Spending Plan Note taking guide

Transcription

1 Spending Plan Note taking guide L1 Note taking guide Total Points Earned 71 Total Points Possible Percentage Name Date Where s My Dough? Class Your percentages pie chart Recommended percentages pie chart Housing Transportation Food Other Saving Insurance Housing Transportation Food Other Saving Insurance How are your percentages different from the recommended and why? Financial planning is: A spending plan is: A tool used in financial planning: Want Definition: An individual or s spending plan is influenced by these components. All of which relate to one another making each spending plan different. Need Definition: Example: Example: Value Definition: Example: Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 15

2 A goal is: Short-term goal time frame: L1 Note taking guide Long-term goal time frame: A short-term goal I have is: A long-term goal I have is: Revised as a SMART goal: Revised as a SMART goal: SMART Goals Term S M A R T Definition Income: Fixed expense: Example: Examples: Flexible expense: Example: Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 16

3 Step 5 Evaluate And Make Adjustments Spending Plan Process Step 1 Track Current Income And Expenses STEP ONE: Why is it important to track expenses? L1 Note taking guide 1 What time frame should be used? Step 4 Implement And Control Step 2 Creating Personalized Income and Expense Categories Step 3 Allocate Money to Each 2. 2 Category STEP TWO: Why are the categories different for everyone s spending plan? What are two tracking methods? 1. Definition: Examples: Payroll Deductions Definition: Gross Income Net Income TAXES: Two items I use that are paid for by taxes are: PAYROLL DEDUCTIONS: Mandatory: Optional: GROSS OR NET INCOME: Which is used to calculate percentages in a spending plan? Why? Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 17

4 L1 Note taking guide Major Expenditures Directions: In a small group brainstorm common expenses in each category. Place a next to expenses you currently have or someone provides for you. Circle all expenses that are usually fixed. Definition: HOUSING: EXAMPLES OF HOUSING EXPENSES: Recommended percent: TRANSPORTATION: Definition: EXAMPLES OF TRANSPORTATION EXPENSES: Recommended percent: Definition: FOOD: EXAMPLES OF FOOD EXPENSES: Recommended percent: Definition: INSURANCE: EXAMPLES OF INSURANCE EXPENSES: Recommended percent: SAVINGS AND OTHER: Definition: EXAMPLES OF SAVINGS AND OTHER EXPENSES: Recommended percent: Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 18

5 3 STEP THREE: What are three things that should be done during this step: STEP THREE: What are three different methods for creating a spending plan template? L1 Note taking guide NET GAIN OR LOSS To reach a zero balance, what should an individual do if they have a: Net gain: Net loss: 4 STEP FOUR: Why is implementing a control system important? Which control system do you think would work best for you and why? 5 STEP FIVE: Why is evaluating and adjusting a spending plan important? What are two questions you should ask yourself during this step? Why is a net worth statement an important tool? Assets Liabilities Net Worth - = Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 19

6 A2 The Brown Family Scenario Total Points Earned 71 Total Points Possible Percentage Name Date Class Directions: Read the scenario and underline all sources of income for the Brown ; put a box around all expenses for the Brown. This is worth 5 points. Tia and John Brown have been married for two years and are awaiting the arrival of their first baby in two short months. John is a branch manager at a local bank which provides adequate benefits including health insurance for John, Tia, and their newborn. John s net income is $ paid bi-weekly. Tia works part-time running a wedding coordination business out of their home which provides an additional $800 net income per month after taxes are paid. In the past, John and Tia have not used a spending plan. Their expenses were tight, but they always managed to get by without using credit cards. However, they also do not have much in their savings account. John and Tia have set a short and long-term goal in preparation for the baby s arrival. Their long-term goal is to deposit $50 each month into a savings account for the baby s college fund. Their short-term goal is to begin saving at least $150 per month for emergencies to begin building their net worth. They know that to be able to achieve these goals and get their finances organized; they must develop a spending plan. They tracked their expenses for a month and here is an analysis of their current spending. John and Tia live in a two bedroom two bathroom rented condominium in a large metropolitan area. They pay $900 per month, and this includes utilities. They know that this will become a bit cramped with one bedroom already being used as Tia s office, but will become the baby s room. However, they really like their home and seldom have overnight guests. John drives a Toyota Camry which they own without payments. Every six months they allocate $900 for maintenance, repairs, gasoline, and oil changes. Tia uses the public subway system to travel around the city when necessary. This costs the Brown $50 per month. Tia and John love to eat out and meet on Mondays and Wednesdays at a café near John s office for a lunch date. Friday nights they also eat dinner at one of their favorite restaurants, often with friends. They spend an average of Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 20

