free online budget and financial planner by davem2


									                                     Lesson 2
                           Elements of Financial Planning

 Module M: Personal Finance                      Responsibility: All Employees
 Unit:     Financial Management

 Standard:                                        Timeline:
 Virtual enterprise students will establish       Prior to first paycheck, but after salary is
 personal financial goals and practice sound      known to employees.
 financial decision-making.

 Lesson Objective(s):      Virtual Enterprise employees will:
                               1. Understand the importance of developing a personal
                                   financial plan
                               2. Establish personal financial goals
                               3. Determine your current financial status
                               4. Develop a personal financial plan

                                 Instruction and Procedures

What you need to know:

Now that you have a virtual job and receive a virtual salary, just as in the real world, you
should have a financial plan. A personal financial plan is a summary of your current financial
position which outlines your future financial needs, and describes specific strategies you can
use to meet those needs. The plan also allows you to save money for expected and
unexpected expenses that will take place in the future. A financial plan is one that constantly
changes as your financial needs and family responsibilities change. Financial planning is a life-
long process that requires frequent review and adjustments.

Research on money management in the United States indicates that many families live well
beyond their means—they spend more than they make resulting in high consumer debt. In
fact, the average American family carries about $8,000 in credit card debt alone
(Understanding Credit will be discussed in Unit 4). Why? Lack of a financial plan, poor
knowledge of living expenses, unwise spending practices, lack of self-discipline, and the “I
want it now” philosophy, are just some of the reasons many Americans are in debt.

Why is a personal financial plan important?

A financial plan will help you in many ways. First, a financial plan will help you make the best
spending decisions—the plan will help you manage your income and expenses. You will
become a better shopper of goods and services and keep a better accounting of the money
you do spend.

Second, you will become more aware of your current financial status--you will be able to set
spending priorities. As you become an adult, you will realize that you cannot buy everything
you want right now. You need to make a list of those items you need and want and list them in
order of importance to you. If you don’t have the money, don’t purchase the item until you
know you can pay for it.

Third, financial planning will allow you to plan for the future by developing and working toward
the accomplishment of goals as you can afford to do so. Do some research on the product or
service you need; don’t just buy the first item you see. If you know the item comes on sale in
January, wait until January to make the purchase. If last year’s model will meet your needs,
buy the later model and save some money.

Finally, a financial plan provides a system of evaluation and revision for your financial
process. Throughout your life, needs and wants change; your income and expenses will
change. Therefore, you need to be able to adapt your financial plan to meet your changing
lifestyle. In addition, you want to be prepared as best you can for unforeseen financial
challenges. A long illness that keeps you out of work, losing your job, a car accident that totals
your car, a fire that destroys much of your furniture, lightening that blows out all your
appliances can wreck havoc with your current financial situation unless you have a plan.

How to Create a Financial Plan

There are many different ways you can create a financial plan. One of the easiest methods to
use is a five-step process developed from a review of current processes used in financial
education, money management, and consumer education programs. The five-steps are:

1.   Define Your Financial Goals
2.   Evaluate Your Current Financial Status
3.   Develop a Plan of Action
4.   Implement Your Plan
5.   Review Your Progress, Reevaluate, and Revise Your Plan as Your Financial Status

Step 1: Define Your Financial Goals

You may be familiar with the saying, “If you don’t know where you’re going, how will you know
when you get there?” A goal is like a destination, it provides direction and focus; a goal lets
you know when you “have arrived.” When a person has a goal, they can plan and work out a
way to get to that destination.

In order to establish your goals you need to be able to distinguish between needs and wants.
What are your basic needs? How much do they cost? Needs are those items that are
necessary to live—food, clothing, shelter, water. As a high school student, most of your needs
are provided by the adults in your family. (For the rest of this module, pretend you are the
adult providing all the necessities of life for yourself.) Wants are the icing on the cake—
going to the movies, buying new car, wearing the most popular clothing, etc. Keep in mind,
that as a teenager, your wants are of primary importance. In the real world, needs must be met
first. Time (how much you work) and money (how much you earn) are limited resources, so
you will need to make choices as to which wants will be fulfilled after needs are met.

A large part of financial planning is establishing financial goals and then developing activities
that will lead you toward accomplishing those goals. Like other types of goals, financial goals
may be short-term (achieved within one year), intermediate-term (one to ten years), and
long-term (longer than ten years). As a high school student planning to attend college and
perhaps working part-time, a short-term goal may be to save money to rent a tuxedo for the
spring prom. An intermediate-term goal may be to save money for college. A long-term goal
may be to save money for a down payment on a house. Unless you have a plan, the money
you hope to have may not be available when you want or need it.

When it comes time to write your goals on paper, use the SMART method:

        Specific—state exactly what you want to achieve. “I want to see three musical shows
        in New York over the Thanksgiving holiday”.

        Measurable—“I need $300 for show tickets.”

        Attainable—“I’ll save $25 a week for 12 weeks.”

        Realistic—“I plan to see a musical every other night while in New York.”

        Time-bound—“If I start to save the first week in August, I’ll have the $300 by the
        beginning of November.

Remember, goals are the cornerstone of a financial plan.

Step 2: Establish Your Current Financial Status

Now that you have identified your goals, you need to determine your current financial status.
Are you living from paycheck to paycheck? Are you spending more than your paycheck each
month? Do you find you have money left over at the end of the month after all your bills are

Your budget and banking information will help you complete two financial documents that will
help you determine your financial status. The first document is a Net Worth Statement. Similar
to a business Balance Sheet, the Net Worth Statement tells you what you own (your assets)
and what you owe (your liabilities) to others. Your net worth is equal to your assets minus your
liabilities. The goal is to have a “positive” net worth—your assets are greater than your
liabilities or, in other words, you own more than you owe.

