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					Personal Financial

    Chapter 8
   Discuss earning money.
   Select a financial institution.
   Manage a checking account.
   Identify where your money goes.
   Plan and prepare a budget.
   Describe financial management and financial
    security tips and hints.
   Explain four ways to potentially retire as a
   Explain key factors that make the millionaire plans
   Discuss how to achieve financial security.
   Understand the levels of financial management.
As the opening ceremony of a Future
Farmers of America meeting notes,
“George Washington was better able
to serve his country because he was
financially independent.” The first step
toward managing the finances of a
business in the agricultural industry is
becoming better able to manage your
personal finances.
      Earning Money
The career or type of work you
choose, and how you choose to work
once you get your job, can be
paramount to your financial well-
being. You must plan your work and
then work your plan. Select a job for
which you have a natural aptitude and
then do that job extremely well. The
ideal job is one which you have a
vacation as a vocation.
Working hard at something you are good
at will, sooner or later, put you where you
want to be. In most careers, you can
simply outwork 80% of your peers and
outsmart (with superior knowledge) 15%
of the rest; that alone puts you in the top
5%, which always pays very well. If you
are good at something, it normally makes
you more intense.
     Gross vs. Net Pay
This leads us to the point of receiving the
paycheck. There are hidden costs to earning
money. These include taxes and optional
employee benefits, which are deducted from
each individual’s paycheck. The total earned
before deductions is called gross pay. The
amount of money left after deductions is
called net pay, or “take-home” pay. Figure
8-1 illustrates a typical pay statement
showing gross vs. take-home pay.
Mandatory Deductions

Money is withheld from an employee’s
pay to cover the cost of government-
mandated taxes and programs. These
vary from state to state, and include:
– Income taxes (federal, state, and local)
– Social Security tax
– Unemployment insurance
– Workers’ compensation insurance
      Employee Benefits
Most employers offer some benefits, which
help them attract and keep good
employees. These benefits may be paid for
by the employer, by the employee, or by a
combination of the two. Sometimes the
benefits are optional and may include:
–   Life insurance
–   Long-term disability insurance
–   Medical insurance
–   Retirement savings plan
–   Profit sharing
–   Other…
    Taxes and Benefits
Federal, state, and local taxes are deducted
by withholding. This is simply a means of
spreading taxes out over the year, rather
than waiting until the April 15 filing deadline
to pay all the money owed. Benefits cost an
employer between 25 and 50% of an
employee’s salary. Although the employee
cannot spend them, benefits are worth
money because they reduce out-of-pocket
expenses for the employee. Refer to figure
8-2 for a summary of taxes and benefits.
  Selecting a Financial
Financial institutions help consumers
manage, protect, and increase their
money. People have a variety of
financial needs, which vary at different
stages of life.
  Types of Institutions

There are several different types of

– Banks
– Credit Unions
– Savings & Loans (S&Ls)
– Brokerage firms
     Factors to consider in
      choosing a financial
Consider the following when choosing a
financial institution:
–   Types of service
–   Convenience
–   Costs
–   Relationships
–   Security
–   Customer qualifications

    Figure 8-3 offers an overview of financial
    services. Study this chart as you select the
    financial institution that is appropriate for you.
        Checking Accounts

   Use caution
   Keep you checkbook properly updated and
    balanced, with all checks, deposits, and
    other charges recorded.
   This is simple, but many people fail to do it.
   Bankers tell horror stories of people who
    bring in checking accounts so far out of
    balance that the only thing that can be done
    is close them out and start over with a new
The biggest caution about keeping a
checkbook concerns being rushed. People
become hurried and forget to record the
proper amount, especially when they are
in a grocery store or some other busy
checkout line (Figure 8-4). When they get
home, they cannot remember the right
amount. Sometimes the check is recorded,
but the balance is never brought forward.
   Reasons for writing
Writing a check is perhaps the simplest way
of withdrawing money from your account –
maybe even too simple. We tend to spend
more money when we write checks than
when we use cash.
A properly written check will have the type
of expense written on the check. As
expenses are being calculated for income
tax preparation, the checks are used as
official records for the year along with the
cash receipts. Check must be written
accurately because the bank needs to
understand exactly how much you want to
give to whom. Also, a poorly written check
can be tampered with. Some points to
remember when writing checks include:

              (see page 168)
    Steps in writing a Check

   Write the correct date.
   Write the name of the person or
    company you intend to pay.
   Enter the amount of the check in
    numbers, including a decimal point to
    show cents, start the numbers as
    close to the dollar sign as possible.
   Enter the amount of the check in words.,
    start writing from the far left side of the
   Sign you check the same way you signed
    the signature card when you opened the
   Write down the purpose of the check.
   Figure 8-5 shows a check completed using
    the preceding steps.
Keeping a checkbook Register
A checkbook register is the small booklet that
you keep with your checkbook for recording
deposits made and check written. Reasons for
keeping a check register properly are that it:
–   Shows your balance at all times
–   Helps avoid overdrafts
–   Keeps a record of checks written
–   Keeps a record of deposits made
–   Shows dates of checks and deposits
–   Provides a record to compare with bank statements
–   Figure 8-6 shows a checkbook register with an
    example of an entered check, deposit, and service
Entering checks Written

By referring to figure 8-6, you can see
the following steps:
– Write the check number (173).
– Write the date (1/22).
– Write the name of the person or business
  to whom the check will be written
  (Tractor Supply Company).
– Write the amount of the check in the
  correct column ($34.00).
– Subtract the check from the balance,
  using scratch paper or calculator.
– Write in the balance ($140.00).
– Repeat each of these steps each time you
  write a check.
    Entering Deposits

By referring to figure 8-6, you can see
the following steps:

– Write the data (1/28)
– Write the word deposit on the line
– Write the amount of the deposit in the
  proper column ($100.00)

   Add the balance, using scratch paper
    or a calculator.
   Write in the balance ($240.00).
   Repeat each of these steps each time
    you make a deposit.
Entering Service Charges

Service charges can be found on the
monthly bank statement. These may
be monthly fees for bank services or
(we hope not!) overdraft charges. By
referring to figure 8-6, you can see the
following steps:

            See page 169
Balancing (Reconciling)
    your Checkbook
Your checking account statement is a
complete record of all the activity in your
account (deposits and withdrawals) for the
previous 30-day cycle, or period. You will
want to take time each month to compare,
or reconcile, this information with your
checkbook register, to make sure your
records agree with those of the bank. This
process is called balancing a checkbook.
        Lets take a look at:
   Importance of balancing your checking
    account monthly.
   Common reasons why checkbook
    registers and account statements
   Steps in balancing (reconciling) a bank
Where your money goes
You must gain control over your money, or
your money will gain control over you.
Money is active. Time, interest rates,
amounts, cash flows, inflation, and risk all
intermingle to create a current that is ever
flowing. Dave Ramsey, in his book titled
Financial Peace, said that money is similar
to a beautiful horse. It is very powerful and
always moving and in action, but if not
trained when young, it will become an out-
of control, dangerous animal when it grows
to maturity.
 Handling money takes
Money and finances are not static. They
must be managed, and you must do the
managing. If you do not, money and
finances will always manage you. Handling
money takes discipline; however, you ill
achieve peace of mind and avoid financial
stress in your life if you are willing to make
the effort to become a disciplined money
manager. You discipline your spending with
both fixed and variable expenses.
       Fixed Expenses
A fixed expense is a set amount of money
due on a set date. As a rule, fixed expenses
must be paid when due. Although we do not
have control over the types of fixed
expenses, we do have some control over
their amounts. Several examples of fixed
expenses follow. Because you are still a
student, many of the examples will not
apply to you; however, they will certainly
apply in the next five years.
           Fixed Expenses