7 A2 $300 per month for groceries and $350 per month eating out. They have made a commitment to themselves that once the baby arrives they will save money on food and eat out only once per week. John and Tia s are very excited about the arrival of their baby. They have opened a savings account in John and Tia s name and deposited $1,000 to begin a college fund. To meet their previously stated savings goals, John and Tia save $150 per month in their account in addition to depositing $50 per month into the baby s college fund. In the spending plan John and Tia are developing, they also allocate, $100 per month for the baby s expenses, $100 per month on personal care including clothing, and $150 per month for automobile and life insurance. At the end of the month, if any additional money is left over they add it to their savings. John and Tia have come to you as their financial advisor. They need you to help them implement the spending plan process to develop a spending plan, analyze their expenses, and make recommendations for how they could best manage their money. STEP ONE: Track expenses. John and Tia have completed this step. Indicate one SMART short-term and one SMART long-term goal for the Brown that have not been stated in the scenario. 1. What is one SMART short-term goal for the Brown? (1 point) 2. What is one SMART long-term goal for the Brown? (1 point) STEP TWO: Identify spending plan categories. Review the spending plan template below. Ensure that the categories noted are appropriate for John and Tia s income and expenses. 3. Why were taxes not included in this scenario? (1 point) Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 21

8 A2 STEP THREE: Allocate money to each category. Based upon the scenario, complete the following table using the information that was gathered. Remember that the amounts indicated in the table should be based upon the monthly amount. (1 point per category and total for a total of 16 points) Date: February 2009 Spending Plan Designed for: The Brown Family Income Amount Wages/salary for Tia (Net pay) $ Wages/salary for John (Net pay) $ Total Income $ Expenses Amount Fixed Expenses Housing $ Savings $ Insurance $ Total Fixed Expenses $ Flexible Expenses Amount Public transportation costs $ Transportation costs for car $ Food (Groceries) $ Food (Eating out) $ Baby expenses $ Personal care $ Total Flexible Expenses $ Total Expenses $ TOTAL INCOME TOTAL $ EXPENSES Percentage of income used for each expenditure Directions: Please complete the pie chart indicating what the Brown Family s spending plan would look like. (worth 6 points) Housing Transportation Food Other Saving Insurance Insurance, 7% Saving, 10% Other, 18% Food, 15% Housing, 30% Transportation, 20% 4. Compare the two pie charts. (worth 7 points) a. What are 2 similarities? b. What are 2 differences? Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 22

9 A2 c. Is the Brown able to readjust their expenses to match the recommended amount? Support your answer with two reasons. STEP FOUR: Implement and Control 5. What control system would be good for the Brown Family? Support your answer with one reason. (2 points) 6. What is the purpose of a control system? (1 point) 7. What advice would you give to a who currently does not have a control system in place? (1 point) STEP FIVE: Evaluate and make adjustments 8. Identify at least five expenses which the Brown probably encountered, but did not include in their February 2009 spending plan? (5 points) 9. If their income does not increase, what are two ways the Brown can adjust their spending to account for these additional expenses? (2 points) Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 23

10 A2 Following your careful evaluation of the Brown spending plan please create a new spending plan for them for the month of March. (20 points available) Date: March2009 Spending Plan Designed for: The Brown Family Income Amount Wages/salary for Tia (Net pay) $ Wages/salary for John (Net pay) $ 1, Total Income $ 2, Expenses Amount Fixed Expenses Housing $ Savings $ Insurance $ Percentage of income used for each expenditure Total Fixed Expenses $ Flexible Expenses Amount Public transportation costs $ Transportation costs for car $ Food (Groceries) $ Food (Eating out) $ Baby expenses $ Personal care $ Total Flexible Expenses $ Total Expenses $ TOTAL INCOME TOTAL $ EXPENSES 10. How did you determine what areas to decrease expenses in to make their balance budget? (1 point) 11. If an individual has a high income. Does this make them a wealthy person? Why or why not? Support your answer with one reason. (2 points) Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 24

11 A4 Spending Plans: Mission Home Front Total Points Earned 20 Total Points Possible (10 for the interview and 10 for the reflection) Percentage Name Date Class OUR GOAL: Create a young adult that is better armed to manage their own personal finances. Dear Family Member, We are studying spending plans in class. In order for the students to see their newly gained knowledge as applicable, we are asking them to interview an adult, preferably a member. It is hoped that this will help them understand how the money, comes and goes, and gain an appreciation for the management that occurs behind the scenes. Instructions: Interview a member or adult about spending plans and how they use them. The Italics indicate a place where students explain learned information to the individual being interviewed. INTERVIEW QUESTIONS: THE SPENDING PLAN PROCESS: STEP 1: SET FINANCIAL GOALS Students, briefly describe a SMART goal. 1. Do you have a spending plan? Yes No 2. Are there specific goals that determine monthly spending? Yes No An example goal is: STEP 2: ORGANIZE 3. Do you write out a hard copy of a budget or spending plan? Yes No If yes: For what period of time is it. Monthly Weekly Bi-Weekly Yearly Other STEP 3: DECIDE In class we discussed how The Costs Add Up. Students, please explain what this means and what you learned. 4. Have you ever tracked your spending? Yes No 5. How is it decided what specific items money is spent on? (Example: food, gas etc.) How: 6. Is the amount set aside predetermined? Yes No Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 28

