go On Average o Taxes Number 1 Food Housing Medical Care o The more earned the more spent on education and entertainment Culmination o Budget A forward looking plan for controlling cash inflows and cash outflows Based on your goals and financial obligations a budget limits spending in different categories Research has shown that people are more willing to create and use a budget if we call it a spending plan Developing a Cash Budget o Examine last year s total income and adjust for the current year o Estimate your tax liability o Identify all fixed expenditures o Identify all variable expenditures o Looks for ways to reduce your variable expenses o Consider the effect of credit payments on future income Developing a Budget Cont o Use worksheet to track income and expenses for one month These numbers now become your base for the next month Strive to be below these base numbers If you want a retirement plan then you must decrease consumption and increase investing Implementing a Cash Budget o Try the budget for a month o Adjust the plan or your expenses as necessary to maintain the plan o Try the Envelope System Divide monthly income into envelopes based on your monthly spending Once an envelope has been used you can t take money from other envelope forcing you to stay in budget A Budget is always Evolving o At the end of month 2 compare the two month s income expenses Make changes as necessary Failure o Research has shown that the number one reason Spending plans fail is Attitude o If you think of it as a penny pinching sacrifice instead of a means for achieving your financial goals and dreams how long are you likely to stick with it Terms to be Familiar With o Balance Sheet Present spending o Assets and Liabilities Own vs Owe o Net Worth Assets Liabilities o Personal Income Statement Past Spending o Income Expenditures o Fair Market Value Street Worth o Budget Spending Plan