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Personal Financial Management: Budgeting and Goal Setting

Learn how to effectively manage your personal finances by creating a budget, setting financial goals, and monitoring your progress. This guide provides tools and tips for budgeting, tracking expenses, and wise use of credit. It also explains how to create personal financial statements and models to plan for the future.

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Personal Financial Management: Budgeting and Goal Setting

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  1. In Engineering Project must define budget as well and project expectations and monitor them.Personal Financal model is example to make it real (and other other benefits)

  2. From Status to Goals To Plans • Where are you now? (financial statements) • Where do you want to go? (financial goals) • Tools to help you get there • Budget • Spreadsheets • Wise use of credit • Monitoring progress (financial statements)

  3. Personal Financial Statements • Balance Sheet: shows position at point in time • Assets listed at market values • Liabilities • Assets – Liabilities = Net Worth • Income & Expense Statement: shows where money came from & where it went • Gross income • Expenses • Income – Expenses = Surplus (or deficit)

  4. Example Balance SheetDecember 31, 2005

  5. Income Statement Surplus or Deficit: Effect on Balance Sheet (P&L) • If income > expenses => Surplus (Profit) • If income < expenses => Deficit (Loss) • In many Balance Sheets and other accounting, negatives are shown in RED to highlight them. (Option for excel!)

  6. Deficit Spending (being “in the Red) DECREASES Net Worth!Being in the red can kill aproject unless initial investment is large enough

  7. Budgeting • Why budget? • What is a budget? • Short-term forecast of income & expenditures (I.e. revenues and costs a project) • Tool to monitor & control spending

  8. Budgeting • Creating a budget (short term model) • Determine how you spend money now. • Evaluate your spending in light of your goals. • Create a forecast (budget) of your monthly income and expenditures. • Track your spending and adjust as necessary. • Financial Model (longer term model) • Future income/costs very approximate, be careful • Use Excel or financial planning software.

  9. Financial models of the futureExpense models • Build your Expense Statement Measured 2006, and estimated 2011, 2021, 2041. • Break expenses into • required costs, • expected costs, • discretionary costs. • 5 different “income” models can either yield different balances or allow more of expected/discretionary costs.

  10. Why Financial Goals? • Use resources in a way that results in the greatest utility (satisfaction) to effort. • How much do you enjoy that daily Starbucks? $4 per day x 260 days per year = $1,040 annually for 30 years Invest it: what would it be worth in 30 years? Direct “Investment” returns “return”-inflation. What if used to avoid debt (e.g. CC debt) and keep budget netural?

  11. Assumptions & Calculations

  12. Can use formula or just “simulate” in excel. • Value = lastval *(1+ yield)+ new_Savings • Use relative formula for “state” and absolute formula for “rates”. • Can more easily adjust for changes over time and 1-time adjustments. Can understand the impact process. • Given values in states at time, can build a graph using plot functions. • Do this yourself now…

  13. Financial Goals • Short-term (< 1 year) (Budget adjustments) • Intermediate term (1 to 5 years) • Long-term (> 5 years)

  14. Defining Goals • Dollar amount • Time frame • Prioritize (Why?)

  15. Wise Use of Credit • Some debt is appropriate: an asset purchased on credit should outlive loan. • Education • House • Car • Pay off credit card debt. • Pay highest interest rate card first. • Roll high interest rate debt onto low interest rate card • Pay more than minimum payment. • Control spending

  16. Credit Reports & Credit Scores • Borrowing costs $$ and the cost depends on risk. (For companies and for people…) • Free copy of personal credit report annually from each of 3 major reporting agencies • Check your credit reports & FICO score before applying for a loan • FICO scores range from 500 (bad) to 850 (good) • Factors that hurt your FICO score • Delinquency on accounts • Amount owed on accounts • High balances relative to credit limits • Recent credit applications (so trying and failing is bad)

  17. Financial models of the futureExpense models • Already have your Expense Statement Measured 2006, and estimated 2011, 2021, 2041. • Break expenses into • required costs, • expected costs, • discretionary costs. • Now add • 5 different “income” models can either yield different balances or allow more of expected/discretionary costs.

  18. Budget For your project ideas • Roughly estimate costs of design, development and production. Include discussion of your estimates. • Roughly estimate the “sales/value” and market size. • List Your data sources/assumptions.

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