   Mortgage or Rent Payments
   Other real estate payments
   Income and property taxes
   Installment contract payments
   Insurance
   Regular contributions
   Dues
   Savings
    Variable Expenses
Variable expenses vary in amount and
frequency and offer the best opportunities
for adjustments in a money plan. Be
conservative with your variable expenses, or
they will quickly get out of hand. Carefully
consider your motives for buying. Why do
you want or think you need this item? Could
you live without it? Do you want if for
selfish reasons, like showing up the
neighbors, or would the item be truly useful
to you? You must develop power over your
purchases rather than letting your
purchases gain power over you.
         Variable Expenses
   Utilities
   Charge Accounts
   Medical/Dental bills not covered by insurance
   Transportation
   Household Maintenance and repair
   Child care
   Food
   Personal Maintenance
   Self-improvement/education
   Recreation/entertainment
   Other Expenses
Planning and Preparing a
A budget is a plan for spending and saving
money. A good budget is an essential tool in
every household. Most of us know this, yet
90 to 95% of American households operate
without a detailed, accurate written outline
of income and expenses (a budget). By
failing to plan, we are planning to fail, and
there will always be too much month left at
the end of the money.
Benefits of a Budget
Simply put, everyone needs a written
budget. A written budget helps you
remember to pay all your bills and
protects you from unexpected expenses.
At times your budget may even tell you
that you cannot afford to eat out or that
your vacation will have to wait. Budgets
may appear to restrict you, and in the
beginning may seem like torture to
Here are some benefits of
        a budget:
   A budget puts you in control of your
    financial future.
   A budget ensures that you do not spend
    more than you earn.
   A budget helps you prepare for major
    periodic expenses, such as car insurance,
    medical insurance, and vacations.
   A budget helps you save money to prepare
    for unpredictable expenses, such as medical
    bills major car repairs, as well as for special
    opportunities, such as a sale on needed
    furniture or a special family event in another
    Budget while Still Living
           at Home
   While you are still living at home, you
    obviously do not have as many expenses.
    However, you should start preparing a
    personal budget immediately.
    Figures 8-12 and 8-13 show two simple
    Figure 8-12 shows a weekly budget, and
    Figure 6-13 shows a budget that is more
    appropriate as a monthly or even yearly
       Living on Your Own
   Once you move out of your family’s home to
    attend college, or simply start living on your
    own, your household and monthly expenses
    ratchet up another notch.
   Many things that you formerly took for
    granted now are major expense items.
   Examples are rent, electricity, telephone,,
    laundry, dry cleaning, groceries, and even
    medicine cabinet supplies.
     Financial Management
        and Security Tips
   Here are 16 tips to help you better manage
    your money. These “sweet 16” money tips
    can change you financial life if you adhere
    to them.
   Limit Debt- do not believe that debt is a way
    of life. Except for a home mortgage, there
    are ways to stay out of debt if you develop
    the proper mindset. Unfortunately, we want
    our dessert first. We borrow as if we had
    forgotten that we have to pay it back.
   One of the biggest challenges in
    managing money is impulse spending.
   When we see something, we want it
    and we buy it. The next time you’re
    tempted to make an impulse
    purchase, take the time to think it
    through overnight.
Do Not Use Credit Cards
   The typical consumer owns from five to
    seven credit cards. As previously mentioned,
    many financial advisors warn that credit
    cards are unwise and dangerous financial
    Their convenience makes you buy “stuff”
    you cannot afford and gives you a false
    sense of prosperity. This “plastic prosperity
    disease” worsens because you do not
    experience the emotional reality that comes
    from actual cash.
The credit card marketing companies
just want you to sign and spend; they
will not help educate you on the
responsible use of a credit card. The
problem is that most student have not
been properly educated as to the
harsh realities of credit and there are
many consequences to bad credit.
              Credit Scores
   Credit scores usually range from 300-900,
    the higher the better. Credit scores are
    created by credit bureaus when they put
    together your credit report. They do it using
    software from the Fair Isaac Company;
    hence the name FICO score. Calculation of a
    credit score is very complicated, as it is
    based on more than 100 parameters in your
    credit file, including length of credit history,
    number of open accounts, loans,
    mortgages, public records, and other items.
   Other companies may also generate credit
    scores, but most lenders use the Beacon
    FICO score. For lenders, your credit score is
    a predictor of your ability to pay. The higher
    your score, the more likely it is that you will
    pay back your creditors on time. According
    to some analysts, 51 percent of all people
    with a credit score from 550-599 will default
    on their debts.
   How does a low credit score affect you?
   What should your credit score be for credit
    and loan approval.
       Protect Your Credit
   Although you have been warned not
    to use credit cards, if you do, never,
    ever have more than one. Even then,
    set a low limit, such as 500$ for
Save Big Money on Home
   15yr. Rather than 30 yr. loans
   Pay an additional payment per year
   Divide the total into two monthly
   Increase retirement Benefits
 Reduce Debt by Using
Debt Snowball Technique
Rationale. If you accumulate debt, what is
the best way to get out of it? The best way
is the “debt snowball” technique. The first
step in this technique is to put your debts in
ascending order, with the smallest
remaining balance first and the larger last.
Do this regardless of the interest rate or
payment. These will be paid from the top to
bottom. This works because you get to see
some success quickly and are not trying to
pay off the largest balance just because it
has a high rate of interest.
Attitude Towards Debt