12 A4 STEP 4: IMPLEMENT 7. Do you have a record keeping system for monthly spending? Yes No STEP 5: CONTROL We talked about 3 control methods: Envelope system, spending plan/calendar system and spreadsheet/register system. Please have the student explain these to you. 8. What type of control system is used to be sure there is enough to pay bills and meet expenses throughout the month in your household? STEP 6: EVALUATE We talked about the gum ball machine analogy to represent income, expenses and the creation of net worth. Please have the student draw and or explain the gumball analogy to you. Do you evaluate spending at the end of the month? Yes No Why? Thank-you for your time. Signature of person interviewed: Date: REFLECTION QUESTIONS: Instructions: Answer the following questions about the spending plan process. 1. When creating your own personal spending plan, explain how you will use each step of the spending plan process? 2. Hypothesize the importance of communication when developing a spending plan for a. 3. Identify two ways you will manage your money to create wealth. Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 29

13 A1 Spending Plan Total Points Earned 50 Total Points Possible Percentage Name Date Class 1. Identify three examples of needs and three examples of wants. (6 points) 2. Write one SMART short-term financial goal and one SMART long-term financial goal. (2 points) 3. Explain the difference between fixed and flexible expenses. Give one example of each. (4 points) 4. Why are spending plans important for overall financial management? Support your answer with two reasons. (3 points) 5. What are the major expenditure categories? What percentages are given as recommendations for each category? (10 points) 6. Why may the percentages in each category be different between two individuals? (2 points) Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 30

14 A1 For the following questions, please indicate if the statement is True or False by writing a T or F on the line. (Each worth 1 point) 7. Net income is the total amount of money that is earned before deductions have been taken out. 8. The S in SMART Goal means specific. Place the following spending plan development steps in the proper order 1 being step one and 5 being step five. Indicate the order by placing the correct number on the line. (5 points) 9. Allocate Money to Each Category 10. Track current income and expenses 11. Implement and Control 12. Evaluate and Make Adjustments 13. Create personalized income and expense categories Match the following terms with the correct definitions. (Each worth 1 point) A Risk B Housing C Health Insurance D Food E Disability Insurance F Net Pay G Life insurance H Gross pay 14. The total amount of money earned during a pay period before payroll deductions. 15. Pays a portion of health care expenses if one is sick or injured. 16. This is considered take home pay. 17. Provides financial support if an individual is injured and cannot work. 18. The third most expensive category within a spending plan that accounts for approximately 15% of an individual s net income. 19. Uncertainty about a situation s outcome. 20. The largest of the four major expenditures making up approximately 30% of an individual s net income. 21. Provides financial support to an individual s beneficiaries upon death. Please define the following control system methods (Each worth 1 point). 22. Envelope system Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 31

15 A1 23. Check register system 24. Electronic spending plan system Directions: Label the components of the gumball machine analogy: (3 points) What would be considered more important: income or net worth? Support your answer with one reason. (2points) Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 32

