Exercise - DiscussionWalmart Exercise

Teacher’s Statement: Walmart is not as good a place to shop

as you might think. Defend Walmart.

Take 5 minutes to do this in class and be prepared present it to the class.

Students Rebutle: Walmart is the following things:Convenient; has excellent prices; a better selection and variety of

goods; four convenient locations in Changchun; lots of car parking available; on bus routes; the best return / exchange policy of any retailer; established since 1996 in China; very good hours of operation

Summary: Personal financial planning must also consider the non-monetary (human – personal) opportunity cost. Your examples show that shopping at Walmart can contribute to wise management of your financial resources.

Lesson 9 Chapter 4 (Textbook)

Setting Goals and the Financial Planning Process

(CONTINUED)

Setting Goals and the Financial Planning Process

(CONTINUED)

Statement of Cash Flows.Where Does Your Money Go?

A Statement of Cash Flows shows inflow and outflow

for a given time period

How will you use a Statement of Cash Flows?

It is a template / model. How will you will use the template in your life?

Use it to analyze and begin modifying your spending, saving and investment plans.

Scientists use models to experiment and improve the lives of humanity. Why shouldn’t you use a model

to experiment with your resources and improve your life and the lives of the people you love?

Record cash inflows

• Net income from employment

• Savings and investment income

• Other sources (streams) of income

Record cash outflows

Fixed and variable expensesFixed: mortgage, car payments, pension

contributionsVariable: heat, water, electricity, gasoline,

food, dining out, toys, clothing, vacations

Some expenses are fixed for a period of time. Examples include providers of the following services: Insurance, internet, cell service.

Have you ever thought you were paying to much for a certain service?

You may determine that another provider can offer the same service for less money, next year. You may switch.

Net cash flows is the surplus or a deficitDefine Surplus: excessDefine Deficit: shortage

In-Class ExerciseUsing a T-Bar, create your own Statement of Cash Flow

1. The Month of October 20122. The Year of 2012Many of these expenses have already occurred. Category examples include:Tuition Books Winter Clothing Cell PhoneTransportation Food Health Care Pets SuppliesEntertainment Parking Tickets

GasolineHygiene Products Include estimates of the amount – do not worry about

being exact!

Show students the next exercises and why they must do this in their own books now!

Ratios for Evaluating

Financial Progress

Debt Ratio = long term liabilities/total assets(commonly used for personal finances)

This will be test question

Debt ratio compares debt to assets.

A lower debt ratio is better to have.

The smaller the liability over the asset, the more you own. More is better.

This ratio tells us how heavily the individual is financed.

Debt Ratio, is sometimes referred to as Debt to Asset Ratio and is the measure most commonly used by individuals to see how much they own as compared to how much they are borrowing.

Why is it important to know the difference?

This ratio is a leverage measure that tells you how much of the business assets, including share holders equity is leveraged against long term debt. It does not consider current liabilities.

Debt to Net Worth Ratio = Total Liabilities/Net Worth(commonly used for business)

You will not be tested on this ratio

The debt/equity ratio is more conservative and useful to help when considering the risk involved when investing money in a company. Perception of risk is increased.

The debt/asset ratio is like a snapshot of an individual. An individual person does not risk their equity (assets) in order to earn money. Rather, the debt to asset ratio is like a picture of your financial position at this moment in time.

Liquidity ratio = liquid assets/monthly expenses

Liquidity ratios show the number of months that living expenses can be paid without cash inflow

A higher liquidity ratio is good

Using your model, calculate the liquidity ratio for the examples you created earlier in this class.

Debt payments ratio = monthly credit payments/take-home pay

Debt payment ratio should be below 20%

Using your model, calculate the Debt Payment Ratio for the examples you created earlier in this class

Savings ratio = monthly savings/gross income

Your savings ratio should be no less than 10%.

Using your model, calculate the Savings Ratio for the examples you created earlier in this class

Purposes of a Budget In contrast to cash flow, which was a record of how

you spent money in a past time period, a budget is a plan for spending in the future, such as for the next month. A budget helps you…1. Live within your income.2. Spend your money wisely.3. Reach your financial goals.4. Prepare for financial emergencies.5. Develop wise financial management habits

Creating and Implementing a BudgetAssessing your current situation.

– Measure your current financial position.– Determine your needs, values and life situation.

Steps in the budgeting process.1 Set financial goals.2 Estimate income from all sources.3 Budget amount for an emergency fund, periodic expenses

and financial goals.4 Budget set amounts that you are obligated to pay. These are

your fixed expenses. BE SURE TO BUDGET FOR SAVINGS.

Creating and Implementing a BudgetSteps in the budgeting process (continued).

5 Estimate amounts that are to be spend for household and living expenses. These are your variable expenses.

6 Record actual amounts for inflows and outflows, comparing actual amounts with budgeted amounts to determine variances. Deficits and surpluses.

7 Review your spending and savings patterns and evaluate whether revisions are needed in your savings and spending plans.

Characteristics of Successful Budgeting

Well planned

Realistic

Flexible

Clearly communicated

Saving to Achieve Financial GoalsCommon reasoning for saving include…1. To set aside money for irregular and unexpected expenses.2. To pay for the replacement of expensive items, such as

cars or a down payment on a house.3. To buy special items like recreational equipment or to pay

for a vacation.4. To provide for long-term expenses such as retirement or

the education of children.5. To earn income from the interest on savings for use in

paying living expenses.

Savings Techniques-If I don’t see it, I won’t spend it

1. Payroll deductions into saving accounts2. Automatic payments from checking into savings

accounts or mutual funds3. Saving regularly in retirement plan(s)

personal/employer/government4. Also save coins, make periodic deposits5. Write a check each payday as a % of income and

deposit into savings

Money Management & Achieving Financial Goals

1. Balance Sheet reports current financial position

2. Cash Flow Statement shows cash you have received and spent in the past

3. Budget helps you to spend and save to achieve financial goals

Bonus Marks = preparation for the test1. Prepare a balance sheet for yourself2. Prepare a detailed cash flow statement for last

month3. Prepare a monthly budget4. Monitor the budget and show variances

This must be typed – Handwritten submissions will not receive bonus marks.

Bonus

1. Do an online search to see if you can find the savings rate in China.

2. How does your family savings ratio compare to the average? Ask you parents if you like. Explain a little bit about their thought and ideas about savings.

This must be typed – Handwritten submissions will not receive bonus marks.

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