1.15.2.

F1

SpendingPlans
TakeChargeofYourFinancesAdvancedLevel
FinancialPlanning
Everydayindividualsmakedecisionswhichinfluencetheirfinancialfuture.Considerthedailypurchaseofan
itemsuchasala e.Whenmakingthepurchase,$3.50maynotseemtobesignificant.Doesthepurchase
seemmoresignificantwhenconsideringitaddsuptobe$1,260peryearorthatitcouldbe$6,838.57in25
yearsifsavedinanaccountearning7%interest?Whatiftheindividualalsohasaspira onstopurchaseanew
car,a endcollege,ordreamsoftravelingtoexo cplaces?The$6,838.57becomesextremelyvaluableto
helpingindividualsachievethoseaspira ons.Inthedailyactofmanagingmoney,individualsarealways
makingtradeos.Byacquiringoneitem,theindividualwillnotbeabletohavetheother.Financialplanningis
atoolusedtoachievefinancialsuccessbaseduponthedevelopmentandimplementa onoffinancialgoals.
Withintheprocess,anessen alfinancialmanagementtoolisaspendingplan.Aspendingplanisapaperor
electronicdocumentusedtorecordbothplannedandactualincomethroughexpendituresoveraperiodof
me.
Eachindividualandfamilyhasauniquespendingplan,becausespendingdecisionsarebasedupontheirunique
values,needs,andwants.Avalueisafundamentalbelieforprac ceaboutwhatisdesirable,worthwhile,and
importanttoanindividual.Valuescanbeinfluencedbyfamily,friends,teachers,religiousalia ons,work/
career,media,andlaw.Theyguideanindividualschoiceabouttheirneedsandwants.Aneedissomething
thoughttobeanecessityoressen alitemrequiredforlife.Examplesincludefood,water,andshelter.Awant
issomethingunnecessary,butdesired,oranitemwhichincreasesthequalityofliving.ExamplesincludeMP3
players,DVDplayers,andthenewestgamesystem.Apersonspercep onoftheirneedsversuswantsaects
theirspending.
Whatdoyouvalue?Howdothesevaluesaectyourspending?

Financialgoalsarethefounda onofafinancialplan.Agoalisdefinedastheendresultofsomethingaperson
intendstoacquire,achieve,do,reach,oraccomplishinthenearordistantfuture.Financialgoalsarespecific
objec vestobeaccomplishedthroughfinancialplanning.Goalshelpindividualstoconsidertheircurrent
financialsitua oncomparedtowheretheywanttobeinthefuture.Theyareinfluencedbyapersonsvalues,
needs,andwants.Atany me,anindividualmayhaveseveralfinancialgoalsandtheamountrequiredto
achieveeachgoalmaybemorethananindividualcanallocateintheirspendingplan.Therefore,theprocessof
se ngfinancialgoalsinvolvesse ngpriori esandcon nuallyexaminingifthegoalsarebeingachieved.In
financialmanagement,goalshelpapersontoconsiderthetradeostheyaremakingwitheachdecision.A
spendingplanthenbecomestheessen altooltoensuringmoneyisallocatedtoachieveeachgoal.
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1.15.2.F1

FinancialgoalsshouldbeSMARTgoals.ASMARTfinancialgoalincludesthefollowingcomponents:

SPECIFIC
Stateexactly
whatistobe
donewith
moneyinvolved.

MEASUREABLE

ATTAINABLE

Writethe
exactdollar
amount.

Determinehow
itcanbe
reached(o en
determinedby
thebudget)

TIMEBOUND

REALISTIC
Donotsetthe
goalfor
something
una ainableor
unrealis c.

Specificallystate
whenthegoal
needstobe
reached.

AnexampleofaSMARTfinancialgoalis:Iplantosave$25.00fromeachbimonthlypaycheckfortwoyearsto
have$1,200towardsadownpaymentforausedcarwhenIturn18yearsold.