16 A3 The Carson Family Total Points Earned 82 Total Points Possible Percentage Name Date Class Directions: As you read the scenario help to keep track of the Carson s lifestyle by completing the following directions: Underline the following concepts in these colors: Blue Bad habits (financial, education, or others) Purple Good habits (financial, education, or others) Green Income Red Expenses The Carson Family (15 points) The Stern Family (Sarah s ) Sarah Carson, formerly known as Sarah Stern grew up in a small community. Sarah s father, Daniel, was a veteran teacher at the local high school and enjoyed being an advisor for the technology club and the assistant boy s basketball coach. Her mother, Rose, was a stay-at-home-mom, but taught occasional sewing class in their living room. Sarah s sister, Joni, is two years younger and looks up to her big sister in every way. Raising two children on a teacher s income was challenging for Daniel, but the pulled together using the extra income provided by Rose s sewing lessons and the girls weekend and evening jobs. They never had much left over at the end of the month, but they had everything they needed. Sarah and Joni were both excellent students and were encouraged by their counselors to think about going to college. The local university was an excellent school and Sarah would be able to attend there and still be close to home. She knew that she d have to work almost full time to get the money she needed to pay for college and might have to take courses on-line or at night. But, she knew it would be worth it. The Carson Family (Jim s ) Jim Carson was born and raised in a small city near by Sarah s hometown. His father, Walter, was a carpenter and worked intermittently for a local contractor. He was frequently unemployed during the fall and winter season, when layoffs were frequent. These times were perfect for hunting with the guys and spending time at the local tavern for endless card games. Jim and his brothers, Bill, Mike, and Joe, followed Walter s example and learned to enjoy the pleasures of hanging out with the guys. Mrs. Carson (Walter s wife) spent her time as a volunteer receptionist at the nearby church. This lived paycheck to paycheck and did not plan for the future. Unlike his brothers, Jim was a good student. One day, early in his senior year, he attended a college information workshop. In fact, a representative from the same state university where Sarah attended was there and persuaded him to take the entrance exams and apply. Unfortunately, there was no money for tuition and the idea of student loans, scholarships, or grants never even crossed his mind. He did, however, decide that he liked the idea of going to college. Sarah, Jim, and Sammy The large state university that Jim and Sarah attend is a quality school. The surrounding residential areas are nice places to raise a. Sarah met Jim one summer evening at a lively restaurant on campus. They began dating immediately and after a whirlwind romance a Justice of the Peace married them six months later. It wasn t long until Sarah found herself pregnant. They had a son, Sammy, who is now six months old and regularly has a raspy cough. Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 33

17 A3 On a trip to a neighborhood clinic, one of the student doctors suggested that Sammy might be showing early signs of asthma. Sarah is now in her senior year of college and attends school three days a week and works as a waitress at an upscale restaurant near their home. Sarah works 32 hours per week at a rate of $7.25. With school, that is all she is able to handle. Her hourly wage net pay each month is $747. Sarah also makes approximately $1,288 after taxes in tips per month. She also receives $1,000 per month in financial aid. Jim has a high school diploma and a few general education credits but stopped going to class when he lost his job and has had a difficult time finding a new one without much education. Resisting Sarah s pleas that he continue his job-hunting efforts or even go back to school, Jim feels that Sammy s day-care expenses would eat up his minimal income. Therefore, Jim stays home and cares for Sammy in their one bedroom apartment that costs $575 per month for rent and approximately $100 per month for utilities. He has developed a smoking habit consuming two packs of cigarettes a day costing them $266 per month. To help pass the time and assist Sarah with her late night homework, the needs internet. Sarah elected to have a bundle pack that included internet, basic cable, and a phone line for $75 per month. Sara also has a cell phone that is pre-paid for $25 per month which she uses for emergencies only. Jim does the grocery shopping spending approximately $350 per month. They seldom eat out. They pay $267 per month for health insurance for all of them. But, it provides minimal coverage. Between dressing for work, school, and keeping Sammy clothed during his fast growing phase the Carson s spent on average $110 per month on clothing. With expenses such as these and the college tuition payment of $750 per month the Carson s were struggling to make all of the payments on time. Sarah only spent $50 per month on entertainment and assumed Jim was spending minimal amounts. However, what she didn t know was that he was using a credit card to have fun with his friends. Since he was home all day, he was able to ignore the calls from the creditor and keep his cards a secret from Sarah. The Carsons were piling up extremely expensive debt. Sarah didn t know that Jim entered the marriage with $5,000 in credit card debt and had paid down none of it. After their marriage, they added another $3,000 in debt using their credit card to get established in their new apartment and go on a honeymoon. They regarded credit cards as a risky, but a necessary way to supplement their limited income. Needless to say, all of these credit cards have incredibly high interest rates which will cause the bills to continue to increase. Their minimum monthly payment for Jim s card is $125 and $75 for their card. In addition, their credit score was quite low as a result of this debt. In thinking about their financial situation, Sarah remembered her mom advising her to set aside some money each month to deal with emergencies. At this time, they do not have money in savings. But, in February, Sarah started allocating $50 per month in a savings account, despite how difficult it was each month. To compound her problems, Sarah worried about the condition of their 1995 Chevy Lumina. It had 120,000 miles on it already and occasionally broke down on her way to work. Even though the car was paid off as a high school graduation gift for Sarah, the repairs cost $75 per month and fuel costs $100 on average per month. Sarah has minimal liability insurance required by law on the car costing the Carson approximately $42 per month. The Carson s apartment was more than a mile from the nearest bus stop and about 10 miles from her work. Sometimes Sarah had to ride to work with some of her co-workers, which left her without a way to get to class or run errands. She and Jim investigated both new and used cars at local dealers, but were discouraged by the prices they were quoted. Even the smallest and cheapest new sedan they wanted, with standard equipment and few options, retailed at $10,000 or more (depending upon special sales and finance charges). While Sarah was concerned about gas consumption and wanted a fuel-efficient vehicle, Jim wanted a SUV. She knew that they d have to finance any new car that they bought and realized that the payments for the loan and insurance would be too high. What can we do? Sarah asked out loud, while Jim stood by silently. Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 34

