The document discusses various financial planning tools such as financial statements, budgets, and time value of money calculations. It describes balance sheets, income/expense statements, and how they are used to track financial progress over time. Ratio analysis of these statements allows people to evaluate their financial performance and progress toward goals. Budgets are presented as a way to help achieve short-term financial goals and monitor expenses.

1. YOUR FINANCIAL STATEMENTS AND PLANS CHAPTER 2

2. Mapping Out Your Financial Future Financial planning facilitates: Greater wealth Financial security Attainment of financial goals

3. Financial Plans, Budgets And Statements Link future goals and plans with actual results Provide direction, control and feedback

4. The Interlocking Network of Financial Plans & Statements

5. Special Planning Concerns 1. Dual income families 2. Employee benefit choices 3. Major life changes, such as: First job Marriage Children Death of family member Divorce Change in health Loss of job Change in economy

6. Types of Financial Planners Commissioned salespeople who work for financial institutions. Fee-only financial planners who work for the individual client. Planners who charge both fees and commissions, depending on the products and services offered. Computerized financial plans prepared by financial institutions.

7. Time Value of Money Putting a Dollar Value on Financial Goals A dollar today is worth more than a dollar received in the future because it can be invested and earn interest.

8. Types of TVM Calculations Single sum —one lump sum investment with no more additions or subtractions. Annuity —a series of equal payments made at fixed time intervals for a specified number of periods.

9. Ways to Calculate TVM Formulas Tables (see Appendices A-D) Financial calculators Spreadsheets (ex: Excel) Internet calculators (search on “calculators”)

10. Future Value The value your invested money will grow to become earning a specific rate of interest over a given time period. The process of growing today’s present value to a larger future value by applying compound interest is known as “compounding.”

11. Calculating the Future Value of a Single Sum Example : What will $5000 grow to become if invested at 10% for 6 years?

12. Tables (Find Future Value Factor for 6 years and 10% in Appendix A) FV = PV x Factor $5000 x 1.772 = $8,860 Calculator (Set on 1 P/YR and END mode.) 5000 +/- PV 6 N 10 I/YR FV $8,857.81 Calculating the Future Value of a Single Sum

13. Calculating the Future Value of an Annuity Example : What would you accumulate if you could invest $5000 every year for the next 6 years at 10%?

14. Tables (Find Future Value Annuity Factor for 6 years and 10% in Appendix B) FV = PMT x Factor $5000 x 7.716 = $38,580 Calculator (Set on 1 P/YR and END mode.) 5000 +/- PMT 6 N 10 I/YR FV $38,578.05 Calculating the Future Value of an Annuity

15. Present Value The amount needed today to invest at a specific rate of interest over a given time period to accumulate the desired future amount. “Discounting” is the reverse of compounding and is the process of working from the future value back to the present value.

16. Calculating the Present Value of a Single Sum Example : You wish to accumulate a retirement fund of $300,000 in 25 years. If you can invest at 7%, what single lump-sum deposit must you make today in order to achieve your goal?

17. Tables (Find Present Value Factor for 25 years and 7% in Appendix C) PV = FV x Factor $300,000 x .184 = $55,200 Calculator (Set on 1 P/YR and END mode.) 300000 +/- FV 25 N 7 I/YR PV $55,274.75 Calculating the Present Value of a Single Sum

18. Calculating the Present Value of an Annuity Example : Your rich uncle wishes to give you a sum of money today to use for the next 4 years of college. If you need $10,000 a year and will leave the remainder invested at 7%, how much should you tell him you need?

19. Tables (Find Present Value Annuity Factor for 4 years and 7% in Appendix D.) PV = PMT x Factor $10,000 x 3.387 = $33,870 Calculator (Set on 1 P/YR and END mode.) 10000 +/- PMT 4 N 7 I/YR PV $33,872.11 Calculating the Present Value of an Annuity

20. Balance Sheet A statement of your financial position at one point in time.

21. Balance Sheet Equation Liabilities Assets = + Net Worth

22. Balance Sheet ASSETS LIABILITIES (Fair Market Value of Assets) (Payoff Amount of Loans and Debts) NET WORTH (Your Equity Portion)

23. Balance Sheet ASSETS What you own : checking acct. car investments jewelry furniture

24. Balance Sheet ASSETS LIABILITIES What you own : checking acct. car investments jewelry furniture What you owe : car loan credit card balances education loans unpaid monthly bills

25. Balance Sheet ASSETS LIABILITIES What you own : checking acct. car investments jewelry furniture What you owe : car loan credit card balances education loans unpaid monthly bills NET WORTH (Subtract total liabilities from total assets to determine net worth.)

26. The Concept of Solvency If your net worth is POSITIVE , you are SOLVENT and have enough assets to cover your financial obligations. If your net worth is ( NEGATIVE ) , you are INSOLVENT and do not have enough assets to cover your financial obligations.

27. The Income and Expense Statement A measure of your financial performance over a given time period.

28. Income and Expense Statement Total Income – Total Expenses = CASH SURPLUS OR (CASH DEFICIT)

29. Income: Cash IN Wages and salaries Bonuses Interest and dividends Child support Tax refunds Gifts

30. Expenses: Cash OUT FIXED Rent or mortgage payment Cable TV Insurance VARIABLE Dry cleaning Recreation Eating out

31. CASH SURPLUS (DEFICIT) If your income exceeds your expenses, you have a CASH SURPLUS . If your expenses exceed your income, you have a ( CASH DEFICIT ) .

32. How We Spend Our Income

33. Using Your Personal Financial Statements Maintain a good recordkeeping system Prepare financial statements periodically Track financial progress

34. Ratio Analysis Financial ratios allow you to: Track progress toward your financial goals Evaluate your financial performance over a period of time

35. Balance Sheet Ratios Solvency Ratio Shows the state of your net worth at a given point in time. Indicates your potential to withstand financial problems. Total net worth Total assets

36. Measures your ability to pay current debts with existing liquid assets. Current is defined as needing payment within one year. Liquidity Ratios Liquid assets Total current debts

37. Savings Ratio Shows the percentage of after-tax income being saved during a given period. Income & Expense Statement Ratios Cash surplus Income after taxes

38. Indicates ability to repay loan obligations promptly with before-tax income. Total monthly loan payments Monthly gross income Debt Service Ratio

39. Preparing & Using Budgets Budget A short-term financial planning report that helps you achieve your short-term financial goals. Achieving your short-term goals then helps you achieve your longer-term goals.

40. Using Budgets Monitor and control finances. Allocate income to reach goals. Implement system of disciplined spending. Reduce needless spending. Achieve long-term financial goals.

41. The Budgeting Process Estimate income Estimate expenses Finalize the cash budget Deal with deficits

42. If You Have Monthly Deficits Shift expenses from months with deficits to months with surpluses. Use savings, investments, or borrowing to cover temporary deficits.

43. If You End The Year In A Deficit Liquidate savings/investments Borrow to cover the deficit Cut low priority expenses; alter spending habits Increase income

44. Depletion of an existing asset, More debt – Or both DECREASES net worth Deficit Spending Results In

45. Things to remember about a budget Use a Budget Control Schedule to compare your budgeted figures to your actual figures and determine the variances. Continually update your budget based upon the actual figures. Always try to keep your budget balanced or, even better, at a surplus.