WhatisaSpendingPlan?
Aspendingplaniscomprisedofthreesec ons;income,expense,andnetgainorloss.Incomeismoney
earned,andexpenseismoneyspent.Therearetwotypesofexpenses;fixedandflexible.Fixedexpenseso en
haveafixedamountdueeachmonth,maybecontractual,andnoteasytoreduceoreliminate.Examples
includerent,cellphonebills,andcarpayments.Flexibleexpensescanvaryeachmonthintheamountowed,
arenotcontractual,anddonothavetobepaidbyacertaindatemakingiteasytoreduceoreliminatethe
expense.Examplesarefood,clothing,andentertainment.

SpendingPlanDevelopmentProcess

DevelopingaSpendingPlan
StepOneTrackCurrentIncomeandExpenses
Tocreateaspendingplan,individualsfirstbeginbymaking
es matesofhowmuchmoneytheywillearnandexpenses
theywillhaveduringaspecificperiodof me.This me
periodiso enconcurrentwithpayday.Formost,thisisbi
monthlyormonthlyincome.Itisessen althatthe
es matesanindividualmakesareasaccurateaspossible
forthespendingplantoberealis candeec ve.Ifan
individualisunsureabouthowmuchtheyarespending,
theyshouldtracktheirdailyexpensesforafewweeks.This
canbedonebycarryingasmallnotebookandwri ngdown
eachexpenseasitoccursorkeepingreceipts.
Majorexpenditurepercentagesprovideareferenceand
maybeusedasaguidewhencrea ngaspendingplan

Step5Evaluate
AndMake
Adjustments

Step4Implement
AndControl

Step1Track
CurrentIncome
AndExpenses

Step2Crea ng
Personalized
Incomeand
ExpenseCategories

Step3Allocate
MoneytoEach
Category

Itisimportanttotakeintoaccountallexpenses
whencrea ngaspendingplan.Some messmall
expensesmaybemissed,butthosesmallexpenses
canaddupveryquicklytobecomelargeexpenses.
Whentrackingexpensesmakesuretotakeinto
accounttheexpensesonthefollowingpage.
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1.15.2.F1

TaxesandPayrollDeduc ons:Mostexpensesaretakenoutofanindividualsnetincome(takehomepay).
Payrolldeduc onshoweveraretakenoutofgrossincome.Grossincomeisthetotalamountofmoneyearned
duringapayperiodbeforepayrolldeduc ons.Payrolldeduc onsincludetaxes,whicharerequiredci zen
chargesbylocal,state,andfederalgovernments.Taxesareusedtoprovidepublicgoodsandservices.Other
payrolldeduc onsmayincludeemployersponsoredre rementandhealthinsurance.
SavingandInves ng:Savingsisapor onofcurrentincomenotspentonconsump on.Itisrecommendedto
save1020%ofnetincomeun latleast6monthsworthofexpensesarereached.Oncethisamountofsavings
isreached,con nuetoinvest1020%ofnetincome.
Housing:Expensesassociatedwithhousingmayinclude:monthlypayment,u li es(electricity,water,
garbage),propertytaxes,homeorrentersinsurance,maintenance,andhouseholdfurnishings.
Transporta on:Expensesassociatedwithtransporta onmayinclude:monthlypayment,licenseand
registra on,insurance,fuel,repairsandmaintenance,andpublictransporta onfees.
Food:Expensesassociatedwithtransporta onmayinclude:foodatthegrocerystore,mealsatrestaurants,
snacks(coees,treats),partyandentertainmentfoods,andnonfoodkitchensupplies(dishsoap).
Insurance:Insuranceisanarrangementbetweenanindividualandaninsurancecompanytoprotectthe
individualagainstrisk.Home,renters,automobile,health,disability,andlifearetypesofinsurance.
Other:Individualshavemanyotherexpensesthatfulfillneedsandwantsasapartofdailylivingandarea
majorpartofaspendingplan.Examplesofotherexpensesinclude:familymembercare,communica onand
computers(cellphone,Internet),medicalcostsnotcoveredbyinsurance,clothing,personalcare,educa onal
expenses,petcare,entertainment,gi sandcharitablecontribu ons,andcreditcosts(loanpayments).

StepTwoCrea ngPersonalizedIncomeandExpenseCategories
Everypersonsvalueswillinfluencetheirspendingdecisions.Therefore,eec vespendingplansarethose
whicharepersonalized.Thisincludesselec ngspendingplancategoriesbaseduponsourcesofincomeand
typicalexpenses.Incomeandexpensecategoriesshouldbebasedoofthetrackingcompletedinstepone.