18 A3 One day Sarah decided that it was time to sit down and create a spending plan. She gathered many receipts to look at the average costs per month that her was spending on items. Sarah was quick to see that they needed to take some action to get their financial lives on track. Sarah began to think about leaving Jim and the city however, she loved the area where she lived and knew there were outstanding job opportunities once she graduated. She was furious with Jim and very worried about her son. Thinking about Sammy s future made her feel even more terrified. However, she has no idea where to begin. What should she do? How can they ever get out of this mess? Directions: The yellow column is the February spending plan for the Carson based upon the receipts that Sarah tracked. The purple column is what the actually spent in February. Review the spending plan and scenario to answer the following questions. Income and Expense Statement for: Carson Time Period: February 2009 February (yellow column) February (purple column) March (blue column) Spending Plan Tracking Spending Plan Income Amount Amount Amount Wages or salary before withholding $747 $700 Commission/tips/bonuses $1,288 $1,150 Worker's Compensation Scholarships/grants $1,000 $1,000 Gifts from relatives $200 From savings $50 Other: Total Income $ 3,035 $ 3,100 Expenses Fixed Expenses Contribution to savings and investments $50 $0 Health Insurance $267 $267 Life insurance Auto insurance $42 $42 Housing (rent, mortgage) $575 $575 Car payment Installment payment #1 Tuition $750 $750 Cable tv and internet $75 $75 Other Total Fixed Expenses $ 1,759 $ 1,709 Variable Expenses Food $350 $323 Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 35

19 A3 Eating out/snacks $50 Utilities (Gas, electricity, water, garbage) $100 $104 Gasoline $100 $77 Car repairs/maintenance $75 $50 Medical/dental care not covered by insurance Prescription drugs and medicines $75 Child/other dependent care Clothing $110 $90 Entertainment $50 $50 Personal care Credit card payment $200 $200 Magazines, newspapers, etc. Pet care/supplies/food/vet Gifts $100 Education/books $35 Telephone $25 $25 Other - Cigarettes $266 $266 Total Variable Expenses $ 1,276 $ 1,445 Total Expenses $ 3,035 $ 3,154 Net gain or Net Loss $ 0 ( $ -54) 1. Write one short-term SMART goal for the Carson. (1 point) 2. Write one long-term SMART goal for the Carson. (1 point) 3. Identify three values the Carson has which influences their spending plan. (3 points) 4. Identify three needs the Carson has. (3 points) 5. Identify three wants the Carson has. (3 points) Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 36

20 A3 6. Identify and draw the percentage spent in each major expenditure category for February (yellow column). (5 points) Housing Transportation Food Other Saving Insurance 7. How has Jim and Sarah s childhoods influenced their perceptions on money management both positively and negatively? (2 points) 8. What has happened to Jim s earning power since he did not finish college? (1 point) 9. What impact does credit card debt have on their spending plan? (1 point) 10. Should the Carson purchase a new car at this time? Why or why not? (2 points). 11. What are two positive financial techniques the Carson currently has? (2 points) 12. What are two negative financial management principles the Carson currently has? What do they need to do to change this? Why might these changes be difficult? (4 points) 13. Analyze the Carson s actual spending for the month of February in the purple column. This month, they had a few unexpected emergencies in addition to changes in how much they were actually spending in categories. Some of the changes were: o Sammy needed medicine for his asthma which was not covered by their insurance $75. o Sarah had a class project which required her to purchase an additional text book and supplies $35. o They had guests in town one night and ate out $50. o Sarah was sick and could not work for two nights one week decreasing her pay. o It was Jimmy s birthday and his parents gave them $200. He spent $100 on a new game and put $100 towards their monthly expenses. Based upon their spending, create a spending plan for the month of March in the blue column. (10 points) Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 37

21 A3 14. What control method would you recommend the Carson uses and why? (2 points) 15. Does the Carson currently have a net gain or a net loss? (1 point) 16. What are two negative spending patterns the Carson had in February? (3 points) 17. Identify four changes you made in the spending plan. Explain why you made those changes. (4 points) 18. What is one challenge the Carson may encounter while trying to implement that change? (1 point) 19. How does not having money in savings impact the Carson when adjusting to their emergencies? (1 point) 20. How was money allocated to help the Carson meet their short and long-term financial goals identified in questions one and two? (1 point) 21. At this point in the Carson s financial situation, are they building net worth? Why or why not? (2 points) 22. Give two examples of how the Carson s financial struggles relate to real life. (2 points) Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 38

