Spending Plans

1. Spending Plans “Take Charge of Your Finances” Advanced Level

2. Typical Spending Plan Pie Chart Provides guidance when creating a spending plan What variables may cause these percentages to be different?

3. Males vs. Females

4. Having a plan • Financial planning - a tool used to achieve financial success based upon the development and implementation of financial goals • Spending plan - paper or electronic document used to record both planned and actual income through expenditures over a period of time Spending Plan Development Process Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 2– Creating Personalized Income and Expense Categories Step 4– Implement and Control Step 3– Allocate Money to Each Category

5. Everyone has a unique spending plan • Based upon the following elements:

6. SMART Financial Goals Why is goal setting important?

7. Example of SMART goals • I plan to save $15.00 from my monthly paycheck for ten months to purchase a new MP3 player for $150.00 • What is the…… S= M= A= R= T=

8. Components of a Spending Plan • Gumball machine represents components of the financial planning process • Income- money earned • Gumballs going into the machine • Wages from a job, allowance, gifts

9. Components of a Spending Plan • Expense - money spent • Money going out of the gumball machine • Fixed expenses -may have a fixed amount due each month and are contractual • Flexible expenses -can vary each month in the amount owed and are not contractual

10. Spending Plan Activity Decide if each item would be income, a fixed expense, or a flexible expense

11. Spending Plan Activity Paying Rent Wages

12. Spending Plan Activity Groceries Internet bill

13. Spending Plan Activity Tips Utilities

14. Spending Plan Activity Gift from family Income Savings Fixed expense or Income

15. Spending Plan Activity Automobile registration Eating out/Snacks

16. Spending Plan Activity Scholarships Hobbies

17. How to Develop and Maintain a Spending Plan • Steps 1-3 help develop a spending plan • Steps 4-5 help maintain a spending plan • Evaluate and adjust to meet personal needs and adapt to life changes Spending Plan Development Process Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 2– Creating Personalized Income and Expense Categories Step 4– Implement and Control Step 3– Allocate Money to Each Category

18. Step 1: Track Current Income and Expenses Necessary to creating a realistic spending plan Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 2– Creating Personalized Income and Expense Categories Step 4– Implement and Control Step 3– Allocate Money to Each Category

19. Tracking Methods Must work for the individual! There is not one right method! Carrying a small notebook and writing down all expenses Keep all receipts Use a debit card if your depository institution creates spending reports for your account Input information into a cell phone Cell phone applications

20. The Costs Add Up • Eating lunch out 5 days per week • $5-$10 daily • $1,300-$2,600 per year • Daily sport drink • $2.00 daily • $730 per year • Weekly date night at the movies with popcorn • $30 per week • $1,560 per year • Daily Latte • $3.75 every day • $1,369 per year

21. Gross vs. Net Income

22. Payroll Deductions • Taxes • Required by local, state, and federal governments • Provide public goods and services • Account for approximately 31% of an individual’s gross income • Payroll deductions: • Federal Taxes (mandatory) • State Taxes (If applicable) • Federal Insurance Contribution Act (FICA tax) (mandatory) • Retirement (depends upon the employer) 401K • Health care benefits (depends upon the employer) What are two items or services you use that are paid for by taxes?

23. Saving and Investing • Savings- Current income not spent on consumption • Pay Yourself First! • Save then spend • Recommend saving 10-20 % of net income • Save at least 6 months worth of expenses for emergencies • Continue to invest

24. Housing -Typically 30% of net income • Possible expenses associated with housing: • Monthly payment – a fee charged each month to live in a home • Utilities – includes electricity, water, and garbage fees • Home or renters insurance – purchased to protect the home and possessions inside from loss • Property taxes – paid by the owner of the home • Maintenance – Repairs, cleaning, and care • Household furnishings - furniture, decorations, etc.

