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Spending Plans

Spending Plans. “Take Charge of Your Finances” Financial Literacy. What is a Spending Plan?. Document used to record both planned and actual income and expenses over a period of time. A budget. Money Management Tools. Statement of Financial Position . Income & Expense Statement.

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Spending Plans

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  1. Spending Plans “Take Charge of Your Finances” Financial Literacy

  2. What is a Spending Plan? Document used to record both planned and actual income and expenses over a period of time A budget

  3. Money Management Tools Statement of Financial Position Income & Expense Statement Spending Plan What is my future money management plan? What is my financial position today? How have I managed my money in the past? Determine what changes to make Make changes

  4. A forward-looking Income and Expense Statement May use the same template for both the Income and Expense Statement and the Spending Plan 

  5. Why is a Spending Plan an important part of financial planning? Help manage your money in a positive manner Analyze the opportunity costs of your trade-offs to maximize financial well-being Increase net worth Helps set and reach goals

  6. Congratulations! You have been hired as a financial advisor for John and Tia Brown • Developed a Statement of Financial Position and Income and Expense Statement • Identified the following goals: • Develop a spending plan for the Brown family Increase the amount of their emergency savings fund Pay more on their monthly car loan payment to pay the loan off faster Spend less money on clothing every month Spend less money dining out at restaurants

  7. Spending Plan Development Process Step 1 - Track Current Income and Expense Step 5 - Evaluate and Make Adjustments Develop the spending plan Maintain the spending plan Step 4 - Implement and Control Step 2 - Personalize Your Spending Plan Step 3 - Allocate Money to Each Category

  8. Track Current Income and Expenses Step 1 - Track Current Income and Expense Step 5 - Evaluate and Make Adjustments Step 4 - Implement and Control Step 2 - Personalize Your Spending Plan Ensures spending plan is realistic Step 3 - Allocate Money to Each Category

  9. The Brown FamilyStep One: Track Current Income and Expenses Kept all receipts for the month of January to create an Income and Expense Statement Review John and Tia’s January Income and Expense Statement for a realistic view of their income and expenses

  10. Personalize Your Spending Plan Step 1 - Track Current Income and Expense Step 5 - Evaluate and Make Adjustments How will you develop a spending plan? What is the intended time period for your spending plan? Step 4 - Implement and Control Step 2 - Personalize Your Spending Plan Step 3 - Allocate Money to Each Category What categories will your spending plan include?

  11. How will you develop a spending plan? Paper and pencil Spreadsheet How would you develop a spending plan? Money management computer software Applications

  12. What is the intended time period for your spending plan? What categories will your spending plan include? • Usually concurrent with pay period • Reference tracking from the Income and Expense Statement • Do any categories need to be added, changed, or removed? What time period would you choose for your spending plan?

  13. The Brown FamilyStep Two: Personalize Your Spending Plan • Requested a spending plan for the month of February • Requested the same document and categories as the Income and Expense Statement • Find the column on the Income and Expense Statement where the Spending plan will be created

  14. Allocate Money to Each Category Step 1 - Track Current Income and Expense Step 5 - Evaluate and Make Adjustments Reference tracking from Step One Step 4 - Implement and Control Step 2 - Personalize Your Spending Plan Determine what changes to make Step 3 - Allocate Money to Each Category

  15. When allocating money consider: Trade-offs and opportunity costs Contractual expenses Goals Required to pay expense for a specific amount of time - not easy to reduce or eliminate Easy to reduce or eliminate -Food, entertainment -Rent, Internet, Cell phone

  16. Spending Plan Guide What variables may cause these percentages to be different?

  17. Net Gain or Net Loss? • Add more money to savings or another expense • Increase income • Decrease expenses • Both

  18. The Brown FamilyStep Three: Allocate Money to Each Category • Indicated a * next to expenses that are either contractual (fixed) or they are unwilling to decrease • Remember goals • Consider trade-offs • Must have a net gain or a zero balance

  19. The Brown FamilyStep Three: Allocate Money to Each Category • Develop a spending plan for the family • Explain each change made • Re-write goals into SMART goals using their new spending plan

  20. Implement and Control Step 1 - Track Current Income and Expense Step 5 - Evaluate and Make Adjustments Step 4 - Implement and Control Step 2 - Personalize Your Spending Plan Use a control system to stay on track Step 3 - Allocate Money to Each Category

  21. Control Systems Which control system would help you stick to your spending plan? Internet-based spending plan program Depository institution programs Check register system Envelope system

  22. The Brown FamilyStep Four: Implement and Control

  23. Evaluate and Make Adjustments Step 1 - Track Current Income and Expense Step 5 - Evaluate and Make Adjustments Is your spending plan helping you reach goals? Step 4 - Implement and Control Step 2 - Personalize Your Spending Plan Step 3 - Allocate Money to Each Category Do you need to make any adjustments?

  24. The Brown FamilyStep Five: Evaluate and Make Adjustments How could creating a spending plan help you now and in the future? • Increase their grocery budget by $20.00 • How has developing a spending plan helped the Brown family? • John and Tia realized that if they dine out at restaurants less often they will need to increase their monthly grocery expense

  25. Ratio Analysis – Current Ratio • Do you have enough cash on hand to meet current obligations? (look for a number > 2) • Formula: • Monetary Assets/Current Liabilities • Example: Cash + Checking + Savings = $5500 • Current liabilities (bills) = $3000 • Current Ratio: 5500/3000 = 1.83 • That means you have 1.83 times the amount of money you need to pay your bills each month

  26. Ratio Analysis: Debt Ratio • Do I have the ability to meet my debt obligations? (This should go down over time) • How much of my assets still belong to the lender? • Formula: Total Debt/Total Assets • Example: • All debt, current + long term = $100,000 • Assets = $150,000 • Debt Ratio = 100,000/150,000 = .667 or 66.7 % • This means that 66.7% of all assets are currently encumbered by debt

  27. Ratio Analysis: Savings Ratio • How much of your income are you really saving? • Formula: Income Available for Savings (Net Income)/Income Available for Living Expenses (Net Pay) • Example: • Net Pay: $3500/month • Net Income (after all expenses are paid): $500 • Savings Ratio: 500/3500 = 14.3% of your income is saved (or left over after all expenses are paid)

  28. Summary Step 1 - Track Current Income and Expense Step 5 - Evaluate and Make Adjustments • A spending plan is an important financial planning tool • Helps achieve goals • Make your spending plan work for you • Make sure to control, evaluate, and adjust your spending plan Step 4 - Implement and Control Step 2 - Personalize Your Spending Plan Step 3 - Allocate Money to Each Category

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