As these bills are paid off, you will
change your attitude about financial
matters. You will start using credit
very cautiously and incurring debt very
sparingly. Depression and misery do
not have to control you. Do not get
into a debt mess again. If you do,
remember you will instantly become
the servant of the leader.
      Develop Power Over
   Live within and below your income
   Paying cash for a car versus going into
    Negotiate and Buy Only
        Big Bargains
   Here are seven basic principles of
    –   Always tell the truth
    –   Use the power of cash
    –   Understand and use “walk-away”
    –   Talk sparingly
    –   “that’s not good enough”
    –   Good guy- bad guy
    –   If I give, I also take
Build an Emergency Fund
   A good financial planner will tell you that
    from the start, you should have three to six
    months of income in savings that are
    available (liquid) for emergencies.
   An example of Liquid Income is a simple
    bank savings account or a money market
    fund on which you can write checks. If you
    make 24000$ annually, you should have
    8000$ to 12000$ located where you can
    easily get to it before you do any other
    investing. As mentioned previously, you
    have to expect the unexpected.
      Points to Remember

   Have enough insurance
   Master the Magic of Compound
   Use an Automatic Savings Plan
   Take advantage of Matching Stock
   Use your hobby to make money
Retiring as a Millionaire

   Is it possible for an agribusiness
    manager or worker to retire as a
   It is very possible. Although nothing in
    life is guaranteed, things certainly will
    not happen unless you make them
Plan one: $2000 a Year
     for Six Years
Starting at age 22, put $2000 a year
into a tax free retirement account,
individual retirement account (IRA), or
tax shelter account (TSA) under
403(b), for six years, and then stop. At
age 65, $12000 will compound to
$1348000 if a 12% interest rate is
attained. Figure 8-22 illustrates this.
Plan Two: Buy a used car
instead of a new one and
  invest the Difference

Give up on owning a new car before
age 23 and buy a used car instead.
Invest the difference between a new
car and a used car in an IRA or TSA.
Plan Three: The 25 plus-
        10 plan
For the first job you take at the age of 22, put $25
per month into an IRA or TSA during the first year.
Each year thereafter, increase the monthly
contributions by $10. In other words, the second
year on the job, you would be putting $35 monthly
into your IRA or TSA. Assuming a return of 12
percent, this will amount to a total of $1830000 by
age 65. Most years, because of inflation, your pay
raises will stay ahead of your initial 120$
investment, even though you will be investing much
money later in life. Thus, the percentage of your
salary you are investing will hardly ever be more
than when you first started.
Plan Four: The 80-10-10
Some people’s beliefs and values cause
them to allot the first 10% of a paycheck to
charitable contributions. Another suggested
strategy is an 80-20 plan or 90-10 plan. By
following this plan, 10 percent goes to
charity or as a gift, 10 percent is invested in
an IRA or TSA, and 80 percent is used for
living expenses. If you do not allocate 10
percent to charity or as a gift, then you
could follow a 90-10 plan. Using this plan,
by following a budget and buying
accordingly, one can retire as a
Key Factors in Making the
 Millionaire Plans Work
   A farmer does not simply plant a seed and
    let it grow, hoping for an abundant harvest.
    He or she has to work on it. You do not
    simply start something and let it grow
    without nurturing it. Knowledge of the
    following factors will help you reach the
    millionaire goal.
  Manage Investments to
achieve a 12% interest rate
Every plan is simply a mathematical
process based on a 12% return on
your investments. It is an achievable
production goal. Ten pigs per litter,
100 bushels of corn per acre, and
18,000 pounds of milk per cow are
viable production goals.
    For a person who is able to save $2,000 per
    years for 43 years (ages 22 to 65), a 1%
    increase in the interest rate would amount to
    $316,946. Look at the following figures:
   8% interest
     – Ages 22 to 65
     – $2000 per year for 43 years at 0.08 interest
       compounded monthly
     – $839,054
   9% interest
    – Ages 22 to 65
    – $2000 per year for 43 years at 0.09 interest
    – $1,156,000
       The Rule of 72

