Budgets and Financial Records
Chapter 8
Objectives
• 1. Analyze and understand the budgeting process and
prepare personal and case study budgets
• 2. Understand the purpose of personal record keeping
and be able to prepare a personal net worth statement
and personal property inventory
• 3. Explain the elements of legal contracts and
negotiable instruments and understand your rights and
responsibilities
• 4. Discuss the need for a filing system for personal
records
Budgeting Income and Expenses
• Benjamin Franklin said, “A penny saved is
a penny earned.”
• The modern version reads, “A penny saved
is better than a penny earned - it has already
been taxed.”
• In order to achieve financial success, you
will have to plan and work for it
• Budgeting and maintaining financial
records are a significant part of financial
planning
• Importance of Financial Planning
• Your disposable income is the money you have
to spend or save as you wish after taxes, social
security, and other required and optional
deductions have been withheld from your gross
pay
• In order to use this income to your best advantage,
you will need to create a financial plan
• Money is either:
– 1. Spent
– 2. Saved
– 3. Invested
• A financial plan is an orderly program for
spending, saving, and investing the money
you earn. It helps you to do the following:
– 1. Determine and evaluate how wisely you are
using your money
– 2. Get the most from your income
– 3. Prevent careless and wasteful spending
– 4. Organize your sources of income so that you
can maintain a plan of personal financial fitness
– 5. Avoid money worries and problems by
understanding the proper methods of saving,
spending, and borrowing money
• The first step is to set up a budget - an
organized plan which matches expected
income with expenses
– (figure 8-1 pg 175 Simple budget for a high
school student)
• Setting up a budget
– 1. Estimate total expected income (ex. Month
of Sept)
– 2. Decide how much of your income you want
to save (experts say 10%)
– 3. Estimate your expenses, or money you will
need for day-to-day purchases
• Typical Monthly Budget
– (Figure 8-2 pg 177 Monthly and Yearly budget for
a married couple)
• Fixed expenses - remain constant, to remove
or change them takes a major revision
– Ex: house payment, utilities, car loans, insurance,
gas and car maintenance
– should not be more than 50 - 60% of take-home
pay for fixed expenses
• Variable expenses - change according to
needs and short-term goals
– fluctuate according to time of year, health,
economic conditions
– Ex: telephone, cable TV, groceries, dental,
medical bills, entertainment, recreation
– Do Activity 8.2 and 8.3
Personal Records
• There are 4 types of personal records which
you will want to keep:
– 1. Records of income and expenses
– 2. Statement of net worth
– 3. Personal property inventory
– 4. Tax records
• These types of records are important
because they enable you to:
– 1. Evaluate your family or individual spending
– 2. Provide information for tax returns
– 3. Analyze our financial picture and plan for
the future.
– 4. Provide a basis for determining future goals
– 5. Provide a basis for maintaining an effective,
updated budget
• 1. Record of Expenses
– W-2’s sent by the employer each January
– Statements from banks regarding interest
– Expense items
• 2. Statement of Net Worth
– Net worth statement (Illustration 8-3 pg 179)
• Lists items of value, called assets, that a person
owns; amounts of money that are owed to others,
called liabilities or debts and the difference between
the two, known as net worth
• If your assets are greater than your liabilities, you
are said to be solvent, or in favorable financial
position
• Do activity 8.6 and 8.7
• 3. Personal Property Inventory
– A list of one’s personal property - take pictures,
put in a safe deposit box
– Example on page 180
– Do Activity 8.8 and 8.9
• 4. Tax Records
– Keep a copy of tax returns, W-2’s, and other
receipts regarding income and expenses for 3
years after the tax return is filed
• for good planning purposes tax returns should be
kept much longer
• the IRS has the right to audit returns for 3 years -
longer if fraud or wrongdoing can be proved
Legal Documents
• Contracts and Agreements
– A contract - legally enforceable agreement
between 2 or more parties to do or not to do
something.
