HACE 3200 1nd Edition Lecture 3Outline of Last Lecture I. Financial Planninga. Why Should You Develop a Financial Plan?II. Life Cycle of Financial PlanningIII. Personal Financial Planning ProcessOutline of Current Lecture I. Evaluate your Financial HealthII. AssetsIII. LiabilitiesIV. ExpendituresV. Developing a BudgetCurrent Lecture- Measuring Your Financial Health and Making a Plano 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- Budgeto Incorporate Weekly!- Using a Balance Sheet to Measure Your Wealtho 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 Owno Monetary o Investmento Retirement Planso Real Estate( Likely to have debt attached to it)o Automobiles and other vehicleso Personal PropertyThese 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 futureo Examples- Stocks, bonds, mutual funds, cash value, life insurance- Retirement Plans:o Investment by you or your employer to save for retiremento Examples: pensions, IRAs, 401(k), Keogh, or SEP-IRA plans- Tangible Assets:o A physical asset; something you can use, feel, and toucho 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 valueo Examples: primary residence, vacation home, rental property- Automobiles and Other Vehicles:o Tangible assets that must be inspected and licensedo Reported as Fair Market Value( Street Worth), but normally depreciates in valueo Examples: cars, trucks, motorcycles, and recreational vehicles- Personal Property:o Tangible assets that represent your lifestyleo Reported as Fair Market Value( Street Worth), but normally depreciates in valueo Examples- boats, furniture, electronics, clothing, jewelry- 2) Your Liabilities: What You Oweo 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 MONTHLYo Long-Term Liabilities: are liabilities that extend beyond one year Examples: home mortgage and auto loans- Your Net Worth: A Measure of Your Wealtho 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 Moneyo Personal Income statement: tells where your money comes from and where it has goneo “the financial motion picture” of The Pasto Cash Basis: statement based entirely on actual cash flows- Expenditures: Where Your Money Goeso The two major expenditure categories: taxes and living expenseso Fixed Expenses: Expenses you don’t directly control Examples: mortgage, rent, cable tvo Variable Expenses: expenses you can control Examples: food, entertainment, clothing- Where Does Your Money Go, On Average?o Taxes( Number 1), Food, Housing, Medical Careo 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 yearo Estimate your tax liabilityo Identify all fixed expenditureso Identify all variable expenditureso Looks for ways to reduce your variable expenseso 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 Budgeto Try the budget for a montho Adjust the plan or your expenses as necessary to maintain the plano 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 Evolvingo 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 spendingo Assets and Liabilities: Own vs Oweo Net Worth: Assets – Liabilities o Personal Income Statement: Past Spendingo Income & Expenditures:o Fair Market Value: Street Wortho Budget: Spending