the “Rule of 72” refers to the process
dividing an interest rate into 72
(72/12=6) to determine how long it
will take for one’s money to double.
Money that yields 12% interest will
double in six years. For example,
$1000 yielding 18% interest would
double to $2000 in just two years.
Figure 8-24 further illustrates this.
 Invest in mutual funds to
achieve a 12% interest rate
There are many types of investment
strategies. Take courses, read, and
seek advice from financial counselors.
Do not simply take our word.
However, we believe the novice
investor would do will to select mutual
funds among many other investment
Mutual funds were invented to make
investment expertise available to ordinary
people. A mutual fund company makes
investments solely on behalf of others. All
the profit (or losses) go to the fund’s
shareholders. In existence in the United
States since 1924, there are now more than
3,400 different mutual funds holding more
than $2 trillion for about 70 million
shareholders. This amount rises yearly.
By law, you have to be given
prospectus before you can incest with
any mutual fund. Consider the
following as you select and monitor
your funds:
– Select a mutual fund on the basis of
  whether the fund has a charge
– Select a mutual fund based on
– Monitor your mutual fund closely
– Diversify your mutual funds
 Types of Mutual Funds
As you select and monitor investments, be
aware of the types of mutual funds. Most
funds carry a risk rating of high, medium, or
low. Furthermore, mutual funds carry this
risk to some extent within each of the
following investment strategy categories:
 – Aggressive growth
 – Long-term growth
 – Growth and income
 – Income
 – Sector
Are mutual funds risky?
The term risk management refers to
the use of various methods to deal
with potential personal or financial
loss. Practicing risk management
means that an individual
acknowledges the existence of
potential losses, knows their possible
magnitude, and uses various methods
to control them.
“Nothing in life is guaranteed
  except death and taxes.”
  Are mutuals the only
There are several types of investment, from
low-risk bank savings (CDs) of high-risk
commodities. Of course, stock are also risky.
Mark Twain summed it up well when he
said, “October.” This is one of the peculiarly
dangerous months in which to speculate in
stocks – the others are July, January,
September, April, November, May, March,
June, December, August, and February.
 Tax-Deferred Savings
The four millionaire plans are tax-deferred
savings plans. Tax-deferred savings allow
an individual to postpone taxes while
building an investment. Examples of tax-
deferred savings include:
– Individual retirement accounts (IRAs), available
  to everyone who has earned income, with
  contributions limited to $2000 per year.
– 401(k) tax-sheltered plans, which are available
  to gov. employees and the self-employed.
– 403(b) tax-sheltered plans, which are available
  to teachers and hospital employees.
       Tax-free Earning
The latest type of IRA is the Roth IRA. With
the Roth IRA, tax is paid on the front end,
not when you withdraw it. You can put
$3,000 yearly into a Roth IRA. Consider the
following advantages of a Roth IRA:
–   Amount Invested
–   Required Distribution
–   Estate tax Reduction
–   Early Distributions
–   When do I get my money?
     Financial Security
You are probably saying, “I don’t care about
retirement, I want to know how to get rich
quick.” But we cannot tell you how to do
that by ethical, legal, or moral means. The
best way to get rich quick is to get rich
slowly. We have heard it said that the safest
way to double your money quickly is to fold
it over once and put it back into your
Financial Security Defined

 Financial security involves being able to
 meet monthly expenses (house payments,
 car payments, utilities, groceries, medical,
 clothing, etc.) with pay from your regular
 full-time job, plus accumulating (saving)
 approximately $100,000 in tax-free
 municipal or government bonds (with a
 return of 8%, which would be $8,000 tax-
 free earnings yearly).
Assumptions for reaching
    financial security
It is possible for an agribusiness manager or
worker is to become financially secure by age
30 to 35. the age depends on whether a
student continues his or her education after
high school before pursuing other plans. For
this to happen, there are some beliefs,
assumptions, or criteria that must be taken into
 –   Think part-time (avocational)
 –   Emphasize marketing
 –   Develop new ways of thinking
 –   Manage investments
 –   Get tough and stay focused
  Selecting part-time
agricultural enterprises
There is a story about the farmer who sold
his farm and went in search of diamonds.
Many agriculture students go searching for
diamonds and gold, and they do not realize
that they are already sitting on gold mines.
Many agriculture students have resources
available that most non-agriculture students
do not have.
  The $2000 Work-unit
The $2000 work-unit approach simply
involves avocational enterprises that will net
you $2000 on an acre of less. No more than
five acres of land, including home and
buildings, will be needed. In many cases,
such as real estate investing, no land,
equipment, or supplies are needed. By
selecting just four different avocational
enterprises that will do this, you can achieve
financial security if you are self-disciplined.
Figure 8-26 lists more than 50 examples.
     Levels of Financial
The more levels of financial security you can attain
the better off you will be at retirement. Consider
the following levels of financial management:
 – Live within a budget
 – Social security
 – Retirement benefits through your job
 – Life insurance
 – One of four plans to retire as a millionaire
 – Financial security by age 30 to 34, through part-
   time avocational enterprises.