22 A5 Where Does the Money Go? Total Points Earned 72 Total Points Possible Percentage Name Date Class Instructions: In small groups, you will create the life of an American Teenager. Since you are a teenager, you are very qualified for this mission. Draw on your knowledge and experiences to create the teenager and identify their spending habits. DESCRIBE THE TEENAGER? To begin, we must first identify who this teenager is along with their values, needs, and wants which will impact their spending decisions. This is the life story of (name) who is years old and a (grade) in high school. HOBBIES (2 points) What does the teenager like doing for fun? ACTIVITIES (2 points) What types of things is the teenager involved in? SCHOOL INVOLVEMENT: COMMUNITY INVOLVEMENT: VALUES (2 points) What does the teenager value? FAMILY (2 points) Who is in this teenager s? Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 39

23 A5 THE TEENAGER S LIFE (5 points) Write a short description describing the teenager s life. HOW DOES THE TEENAGER RECEIVE MONEY? Now that we know who they are, let s decide how the money is earned. INCOME: Where do they get their money? How much would they get in one month from each place (parents, job, gifts, from savings account)? JOB (1 point) Does the teenager have a job? Yes No Employer: OTHER SOURCES OF INCOME (1 point) Does the teenager receive income from other sources such as parents, savings account, or gifts? If so, where and how much per month? Hourly rate: Hours per month: Total monthly pay: TAX DEDUCTIONS (1 point) If the teenager receives a paycheck, does he or she have federal and state taxes along with FICA deductions removed? Why or why not? This is approximately 30% of gross pay from each paycheck. Yes No Total monthly pay x.30 = Deduction amount HOW DOES THE TEENAGER SPEND THEIR MONEY? Now that we know who they are and how they earn money, let s decide how the money goes. EXPENSES: Where do they spend their money? How much would they spend in one month? Consider every penny! FINANCIAL GOAL (1 point) Identify one SMART financial goal that the teenager has which will influence their spending. (15 points) Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 40

24 A5 HOUSING Where does the teenager live? Types of Expenses Who provides? Monthly Amount House payment What type of home? TRANSPORTATION How does the teenager get around? Types of Expenses Who provides? Monthly Amount Type of transportation Utilities(power, water, garbage, internet, TV, phone) Gas and maintenance Yes No Home insurance Yes No Automobile Insurance Yes No INSURANCE How is the teenager protected against risk? Types of Expenses Who provides? Monthly Amount Health Yes No FOOD What does the teenager eat? Types of Expenses Who provides? Monthly Amount Food at home Disability Yes No Eating out Where? Life Yes No Snacks What type? SAVING & OTHER EXPENSES Does the teenager save? What expenses does the teenager have to pay for his or her hobbies and school activities? Examples may include cell phone, entertainment, clothing, donations, personal care, education, etc. Types of Expenses Who provides? Monthly Amount Types of Expenses Who provides? Monthly Amount Saving Yes No What for? Identify the expense. Identify the expense. Identify the expense. Identify the expense. Identify the expense. Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 41

25 A5 THE TEENAGER S SPENDING PLAN Now that we know who they are and how they earn and spend their money, let s create a spending plan to help them keep their finances balanced for one month. (15 points) INCOME Where from: Gross income: Identify where from: Gross income: Identify where from: Savings Parents Other: Identify where from: Tax deductions: EXPENSES Where from: Housing Transportation Insurance Food Savings Other: Identify what: Other: Identify what: Other: Identify what: Other: Identify what: Other: Identify what: TOTAL GROSS INCOME TOTAL NET INCOME (Gross Income-Deductions = Net Income) TOTAL EXPENSES NET GAIN OR LOSS (Total Net Income-Total Expenses) How much per month? How much per month? 1. Highlight the fixed expenses listed above. (2 points) 2. Is the total net income equal to the total expenses? (5 points) a. If there is a net gain, where will the extra income be allocated to? b. If there is a net loss, what adjustments will be made to the spending plan? Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 42

