Developing a Spending Plan Financial Literacy Introduction Spending Plans Income and Expense Fixed & Flexible Expenses Net Loss & Gain Spending Plan Process Spending Plan Financial Statement Assists in money management Estimate of income and expense over time Important positive uses: Understanding where money is going Tracking income and expense Helps to meet financial goals Helps people live within their income Reduces the need for using credit Income & Expense Spending Plans have two main components Income Money Earned Expense Money Spent Fixed Expenses Flexible Expenses Income Income is money earned from: Tips Wages or salaries Withdrawal of money from savings Interest from savings accounts, or investments Monetary gifts Scholarships Expense Money Spent Fixed Expenses Same amount paid each time, usually has a specific due date Rent/Mortgage Difficult to change in short amount of time Flexible Expenses Different amount paid each time, usually no specific due date Clothing Easier to change in short amount of time Net Loss & Gain When finished with the spending plan two outcomes are possible: Net Loss More expenses than income An individual needs to increase income or decrease spending Net Gain More income than expenses Ideal situation Extra money can go into savings, be invested, or spent Spending Plan Process Six steps in the spending plan process 1. Set Financial Goals 2. Organize 3. Decide 4. Implement 5. Control 6. Evaluate Step 1: Set Financial Goals Financial Goals should be: Specific: exactly what is to be done with the money; Measurable: write the exact dollar amount; Attainable: how will the goal be reached - determined by budget; Realistic: Do not set the goal for something unattainable or unrealistic; Time Bound: specifically state when the goal needs to be reached. Step 2: Organize Determine the appropriate way of record keeping Select categories for the spending plan Select a time period Usually when paychecks are received Weekly Bi-weekly Monthly Step 3: Decide Make realistic decisions and estimates for categories If expenses exceed income, Earn more income Decrease expenses A combination of both Balancing Your Budget Use the 3 Rs Reality Responsibility Restraint Step 4: Implement Put spending plan into effect Keep accurate records of all income and expense Income is usually constant Keeping track of expenses is the most important! Evaluating Your Budget What strategies can you use to reduce your expenses? What are some purchasing strategies that will help to reduce expenses? Step 5: Control Control systems are ways that a person can keep accurate records of spending Realize potential problems early if spending too much in one area Control systems occur simultaneously with implementation A person should keep a credit spreadsheet which logs all credit transactions (charges and payments for each creditor) Types of Control Systems Envelope System Individuals place actual budgeted cash in a labeled envelope for a certain expense Each time $ is taken out of an envelope, write down amount and place receipt inside Move money around to meet expenses Once cash is gone, its gone and there is no more money in that category Types of Control Systems Spending Plan System Track expenses on a sheet by entering amount Keep daily to know how much is being spent Check Register System Tracks all expenditures in a checkbook register Divided into spending plan categories Savings Why are savings important? What strategies can you use to achieve your financial goals? Rebalancing your Budget Uh oh, you spent too much on a variable expense! What now? Step 6: Evaluate Determine if previous steps in spending plan process have worked Compare estimated amounts to actual amounts Have goals been met? Were there major balances or deficits? Make necessary changes to spending plan A continual process because financial situation is always changing! Homework Research the influence of advertising and peer pressure on spending. Come to class with 2 articles on the topic, and any other notes you have taken.