Unit 4 – Managing MoneyGeneral Learning Outcome:Develop an understanding of managingmoney.Specific Learning Outcomes• Solve problems that involve personalbudgets.• Demonstrate an understanding offinancial institution services used toaccess and manage finances.
Unit 4 – Managing MoneySpecific Learning Outcomes• Solve problems that involve personal budgets. • identify income and expenses that should be included in a personal budget. • Explain considerations that must be made when developing a budget including prioritizing, recurring, and unexpected expenses. • Create a personal budget, with or without technology, based on given income and expense data. • Collect income and expense data, and create a budget. • Modify a budget to achieve a set of personal goals. • Investigate and analyze, with or without technology, “what if …” questions related to personal budgets.
Unit 4 – Managing MoneySpecific Learning Outcomes• Demonstrate an understanding of financialinstitution services used to access and managefinances.•describe the type of banking services available from variousfinancial institutions, such as online•services.•describe the types of accounts and related service chargesavailable at various financial institutions.•identify the type of account that best meets the needs for a givenset of criteria.•identify and explain, for different accounts, the various record-keeping options such as deposit slips,•withdrawal slips, cancelled cheques, account statements, chequeregister, and receipts.
Unit 4 – Managing MoneySpecific Learning Outcomes• Demonstrate an understanding of financialinstitution services used to access and managefinances.•identify and explain various automated teller machine (atM)service charges.•describe the advantages and disadvantages of online banking.•describe the advantages and disadvantages of debit cardpurchases.•describe ways that ensure the security of personal and financialinformation such as passwords,•encryption, protection of personal identification number (PiN)
Unit 4 – Managing MoneyBudgeting• Preparing a budget is one of the best ways to reach your financial goals. A budget allows you to compare your income with your expenses. It allows you to see where your income is coming from and how you are spending it. A budget can help you: – live within your income – identify financial priorities – allocate funds to meet expenses – meet financial emergencies and reduce credit use – reduce uncertainty and conflict about affairs – gain a sense of financial independence and control – save and invest to reach financial goals
Unit 4 – Managing MoneyBudgeting – Paying Yourself First• One of the most important suggestions made by financial planners is ‘paying yourself first.’ By this, financial planners mean that you should set aside a certain percentage of your net income as soon as you receive it and live off the remaining amount. Paying yourself first will provide you with financial security.• Most people know it is important not to spend all the money they earn, but to save some of it. ‘Paying yourself first’ involves saving money but with a twist. Rather than spend and save what is remaining, you set aside a fixed amount to save first and then spend the remaining amount. Most financial planners recommend that you set aside 10% of your net income. They also suggest you begin the habit of paying yourself first as soon as you start earning money.
Unit 4 – Managing MoneyBudgeting – Recommended Spending Levels• The recommended levels of spending in the various categories of a budget differ by the subject’s age, income, and family situation. The following table of recommended levels of spending provides a general guideline only.
Unit 4 – Managing MoneyPreparing a Budget• The budget template you will be using is divided into the following five sections. Section 1: Net income Section 2: Expenses - Monthly Expenses Section 3: Expenses - Annual Expenses Section 4: Reserve Fund and Savings Section 5: Summary
Unit 4 – Managing MoneySection 1: Net income• Your first step in preparing a monthly budget is to accurately estimate your annual income. The category for net income is subdivided into three parts: regular net annual income, additional net annual income, and other net annual income. Regular net annual income is that of the major income earner. Additional net annual income includes that of other family members. Other net annual income includes income such as scholarships, bonuses, tips and gratuities, income tax refunds, child tax credits, and inheritances. Note: Annual income in the budget form is net income and not gross income. This means that it is the income you receive after all deductions such as Canada Pension Plan contributions, Employment Insurance premiums, and income tax have been deducted.
Unit 4 – Managing MoneySection 2: Monthly Expenses• This section consists of expenses that are paid each month. Some of these may be fixed expenses such as a mortgage or car payment. Some of these may be variable expenses such as groceries, clothing, and car maintenance.Section 3: Annual Expenses• This section consists of annual expenses. Although you pay annual expenses only once a year, you should budget for them each month. You are then prepared for them when you have to pay them. Note that this calculation is completed by dividing an annual expense by 12 to calculate the average monthly contribution.
Unit 4 – Managing MoneySection 4: Reserve Fund & Savings• Many financial planners suggest that individuals should set aside money in a reserve fund for emergencies. The suggested amount is equal to two month’s net income. Apart from this emergency reserve fund, individuals should ‘pay themselves first’ by saving approximately 10% of total net monthly income.Section 5: Summary• In this section, the total of all expenses, reserve fund and savings is subtracted from the total net monthly income. The calculation will result in a surplus (income exceeds expenses) or a deficit (expenses exceed income – shown in red on the spreadsheet).
Unit 4 – Managing MoneyPreparing A Budget Exercise Q. 1 - 7
Unit 4 - InvestmentsNet Worth• A net worth statement is a ‘snapshot’ of your financial situation at a given time. It is the difference between what you own, your assets, and what you owe, your liabilities. Your net worth statement is the best overall indicator of your financial worth.
Unit 4 - InvestmentsNet Worth• In a net worth statement, your assets can be divided into the following three categories: – Liquid Assets – Semi-Liquid Assets – Non-liquid assets
Unit 4 - InvestmentsNet Worth• Your liabilities in a net worth statement can be divided into the following two categories: – Short-term debts – Long-term debts
Unit 4 - InvestmentsNet Worth – Debt/Equity Ratio• One of the most important ratios used to analyze a net worth statement is the debt/equity ratio. The debt/equity ratio of a net worth statement compares all debt, excluding the mortgage on a principal residence, to the equity or net worth. This ratio is expressed as a percentage and is a measure of an individual’s debt burden. The debt/equity ratio is calculated using the following formula:
Unit 4 - InvestmentsNet Worth – Debt/Equity Ratio• Most financial advisors suggest that the debt/equity ratio should not exceed 50%. If the debt/equity ratio is greater than 50%, it indicates an individual’s debt burden is too high. The individual should then consider ways to reduce this debt.
Unit 4 - InvestmentsSample Problem:Completing a Net Worth Statement• Olivia Jones has $670 in her chequing account and $1500 in a savings account. Her life insurance policy has a $5000 cash surrender value. She has $6000 invested in mutual funds and $35,000 in a registered pension plan. Her home is valued at $85,000 on which she has an outstanding mortgage of $62,000. Her car is valued at $18,000. She has a car loan of $8000 that must be repaid within two years. The balance owing on her credit cards is $495.
Unit 4 - InvestmentsSample Problem:Completing a Net Worth Statement - Solution Olivia has a net worth of $80,675 and a debt/equity ratio of approximately 10.53%. Since her debt/equity ratio is well below 50%, her debt burden is quite manageable.