26 A5 3. Draw a chance card. How will this impact the spending plan? If this were real life, identify specifically how the spending plan would be adjusted to accommodate this card. (3 points) 4. Was the teenager able to reach their goal? Why or why not? (2 points) 5. Provide three examples of how the expenses in the spending plan support the teenager s values, activities, hobbies, and structure. (3 points) 6. If certain expenses were not paid for by the teenager s, what impact would that have on their spending plan? (2 points) 7. Now that the plan has been created, how will they use it? What type of control method will work best for this teenager? (2 points) 8. When the month is finished, how do they need to complete the process and begin again? (1 point) 9. If this was your spending plan, what are three things that would be different? (3 points) 10. Explain how spending plans are useful. (1 point) 11. When you are living on your own, how will you begin the spending plan process? (1 point) Family Economics & Financial Education Revised April 2010 Spending Plans Unit Spending Plan Page 43

27 F1 Spending Plans Financial Planning Family Economics & Financial Education Daily, individuals make decisions which influence their financial future. Consider the daily purchase of an item such as a latte. When making the purchase, $3.50 may not seem to be significant. Does the purchase seem more significant when considering it adds up to be $1,260 per year or that it could be $6, in 25 years if saved in an account earning 7% interest? What if the individual also has aspirations to purchase a new car, attend college, or dreams of traveling to exotic places? The $6, becomes extremely valuable to helping individuals achieve those aspirations. In the daily act of managing money, individuals are always making tradeoffs. By acquiring one item, the individual will not be able to have the other. Financial planning is a process individuals engage in to achieve long-term financial success while having a quality standard of daily living. Within the process, an essential financial management tool is a spending plan. A spending plan is a paper or electronic document used to record both planned and actual income through expenditures over a period of time. 1 Each individual and has a unique spending plan because the decisions made are based upon their unique values, needs, and wants. A value is a fundamental belief or practice about what is desirable, worthwhile, and important to an individual. Values can be influenced by, friends, teachers, religious affiliations, work/career, media, and law. They guide an individual s choice about their needs and wants. A need is something thought to be a necessity or essential item required for life. Examples include food, water, and shelter. A want is something unnecessary, but desired, or an item which increases the quality of living. Examples include MP3 players, DVD players, and the newest game system. A SMART financial goal includes the following components: Specific: State exactly what is to be done with the money involved. Measurable: Write the exact dollar amount. Attainable: Determine how it can be reached. Realistic: Do not set the goal for something unattainable or unrealistic. This involves reviewing a spending plan to ensure the amount allocated can be saved. Time Bound: Specifically state when the goal needs to be reached. Want Something unnecessary, but desired Needs Something Thought to be an essential item Value required for life A fundamental belief about what is desirable, worthwhile, and important to an individual Setting Financial Goals Financial goals are the foundation of a financial plan. A goal is defined as the end result of something a person intends to acquire, achieve, do, reach, or accomplish in the near or distant future. Financial goals are specific objectives to be accomplished through financial planning. Both short-term and long-term financial goals are necessary components of an effective financial plan. Goals help individuals to consider their current financial situation compared to where they want to be in the future. They are influenced by a person s values, needs, and wants. Short-term goals are less than one year. Long-term goals are more than one year. Family Economics & Financial Education Revised February 2009 Spending Plans Unit Spending Plan Page 1

28 F1 Setting Financial Goals At any time, an individual may have several financial goals and the amount required to achieve each goal may be more than an individual can allocate in their spending plan. Therefore, the process of setting financial goals involves setting priorities and continually examining if the goals are being achieved. In financial management, goals help a person to consider the tradeoffs they are making with each decision. A spending plan then becomes the essential tool to ensuring money is allocated to achieve each goal. Examples of SMART Goals: Short-term goal: I plan to save $15.00 from my monthly paycheck for ten months to purchase a new MP3 player that will cost of $ Long-term goal is: I plan to save $25.00 from each bi-monthly paycheck for two years to have $1,200 towards a down payment for a used car when I turn 18 years old. What is a Spending Plan? A spending plan is comprised of three sections; income, expense, and net gain or loss. Income is money earned, and expense is money spent. There are two types of expenses; fixed and flexible. Fixed expenses often have a fixed amount due each month, are contractual, and not easy to reduce or eliminate. Examples include rent, cell phone bills, and car payments. Flexible expenses can vary each month in the amount owed, are not contractual, and do not have to be paid by a certain date making it easy to reduce or eliminate the expense. Examples are food, clothing, and entertainment. Developing a Spending Plan Step One Track Current Income and Expenses To create a spending plan, individuals first begin by making estimates of how much money they will earn and expenses they will have during a specific period of time. This time period is often concurrent with payday. For most, this is bi-monthly or monthly income. It is essential that the estimates an individual makes are as accurate as possible for the spending plan to be realistic and effective. If an individual is unsure about how much they are spending, they should track their daily expenses for a few weeks. This can be done by carrying a small notebook and writing down each expense as it occurs or keeping receipts. Step 5 Evaluate And Make Adjustments Step 4 Implement And Control Step 3 Allocate Money to Each Category Step 1 Track Current Income And Expenses Step 2 Creating Personalized Income and Expense Categories Family Economics & Financial Education Revised February 2009 Spending Plans Unit Spending Plan Page 2

