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Managing Money

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Unit 4 – Managing Money
Unit 4 – Managing Money




General Learning Outcome:
Develop an understanding of managing
money.

Specific Learning Outcomes
• Solve problems that involve personal
budgets.
• Demonstrate an understanding of
financial institution services used to
access and manage finances.
Unit 4 – Managing Money



Specific 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 Money



Specific Learning Outcomes
• Demonstrate an understanding of financial
institution services used to access and manage
finances.
•describe the type of banking services available from various
financial institutions, such as online
•services.
•describe the types of accounts and related service charges
available at various financial institutions.
•identify the type of account that best meets the needs for a given
set of criteria.
•identify and explain, for different accounts, the various record-
keeping options such as deposit slips,
•withdrawal slips, cancelled cheques, account statements, cheque
register, and receipts.
Unit 4 – Managing Money



Specific Learning Outcomes
• Demonstrate an understanding of financial
institution services used to access and manage
finances.
•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 card
purchases.
•describe ways that ensure the security of personal and financial
information such as passwords,
•encryption, protection of personal identification number (PiN)
Unit 4 – Managing Money


Budgeting
• 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

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Managing Money

  • 1. Unit 4 – Managing Money
  • 2. Unit 4 – Managing Money General Learning Outcome: Develop an understanding of managing money. Specific Learning Outcomes • Solve problems that involve personal budgets. • Demonstrate an understanding of financial institution services used to access and manage finances.
  • 3. Unit 4 – Managing Money Specific 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.
  • 4. Unit 4 – Managing Money Specific Learning Outcomes • Demonstrate an understanding of financial institution services used to access and manage finances. •describe the type of banking services available from various financial institutions, such as online •services. •describe the types of accounts and related service charges available at various financial institutions. •identify the type of account that best meets the needs for a given set of criteria. •identify and explain, for different accounts, the various record- keeping options such as deposit slips, •withdrawal slips, cancelled cheques, account statements, cheque register, and receipts.
  • 5. Unit 4 – Managing Money Specific Learning Outcomes • Demonstrate an understanding of financial institution services used to access and manage finances. •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 card purchases. •describe ways that ensure the security of personal and financial information such as passwords, •encryption, protection of personal identification number (PiN)
  • 6. Unit 4 – Managing Money Budgeting • 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
  • 7. Unit 4 – Managing Money Budgeting – 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.
  • 8. Unit 4 – Managing Money Budgeting – 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.
  • 9. Unit 4 – Managing Money Budgeting Worksheet 8.6
  • 10. Unit 4 – Managing Money Preparing 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
  • 11. Unit 4 – Managing Money Preparing a Budget
  • 12. Unit 4 – Managing Money Section 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.
  • 13. Unit 4 – Managing Money Section 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.
  • 14. Unit 4 – Managing Money Section 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).
  • 15. Unit 4 – Managing Money Preparing A Budget Exercise Q. 1 - 7
  • 16. Unit 4 - Investments Net 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.
  • 17. Unit 4 - Investments Net Worth • In a net worth statement, your assets can be divided into the following three categories: – Liquid Assets – Semi-Liquid Assets – Non-liquid assets
  • 18. Unit 4 - Investments Net Worth • Your liabilities in a net worth statement can be divided into the following two categories: – Short-term debts – Long-term debts
  • 19. Unit 4 - Investments Net 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:
  • 20. Unit 4 - Investments Net 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.
  • 21. Unit 4 - Investments Sample 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.
  • 22. Unit 4 - Investments Net Worth Statement
  • 23. Unit 4 - Investments Sample 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.