25. Transportation-Typically 20% of net income • Possible expenses associated with transportation: • Monthly payment – if a loan is taken out to purchase an automobile • License and registration – required by law to own an automobile • Insurance – required by law to protect the vehicle and individuals if involved in an accident • Repairs and maintenance • Fuel • Public transportation fees – including bus, metro pass, taxis, or parking fees

26. Food-Typically 15% of net income • Possible expenses associated with food: • Food at the grocery store • Meals at restaurants • Snacks eaten out (coffees, treats) • Party and entertainment foods • Non-food kitchen supplies (plastic wrap, dish soap)

27. Insurance-Typically 7% of net income • Arrangement between an individual and an insurance company to protect the individual against risk Health – pays a portion of health care expenses if one is sick or injured Home/renters Automobile Life – provides financial support to an individual’s beneficiaries upon death Disability – provides financial support if an individual is injured and cannot work

28. Other Expenses-Typically 18% of net income Communication and computers (Internet, cell phone, cable television) Medical costs not covered by insurance Clothing Educational expenses Pet care Entertainment Personal care Gifts and charitable contributions Credit costs (loan payments)

29. Step 2: Create Personalized Income and Expenses Categories Categories are based upon the individuals/families income and expenses Reference tracking from Step One Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 2– Creating Personalized Income and Expense Categories Step 4– Implement and Control Step 3– Allocate Money to Each Category

30. Step 3: Allocate Money to Each Category Use categories created in Step Two Reference tracking from Step One Refer to goals and determine if any changes in spending needs to be made A spending plan is now developed! Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 2– Creating Personalized Income and Expense Categories Step 4– Implement and Control Step 3– Allocate Money to Each Category

31. Spending Plan Template • Everyone uses a different program to create a spending plan • Paper and pencil • Online software • Electronic programs such as Microsoft Excel and Word • Must be something that an individual can manage effectively

32. Spending Plan Template

33. Net Gain or Net Loss? • Net gain - there is remaining money to either save, spend or invest • Net loss - an individual is spending more money that he/she is earning and has to use credit (borrowed money) to meet their financial obligations • A spending plan should have income and expense matching one another (reach zero)

34. Step 4: Implement and Control • Implement: • Put plan into action! • Control: • Determine what was actually spent • Continued monitoring of spending allows an individual to know if they are spending too much in a category • Helps avoid credit and savings use • Utilize control systems Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 2– Creating Personalized Income and Expense Categories Step 4– Implement and Control Step 3– Allocate Money to Each Category

35. Control Systems • Envelope systems – place the actual budget amount of cash from a paycheck into a specific envelope system for the expense • Check register system –track all expenditures in a checkbook register which has been divided into spending plan categories • Electronic spending plan systems – Multiple types of software are available • Cell Phone Applications

36. Step 5: Evaluate and Make Adjustments • Make changes to spending plan if necessary • Begin the process again! • Assess if spending plan is working • Are goals being met? • Are the dollar amount allocations in each category accurate? • Is money being saved or invested? • Is credit being used? If so, then the spending plan needs to be adjusted (by increasing income or decreasing expenses) Step 1- Track Current Income and Expenses Step 5– Evaluate and Make Adjustments Step 2– Creating Personalized Income and Expense Categories Step 4– Implement and Control Step 3– Allocate Money to Each Category

37. To know where your money is going! To build long-term wealth! To create long-term financial security! What is the Long-term Positive impact of a spending plan?

38. Net Worth Statement • Net worth statement - describes an individual or family’s overall financial condition on a specified date • The components include: • Assets – Everything a person owns with monetary value • Liabilities – Debts or what is owed to others • Net Worth – the amount of money left when liabilities are subtracted from assets (indicates wealth)

39. Who is Wealthier? Juanita – earns $35,000 per year Alexis – earns $100,000 per year

40. Gumball Analogy Always have more money coming in than out! Work towards building wealth! • Income(money in) • Net Worth (wealth) • Flexible Expenses (money out) • Fixed Expenses (money out)

41. Any Questions

42. Let’s Review Katie Cole First, review her estimated income and expenses? (Do you see her various categories; income, fixed expenses and flexible expenses?) Next, refer to her calendar to view her actual income (wages, tips, scholarships, etc.), fixed and flexible expenses.

43. Katie Cole cont. Properly allocate her actual income and expenses. Calculate the differences(correctly noting positive and negative differences) for each. Did she have a net gain or net loss? Answer the last page of your packet, making recommendations to her spending plan.

44. The Brown Family… First read the hand-out about their family. What does the Brown Family value? How will these values affect their spending?

45. The Brown Family • Complete Step 2 • Review spending plan categories • Answer taxes question • Complete Step 3 • Complete the spending plan with the Brown families income and expenses • Analyze the pie chart • - Similarities • - Differences • - Adjustments

46. The Brown Family • Complete Step 4 • Identify control systems for the Brown family • Analyze the purpose of a control system • Brainstorm advice for a family who does not have a control system in place • Complete Step 5 • Identify expenses encountered, but not included • Identify ways to adjust their spending plan • Create a new spending plan