• Ex: retail credit plans, buying a home, renting an
apartment
• expressed agreement - can be oral or written, terms
have been expressed and agreed on
• implied agreement - unwritten agreement, ride a
bike and obey the laws, rent a movie and return it
• Elements of Enforceable Contracts
– 1. Agreement
– 2. Consideration
– 3. Contractual capacity
– 4. Legality
– 5. Genuineness of assent
– 6. Legal form
• Agreement: need mutual assent, where a
valid offer and acceptance of that exact
offer exist. A counter offer is a new offer
and has to be accepted (or rejected) by the
first person
• Consideration: the price involved,
something of value
• Contractual capacity: competence (legal
ability of the parties.
– Minors are not considered competent unless
married
• Legality: must be a lawful nature, not
illegal, or it is not binding
• Genuineness of Assent: unenforceable
because of misrepresentation, mistake,
duress, undue influence
• Duress: the use of force or fear
• Legal Form: (a) must state the date (b) the
duration of contract (c) persons involved (d)
consideration (e) terms of agreement and
purpose and intention of the contract
– In some cases contract must be recorded and
become a matter of public record
• Valid, Void, and Voidable Contracts
• 1. Valid contracts - contain all of the
essential elements previously listed.
Sometimes become unenforceable because
of the time limit
• 2. Void contracts - missing one or more
elements. Null and void, unenforceable in
court (like doing something illegal)
• 3. Voidable contracts - can be enforced or
avoided by one of the parties (minor
entering into a contract)
You are not
sleeping yet, are
you?
• Statute of Frauds states that some contacts,
by their nature, must be in writing to be
enforceable:
– contracts for purchase and sale of real estate
– contracts that cannot be preformed in less than
one year
– contracts for the purchase and sale of goods
over a certain price
Minors and the Law
• A minor has not reached the age of majority (most
states 18)
• Laws very in states - minority shall be “used as a
shield, not as a sword.”
• Protection:
– the right to disaffirm a contract
– (if a cosigner, they are responsible)
– (if it is necessary, the minor can be held to payments)
– (if they pay after reaching the age of majority - the contract is
ratified)
Consumer Responsibilities in
Agreements
• As a consumer you should:
– 1. Understand the terms of an agreement. Do
not sign until you have read it
– 2. Keep a copy of the agreement
– 3. Be sure the agreement is dated correctly
– 4. Be sure that all blanks are filled in *put your
initials on the bottom of each page
– 5. Be sure provisions are written clearly
• 6. Be sure dates, amounts, and numbers are
correct and written clearly
• 7. Be sure proper disclosure is made by the
seller (interest finance charge, cash payment
price)
• 8. Cancellations and adjustments are made
in accordance with the contract
• Negotiable Instruments
– a document that contains a promise to pay
monies and is legally collectable
• (ex the most used is a check, Promissory notes are
also included here)
I would love to be a
test question!
I am not a
cow…What am I?
• A negotiable instrument is legally
collectable if:
• 1. It is in writing and signed by the maker
• 2. Contains an unconditional promise to pay
a definite amount of money
• 3. Payable on demand or on a fixed date
• 4. Payable to the order of a person or holder
of the note
• 5. Delivered to the payee
• Warranties
– also called a guarantee, is an assurance of
produce quality or of responsibility of the seller
– may be in writing or assumed to exist
– do not protect against normal wear and tear
Filing Systems for Personal
Records
• Keeping a good filing system will help you organize,
store, and retrieve needed information
• Manual Filing System - contains folders, labels, file
cabinet
• Electronic Filing System
– Advantages:
• ease of updating information
• ease of storage of records
• speed of making new computations, calculations, and comparisons
• Spreadsheet - program that sets
information into charts. Numbers and
formulas can be used as input
• Database Management - programs allow
the storage and use of information so that
all parts of it can be recalled, combined, and
manipulated
Bye
cows