Financial Literacy Ch 3

Financial Literacy Ch 3

By Ty Pearson

• opportunity cost?

• Tax?​

​What is:

Warm Up

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Chapter 3

​Learning Objectives

Differentiate between Cash Inflow and Outflow

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Explain steps in financial decision making

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Cash Flow and Financial Future

​What is Inflow and Outflow?

Cash Inflow - Money received from various sources

Cash Outflow - Money paid out or spent​

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Cash Flow and Financial Future

​Think of your Key Components!

​- Budgeting determines how much income you spend on products and services as well as what's left over

- What you have left over leads to planning your liquidity management: how much cash. you have and how much you rely on credit

​-This determines what you can invest, finance, etc...

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​Reminder!

Financial Plan Components

1. Income Management

2. ​Liquidity Management

3. Financing

4. Protect Assets and Income

5. Investing

6. Retirement and Estate​

7. Communicate and Keep Records​

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​Decision Making

We will focus on 6 steps

1. Establish your Goals

2. Evaluate Current Financial Position

3. Identify Options for Accomplishing Goals

4. Pick the Best Plan

5. Periodically Evaluate Your Plan

6. Revise as Ne​cessary

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​Step 1: Establish Goals

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What are your goals? What do you want to accomplish?

WE NEED A PLAN!!

- 3 types of goals

1.​ Short Term

2. Intermediate Term

3. Long-Term​

​Goals

Short Term Goals: Goals you plan to accomplish within the year

Ex. Save enough money to buy a phone in a month.

Ex. Save to buy a new computer in a few months

These goals require a sense of realism - goals that are achievable​

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​Intermediate Term

Goals that we plan to meet within 1 to 5 years.

Ex. Save enough to buy a used car within a year.

Ex. Save enough to buy new furniture within 2 years​

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​Long Term

Goals that will take more than five years to accomplish

Ex. Buy a house within 10 years

It's important to be specific as your goals become more involved.

Make sure each goal is realistic - Saving $1,200 per year vs $12,000 is more realistic out of high school.​

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Classify

Which of these are short term, intermediate term, or long term?

Increase income by $80 per week

Accumulate $5,000 in savings in the next year.​

Buy a better vehicle next year

Earn a graduate degree

Accumulate $20,000 for a down payment on a home​

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​STEP 2: Evaluate your financial position!

What is your income? Do you have more than one source? What are your expenses? ​

Your income, as discussed previously, determines your monthly budget!

Further, we need to consider expenses!​

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​Expenses

What do you spend every month?

What bills need to be paid?

Fixed: Bills - expenses that are the same every month

Variable: Expenses that may change every month​

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Open Ended

What are some examples of fixed expenses?

Calculations

If someone brings in $3,200 per month and has fixed expenses of $275, $150, $60, and $1,100; how much money do they have left over?

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$3,200 - $275 - $150 - $60 - $1,100 = $1,615​

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Open Ended

Calculate -

Income: $1,750

Expense: $350, $100, $50, $600

How much is left over? What would you do with this money to achieve your goals?

​Step 3: Identify Options

In order to meet your goals, we have to identify options!

Say you want to go to college, let's consider 3 options.

1. Find an apartment to rent.

2. Live with your parents while attending

3. Post-pone and work to save.

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Step 4: Pick the best

We have 3 options, how do we determine what would be best?

This is very dependent on the situation!

Let's consider the pros and cons of each​

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Renting is an expense

Most likely would need roommates to make the expenses manageable​

​Cons

More freedom of choice

Able to make your own decisions​

​Pros

Option 1

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Less freedom of choice

​Cons

Least Expensive

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​Pros

Option 2

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Loss of education that leads to higher income

"Opportunity Cost" is high - loss of greater income in the future

May prevent long term goals​

​Cons

More freedom

Have a stable income earlier ​

Pros

Option 3

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​Step 5 and 6: Evaluate and Revise

Periodically, we need to evaluate our plans and revise them.

Our situations can change at any time, therefore we have to be able to adapt!​

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