StepThreeAllocateMoneytoEachCategory
A ertrackingspendinganddeterminingcategoriesreflec veofanindividualsearningandspendingprac ces,
individualsarereadytocreatetheirplanforhowmuchtoallocateforeachcategory.Thisbecomesthe
individualsspendingplaniden fyinghowtheywillearnandspendtheirmoneyduringthespecified me
period.Severalprogramsareavailabletohelpindividualscreateaspendingplanincludingusingpaperand
pencil,Microso WordandExceltemplates,andonlinetemplates.Theincomeandexpensesec onsofthe
spendingplanshouldbetotaled.Then,evaluateiftheyhaveanetgainornetlosswhichistheamountof
moneyremaininga ersubtrac ngexpensesfromincome.Ifapersonhasanetgainthatindicatesthatthereis
remainingmoneytoeithersave,spend,orinvest.Ifapersonhasanetlossthentheyarespendingmore
moneythanhe/sheisearningandhastousecredit(borrowedmoney)tomeettheirfinancialobliga ons.The
spendingplanmustbeadjustedtoensurethatincomeandexpensesareequal(reachzero).
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1.15.2.F1

StepFourImplementandControl
Atthisstepconsumersarereadytoputtheirplanintoac on.Controlsystemsareusedtohelptrackincome
andexpensesandassurethatthetrackingofexpensesaredoneinanaccurateway.Con nuallymonitoring
spendingallowsanindividualtoknowiftheyarespendingtoomuchinacategoryandmustmakeadjustments
toavoidusingcredit.Thereareseveraldierentwaystomonitorspendingandanindividualmustchoose
whichworksbestfortheirpersonality.Examplesinclude:
EnvelopeSystemIndividualsplacethe
actualbudgetedamountofcashfrominto
thespecificenvelopelabeledforthe
expense.Anotherwaytotrackthisisto
placereceiptsinsidetheenvelope.

CheckRegisterSystemTrackallexpendituresinacheckbook
registerwhichhasbeendividedintospendingplancategories.
ElectronicSpendingPlanSystemsMul pletypesofso ware
areavailableforconsumerstousetohelpkeeptrackoftheir
financialrecords.

StepFiveEvaluateandMakeAdjustments
Thisisthestepwheretheconsumerscanevaluatethepreviousstepstodetermineiftheirfinancialplanis
working.Thisisdeterminedbyassessingifgoalshavebeenmet,thealloca onsineachcategoryareaccurate,
moneyisbeingsaved,andcreditisnotbeingused.Ifanyofthesecriteriaarenotbeingmet,itis metoadjust
thespendingplan!

NetWorthStatement
Aspendingplanisatoolfordailycashmanagement.Aneec velymanagedspendingplanallowsanindividual
tonothavecreditandbegincrea ngwealthforlongtermsecurity.Wealthismeasurementofhowmucha
personorhouseholdownsoncealldebtshavebeenpaid.Wealthisthemostimportantpredictorofan
individualsoverallfinancialsecurityiden fyingthestandardoflivingapersonwillbeabletohaveduring
re rement.Wealthismeasuredwithanetworthstatement.Anetworthstatementdescribesanindividualor
familysfinancialcondi ononaspecifieddate.Therearemul plecomponentsincluding:
AssetsEverythingaperson
ownswithmonetaryvalue.

Liabili esDebtsorwhatis
owedtoothers.

Examplesmayincludecash,value
ofanautomobileandhome,and
investments.

Examplesmayincludecredit,
unpaidbills,andloanssuchas
educa on,home,orautomobile.

NetWorthTheamountof
moneyle whenliabili es
aresubtractedfromassets.

oIncome(moneyin)
Thefinancialplanningprocessisongoing.Planswill
changedependingonanindividualorfamilysfinancial
oNetWorth(wealth)
situa on.Ifconsumerscon nuetomonitor,change,
oFlexibleExpenses
andevaluatetheirplansetintoplacetheywillbe
(moneyout)
financiallysuccessful.Inrela ontothegumball
analogy,alwayshavemoremoneycominginthanout
oFixedExpenses
toachieveyourfinancialgoals!

(moneyout)

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