Income and Expenditure


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Income and Expenditure

  1. 1. Chapter 3 Income and Expenditure
  2. 2. Sources of Income <ul><li>To meet all your financial goals whether it’s a short-term or a long-term </li></ul><ul><li>Monetary Sources </li></ul><ul><li>Income from work (employment income) </li></ul><ul><ul><li>Primary source </li></ul></ul><ul><ul><li>The excess of income from current use can be used to fulfill future goals </li></ul></ul><ul><ul><li>Dual earner or single earner: Is more income earner better? Look at trade-offs of having the wife to work </li></ul></ul><ul><ul><li>Working longer hours </li></ul></ul>
  3. 3. Sources of Income <ul><li>Income from children </li></ul><ul><ul><li>Secondary source </li></ul></ul><ul><ul><li>Working children contribute to income of old parents </li></ul></ul><ul><ul><li>May be regular or may not be reliable </li></ul></ul><ul><ul><li>Depends on the children’s value towards their parents </li></ul></ul>
  4. 4. Sources of Income <ul><li>Savings/investments </li></ul><ul><ul><li>Can be a reliable or unreliable source of income for your future needs </li></ul></ul><ul><ul><li>Depending on the risk you take with your money </li></ul></ul><ul><ul><li>Invest in low risk investment with a low return </li></ul></ul><ul><ul><li>Or invest in high risk investment with a high return </li></ul></ul><ul><ul><li>Investment is not based on luck but need knowledge or experience </li></ul></ul><ul><ul><li>Preferably just choose to save in bank accounts with no risk </li></ul></ul>
  5. 5. Sources of Income(cont.) <ul><li>Equities </li></ul><ul><ul><li>Equities (share of ownership) in home exist as individual payoff their mortgage loan & as the home increases in value </li></ul></ul><ul><ul><li>Equities in life insurance policies also increase with time </li></ul></ul><ul><ul><li>Both are sources for future need with substantial amount </li></ul></ul><ul><ul><li>Home can be refinanced or cashing in the life insurance policy but not too early </li></ul></ul>
  6. 6. Sources of Income(cont.) <ul><li>Borrowing </li></ul><ul><ul><li>Borrowing enables you to pay for housing, automobiles or college tuition </li></ul></ul><ul><ul><li>If not, it may take years of accumulation of fund </li></ul></ul><ul><ul><li>However, it involve finance charges that would be using future income or money. This affect the future cash flow </li></ul></ul><ul><ul><li>Prudent borrowing can enhance current lifestyle </li></ul></ul><ul><ul><li>Imprudent borrowing can jeopardise future lifestyle </li></ul></ul>
  7. 7. Sources of Income(cont.) <ul><li>Enforced or Automatic Savings: Pension, Social Security, Profit-sharing Plans </li></ul><ul><ul><li>Represent most of their sources for meeting retirement goals </li></ul></ul><ul><ul><li>Vital for an accurate accounting of what would be available on continuing basis </li></ul></ul><ul><li>Inheritances, Gifts & other Windfalls </li></ul><ul><ul><li>Consider the after-tax amount as this can have considerable effect on financial plans </li></ul></ul>
  8. 8. Sources of Income(cont.) <ul><li>Non-monetary Income </li></ul><ul><li>Household production </li></ul><ul><ul><li>The production of goods services by the members of the household for their own consumption, using their own capital & unpaid labour </li></ul></ul>
  9. 9. Financial Management Through the Life-Cycle <ul><li>Financial activities throughout the life-cyle differs depending on the status and age of the individual; from preteen to teen, from singles to young and married, from middle-aged married to their retirement </li></ul><ul><li>Different needs arise throughout the life-cycle, thus reviewing and changing the financial plan is vital for financial success </li></ul><ul><li>Expected financial events can be predicted and one can plan for the future needs </li></ul><ul><li>Unexpected financial events may occur , however some events can be detected to occur several years before it happened. Inflating the savings may help to reduce the burden of the negative consequences of financial events </li></ul>
  10. 10. Financial Management Through the Life-Cycle (cont.) Life-cycle Activities Preteens Children are highly dependent on parents for existence and most decision making. There is little need to develop personal financial objectives Interest in savings developed during this period Teens Teenagers attempt to establish their identity Confronted with additional financial objectives Decision on life-style, protection & probably investment become important
  11. 11. Financial Management Through the Life-Cycle (cont.) Life-cycle Activities Singles Years between secondary school and marriage. This period lays the foundation for future periods and objectives, thus extra care must be taken in decision making. No additional objectives are introduced Young married The newly-wed discover economics involved in trying to live more cheaply using two heads. Family planning and addition of new family members. Initial plans for retirement and estate planning should be developed