The second document is the equivalent to a business income statement. This document lists
all the money coming in (your income) and all the money you are spending (expenses). When
you subtract expenses from income, one of the following three situations will arise:

   1. Your value will be positive, meaning that you have money left over after all expenses
      are paid (often call discretionary income). You have money left over to spend, save or

   2. Your value will be zero, meaning that you spend all that you earn and there is no money
      left over to spend, save or invest.

   3. Your value will be negative, meaning that you spend more than you earn and you have
      no money left over; you are in debt for the difference.

If your financial position falls into situation 2 or 3, you have some work to do—you need to cut
back on purchases and expenses so that you have some amount of money left over at the end
of the month to save and/or invest. You will have no money to save or invest to meet financial
goals unless you do this.

Step 3 Develop Your Action Plan

Your action plan will describe how you are going to reach the financial goals established in
Step 1. Depending upon the amount of money you have left after paying all your expenses for
the month, you make decisions about how you will save or invest your money. Typically
savings options are selected for short- and some intermediate-term goals and investments are
used for some intermediate and long-term goals. Which ever option or options you choose,
your objective is to reach your financial goal(s) in the timeframe you identified.

Typically, an action plan should:

    1. Be flexible—you should be able to change the plan based on changes in life
    2. Be liquid—you should be able to convert non-cash assets to cash within a short
       period of time.
    3. Provide protection—your plan should allow you to meet unexpected financial
       obligations without destroying your plan.
    4. Minimize taxes—keep your tax bill to the federal government as low as possible.

Lesson 3 Saving Options and Lesson 4 Investment Options will provide an overview of the
most common methods people select to reach their financial goals. Activities in those lessons
will help you develop an action plan to meet one or more of your goals.

Step 4 Implement Your Plan

Now that your financial plan is in place, you need to put it into action. You will select the
savings and/or investment option(s) that will best meet your goals. Often steps 3 and 4 are
determined with the help and advice of a professional financial adviser. (Note: Financial
advisers are discussed in Lesson 4).

If you are not using a financial adviser, you will need to do a good bit of research on the
various savings and investing options before making your selection(s). Once you do make
your decisions, you will need to open accounts or make purchases from you local bank or


      Use common sense and moderation—don’t force yourself to track every penny.
      Remain positive about your plan; don’t view your plan as punishment.
      Rewards await you, so don’t lose sight of why you developed the plan.

Step 5 Revise Your Plan

Nothing stays the same! As you grow older you may marry and have children and your
financial responsibilities will change. You grow and advance in your career; you may get
bonuses and salary increases that raise your standard of living. On the other hand, you may
get laid off, need to relocate, or take a lesser salary to keep your job. You may get seriously ill
or become disabled. All of these events will impact your financial plan. Financial advisers
usually meet with their clients on an annual basis to review their financial goals and
savings/investment options. If you don’t have one, review your plan yourself. You may want to
delete a goal that is no longer important or add a new goal. You may want to change your
saving/investment options to one that is less or more risky. Either way, it is your responsibility
to make adjustments to your financial plan to protect you and your loved ones from a financial

What you need to do and how to do it:

Note to Coordinators: Read, review and discuss in class the PowerPoint Presentation:
“Elements of Financial Planning.”

Remember, you are a virtual adult in a virtual job with a virtual salary. You will be following a
five step plan that is recommended by many financial institutions and financial advisors. Some
of the activities you will complete are supported online by the U.S. Securities and Exchange
Commission so Internet access is required. The forms have been recreated for your use and
assessment. You will complete the first two steps of the five step plan in this lesson.

Step 1 Define Your Financial Goals--In addition to paying monthly living expenses, adults
have other financial wants, needs, and responsibilities. If you are a young married employee,
you might want to save for a new home, a young single may want to save up for that sporty
car, a parent may want to save for the college education of their child, older adults may want
to start saving for their retirement years. All of these scenarios are potential goals. Also,
financial advisors recommend saving at least six months living expenses, just in case
something happens and you cannot work to support yourself or your family.

    Click Define Your Goals Read the information provided by the SEC and complete
    Activity 1, My Virtual Goals. Share some of your goals with your coordinator and fellow

Step 2: Evaluate Your Current Financial Status--Click Make a Financial Plan Read the
information provided by the SEC. If you have any questions before you begin, ask your VE
Coordinator. Next, complete Activity 2, Your Virtual Net Worth Statement. Keep in mind,
that as a new virtual employee, you may not have many entries on Your Net Worth
Statement. Use the data from your personal budget to complete the Activity 3, Know Your
Income and Expenses form.

Assessments: Activities 1, 2 and 3

Materials Needed: Employees will need their personal budget completed in Lesson 1.


Eggland, Steven A.; Dlabay, Les R.; and Burrow; James L. (2004); Intro to Business. Mason,
      OH: South-Western.

Miller, Roger LeRoy and Stafford, Alan D. (2002); Economic Education for Consumers 2e.
        Mason, OH: South-Western.

Ryan, Joan S. (2006); Managing Your Personal Finances, 5th Edition. Mason, OH: South-
      Western. Free on-line High School Personal Finance Course
 (a financial literacy game)

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