Spending plan Essentials- Advanced Level

1. Spending plan Essentials- Advanced Level The Essentials of Take Charge of Your Finances

2. Having a plan • Financial planning is a process individuals engage in to achieve long-term financial success while having a quality standard of daily living • A spending plan is a paper or electronic document used to record both planned and actual income through expenditures over a period of time Spending Plan Development Process

3. Each individual has a unique spending plan • Based upon the following elements: What do you value? How do these values affect your spending? What are your perceptions of needs versus wants? How do these perceptions influence spending?

4. Financial Goals How do values, need, wants, and goals relate to spending plans? • Financial goals are the foundation of a financial plan • Goal- the end result of something a person intends to acquire, achieve, do, reach, or accomplish in the near or distant future • Financial goals- specific objectives to be accomplished through financial planning

5. Components of a Spending Plan • Income, Expenses, Net Gain/Loss • Gumball machine represents components of the financial planning process • Income is money earned • Gumballs going into the machine • Wages from a job, allowance, gifts What are your sources of income?

6. Components of a Spending Plan What are two fixed expenses and two flexible expenses you currently have? • Expense is money spent • Money going out of the gumball machine • Fixed expenses may have a fixed amount due each month and are contractual • Flexible expensescan vary each month in the amount owed and are not contractual

7. Spending plan activity-Decide if each item is income, a fixed expense, or a flexible expense Rent Fixed expense Wages Income

8. Spending plan activity Groceries Flexible expense Internet bill Fixed expense

9. Spending plan activity Tips Income Utilities Fixed expense

10. Spending plan activity Gift from family Income Savings Fixed expense

11. Spending plan activity Eating out/Snacks Flexible expense Why is it important to distinguish between income, fixed expenses, and flexible expenses?

12. How to Develop and Maintain a Spending Plan • Steps 1-3 help develop a spending plan • Steps 4-5 help maintain a spending plan • Once a spending plan is developed it should be continually evaluated and adjusted to meet personal needs and adapt to life changes Spending Plan Development Process

13. Step 1: Track Current Income and Expenses Necessary to creating a realistic spending plan

14. Taxes What are two items or services you use that are paid for by taxes? • Compulsory charges imposed on citizens by local, state, and federal governments • Provide public goods and services • Income taxes are taken out of gross income

15. Typical Spending Plan Expenses • A reference • Provides guidance • Based upon net income What variables may cause these percentages to be different?

16. Costs Associated with Housing

17. Costs Associated with Transportation

18. Costs Associated with Food

19. Types of Insurance • Home/renters and auto are included in their major expenditure categories • Insurance also includes the following: • Health – pays a portion of health care expenses if one is sick or injured • Disability – provides financial support if an individual is injured and cannot work • Life – provides financial support to an individual’s beneficiaries upon death

20. Savings and Other Expenses • Savings and investing • 10-20 % of net income • Save at least 6 months worth of expenses for emergencies • Continue to invest • Other Expenses • Any additional needs and wants • Clothing • Personal Care • Entertainment Determine which of these expenses relate to your spending plan on the spending plan template.

21. Step 2: Create Personalized Income and Expense Categories Reference tracking from Step One To determine personalized income and expense categories for your spending plan

22. Step 3: Allocate money to each category Use categories created in Step Two Reference tracking from Step One to fill in “Planned Amount” column for each category Refer to goals and determine if any changes in spending needs to be made A spending plan is now developed!

23. Spending Plan Creation

24. Components of a Spending Plan: 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 • A spending plan should have income and expenses matching one another (reach zero)

25. Step 4: Implement and control • Implement: • Put plan into action! • Control: • Fill in the “Actual Amount” column • 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

26. Control Systems • Envelope systems – individuals place the actual budget amount of cash from a paycheck into a specific envelope system for the expense • Check register system – This helps consumers to 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 for consumers to use to help keep track of their financial records Which control system do you think would work best for you and why?

27. Step 5: Evaluate and make adjustments Why is evaluating and adjusting a spending plan important? • 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) • Make changes to spending plan if necessary • Begin the process again!

28. Why is it important to create a spending plan? • To help set and reach financial goals • An effective spending plan creates wealth • Wealth-a measurement of how much a person or household owns once all debts have been paid Income(money in) Wealth (money remaining) Flexible Expenses (money out) Fixed Expenses (money out)

29. Summary • A spending plan is a financial planning tool that records planned and actual income through expenditures over a period of time • Everyone has a different spending plan because of unique values, needs, wants and goals • A spending plan includes three sections: income, expense, and net gain or loss. • A spending plan should be continually evaluated • and adjusted

30. Summary • Steps to develop a spending plan: • Step 1: Track current income and expenses • Step 2: Create personalized income and expense categories • Step 3: Allocate money to each category • Step 4: Implement and Control • Step 5: Evaluate and Make Adjustments • An effectively managed spending plan allows an individual to begin creating wealth for long-term security