  12. 12. Financial Management Through the Life-Cycle (cont.) Life-cycle Activities Middle-age married At this stage, the family objectives of protection , savings and certain investment needs such as education have been fulfilled . Concern for retirement and estate planning becomes paramount Retirement Many people looking forward to a different way of life centered around recreation and relaxation. The ease or difficulty of this transition is a function of the financial success of earlier retirement plans and the psychological preparation of the retiree
  13. 13. Financial Decision Making <ul><li>Financial decision making is a decision making involving financial matters </li></ul><ul><li>Trade-offs are associated with each choice made </li></ul><ul><li>By selecting one choice, you are giving up the other choice, hence giving-up the benefit of that unselected choice. Thus, incurring an opportunity cost </li></ul>
  14. 14. Financial Decision Making (cont.) <ul><li>For financial management decision, trade-off situation or opportunity costs include the following: </li></ul><ul><li>Choose to spend reduces amount to save or invest </li></ul><ul><li>Using credit results in payment later and reduces amount of future income for spending </li></ul><ul><li>Use saving for purchases reduce interest earning and inability to use savings for other purposes </li></ul><ul><li>Comparison shopping saves money and improve quality of purchases but use up your time </li></ul>
  15. 15. Financial Issues <ul><li>Financial issues arising from changes in government policies, economic environment and political stability </li></ul><ul><ul><li>These affect sources of income and pattern of expenditure of households </li></ul></ul><ul><ul><li>Retrenchment or a pay cut may occur </li></ul></ul><ul><ul><li>Inflation indirectly will increase prices of goods and services </li></ul></ul><ul><ul><li>Increase cost of production (eg labour, transportation, energy) will increase prices of all the products in the production chain, thus increasing cost of living </li></ul></ul>
  16. 16. Financial Issues (cont.) <ul><ul><li>Financial issues arising from mismanagement at the household level </li></ul></ul><ul><ul><li>Unwise financial decision </li></ul></ul><ul><ul><li>Overspending </li></ul></ul><ul><ul><li>Misuse of credit </li></ul></ul><ul><ul><li>Investment mistake </li></ul></ul><ul><ul><li>Not financially prepared for retirement or old age </li></ul></ul><ul><ul><li>Not enough risk protection </li></ul></ul><ul><ul><li>Do not financial plan for the need through their life-cycle </li></ul></ul><ul><ul><li>File for bankruptcy </li></ul></ul>
  17. 17. Financial Issues (cont.) <ul><ul><li>Negative financial events related to financial issues </li></ul></ul><ul><ul><li>Moving to new houses – costs of moving, costs of education of children & other expenses increases </li></ul></ul><ul><ul><li>Divorce – your own divorce or relatives </li></ul></ul><ul><ul><ul><li>Shift from dual earner to a single earner </li></ul></ul></ul><ul><ul><ul><li>Divorce of relatives – divorcee might be your new financial dependent </li></ul></ul></ul><ul><ul><li>Accident happening to family members or relatives that affect the family finances </li></ul></ul><ul><ul><li>Death of spouse, children or relatives </li></ul></ul><ul><ul><ul><li>Became single earner, grieveness led to loss of spirit to work </li></ul></ul></ul>
  18. 18. Financial Issues (cont.) <ul><ul><li>Natural disaster </li></ul></ul><ul><ul><ul><li>Flood </li></ul></ul></ul><ul><ul><ul><li>Monsoon </li></ul></ul></ul><ul><ul><ul><li>Fire </li></ul></ul></ul><ul><ul><ul><li>Earth-quake </li></ul></ul></ul><ul><ul><ul><li>Volcano erruption </li></ul></ul></ul>
  19. 19. Financial Problem <ul><li>In general, financial problems exist when expenses exceed total income </li></ul><ul><li>Financial problem may arise from the following: </li></ul><ul><li>Cannot control desire to spend and keep spending without proper planning – esp. for compulsive buyers </li></ul><ul><li>Having irregular savings habit </li></ul><ul><li>Keep using savings for daily expenses </li></ul>
  20. 20. Financial Problem (cont.) <ul><li>Indicator of financial problem </li></ul><ul><li>Unable to pay for utilities </li></ul><ul><li>Unable to pay monthly installment </li></ul><ul><li>Received overdue notice from bank </li></ul><ul><li>Taking cash advances from credit card </li></ul><ul><li>Make minimum payments for credit card bills </li></ul><ul><li>Commit more than 20% of income to pay for installment credit </li></ul><ul><li>Using credit to pay for other credit </li></ul><ul><li>No savings </li></ul><ul><li>Not knowing their financial situation (how much owe and own) </li></ul><ul><li>Spend without plan </li></ul>
  21. 21. Financial Problem (cont.) <ul><li>One way to trace early sign financial problem is by using financial statement (Chapter 7) </li></ul><ul><ul><li>From excessive debt in the statement </li></ul></ul><ul><ul><li>Savings growth not as expected over the years by comparing a series of financial statement </li></ul></ul><ul><li>Consider this to be financially stable: </li></ul><ul><ul><li>Emergency funds should be 3 times the monthly income </li></ul></ul><ul><ul><li>Save each month a portion of 10% from income </li></ul></ul><ul><ul><li>Monthly installment payment should be less than 20% from income </li></ul></ul><ul><ul><li>Monthly installment plus mortgage loan should be less 35% from income </li></ul></ul>