29 F1 Step Two Creating Personalized Income and Expense Categories Every individual and s unique values will influence their spending decisions. Therefore, effective spending plans are those which are personalized. This includes selecting spending plan categories based upon sources of income and typical expenses. Income categories may include salary, interest, loans/scholarships, and savings withdrawals. There are several expense categories most households have. Most expenses are taken out of an individual s net income. An individual s net income is considered take home pay. Taxes however are taken out of gross income. Gross income is the total amount of money earned during a pay period before payroll deductions. Taxes are one of the largest expenditures that an employee has taken out of their paycheck. Taxes: Required citizen charges by local, state and federal governments used to provide public goods and services. Housing: The largest of the four major expenditures. Transportation: Part of everyday life and the second most expensive major expenditure. Food: The third most expensive major expenditure. Savings: A portion of income should be saved each month to build an individual s wealth and create financial security. Insurance: Insurance is the foundation for every individual and s spending plan. Other: Individuals have many other expenses that fulfill needs and wants as a part of daily living and are a major part of a spending plan. Step Three Allocate Money to Each Category After tracking spending and determining categories reflective of an individuals earning and spending practices, individuals are ready to create their plan for how much to allocate for each category. This becomes the individual s spending plan identifying how they will earn and spend their money during the specified time period based upon their values, needs, and wants. Several programs are available to help individuals create a spending plan including using paper and pencil, Microsoft Word and Excel templates, and online templates. The income and expense sections of the spending plan should be totaled. Then, evaluate if they have a net gain or net loss which is the amount of money remaining after subtracting expenses from income. If a person has a net gain that indicates that there is It is recommended, households allocate their expenses into the following categories: remaining money to either save, spend, or invest. If a person has a net loss then they are spending more money than he/she is earning and has to use credit (borrowed money) to meet their financial obligations. The spending plan must be adjusted to ensure that income and expenses are equal (reach zero). Step Four Implement and Control 10% Housing 18% 7% 30% Transportation Food Insurance Other 15% 20% Saving At this step consumers are ready to put their plan into action. Control systems are ways to assure that the tracking of expenses are done in an accurate way. Control systems are used to help track income and expenses. Continually monitoring spending allows an individual to know if they are spending too much in a category and must make adjustments to avoid using credit. Family Economics & Financial Education Revised February 2009 Spending Plans Unit Spending Plan Page 3

30 F1 Step Four Implement and Control There are several different ways to monitor spending and an individual must choose which works best for their personality. Examples include: Envelope System Individuals place the actual budgeted amount of cash from a paycheck into the specific envelope labeled for the expense. Each time money is taken out, the amount should be written down on the envelope. Another way to track this is to place receipts inside the envelope. This will help an individual to evaluate their spending plan at the end of each month. A consumer should be aware that if they choose to use the envelope system and a theft occurs there is no reimbursement for lost cash such as what is offered by a credit card for unauthorized charges. 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. Excel spreadsheets with formulas are available to help consumers calculate the costs of expenses and income. Additional programs are available for purchase that can be used online or downloaded onto a computer to aid in setting up financial plans. Step Five-Evaluate and Make Adjustments This is the step where the consumers can evaluate the previous steps to determine if their financial plan is working. This is determined by assessing if goals have been met, the allocations in each category are accurate, money is being saved, and credit is not being used. If any of these criteria are not being met, it is time to adjust the spending plan! Net Worth Statement A spending plan is a tool for daily cash management. An effectively managed spending plan allows an individual to not have credit and begin creating wealth for long-term security. Wealth is defined as having a large amount of money or valuable possessions. Wealth is the most important predictor of an individual s overall financial security identifying the standard of living a person will be able to have during retirement. Wealth is measured with a net worth statement. A net worth statement describes an individual or s financial condition on a specified date. There are multiple components including: 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. The financial planning process is ongoing. Plans will change depending on an individual or s financial situation. If consumers continue to monitor, change, and evaluate their plan set into place they will be financially successful. Gumball Analogy Always have more money coming in than out to achieve your financial goals! Income (money in) Net Worth (wealth) Flexible Expenses (money out) Fixed Expenses (money out) 1. Garman, T., & Forge, R. (2003). Personal Finance. 7th edition. New York: Houghton Mifflin Company. Family Economics & Financial Education Revised February 2009 Spending Plans Unit Spending Plan Page 4