Budgets and Financial Records

1
Chapter 8

• Budgets and Financial Records

2
Objectives

• Analyze and understand the budgeting process and
  prepare personal and case study budgets
• Understand the purpose of personal net worth
  statement and personal property inventory
• Explain the elements of legal contracts and
  negotiable instruments and understand your rights
  and responsibilities
• Discuss the need for a filing system for personal
  records

3
Budgeting Income and Expenses

• Importance of Financial Planning
• Disposable income is the money you have to spend
  or save as you wish after required and optional
  deductions from your gross pay
• A financial plan is an orderly program for
  spending, saving, and investing the money you
  earn
• Determines/evaluates how wisely money is spent
• Get the most for your income
• Prevents careless/wasteful spending
• Organizes financial resources allowing for a plan
  of personal financial fitness
• Avoid money worries by understanding proper
  methods of saving, spending, and borrowing money

4
Budgeting Income and Expenses
Contd

• Budget an organized plan whereby you match your
  expected income to your expected expenses (see
  fig. 8-1, 8-2 p.175 and 177)
• First step in budgeting is to estimate total
  expected income for time period
• Second step decide how much of your income you
  want to save
• Third step estimate expenses for time period

5
Budgeting Income and Expenses
Contd

• Two types of expenses
• Fixed expenses are those that remain constant,
  and to remove or change them will take a major
  revision in lifestyle
• Ex. Savings, mortgages, car payments, utilities,
  auto gas, insurance etc.
• Experts recommend that no more than 50-60 of
  take-home pay be set aside for fixed expenses
• Variable expenses will change according to needs
  and short-term goals
• Ex. Telephone, cable/satellite TV, groceries,
  entertainment, recreation, etc

6
Personal Records

• Important for long-range planning, simplify
  budgeting, form basis for tax returns
• Four types of personal records
• Income and expenses
• Net worth
• Personal property inventory
• Tax records

7
Personal Records
Contd

• Records of income and expenses
• W-2 shows money earned and deductions made by
  employer
• Statement of net worth
• Items of Value assets
• Money owed liabilities
• Net Worth assets liabilities
• See fig 8-3 p. 179

8
Personal Records
Contd

• Personal Property Inventory
• A list of all ones personal property
• Useful in the event of fire, theft, or property
  damage a proof of possession for insurance
  company
• Photographs/videos may also be taken and kept
  with inventory
• Should be kept in a safe place (safe deposit box,
  fire proof safe, etc)
• See fig 8-4 p. 180

9
Personal Records
Contd

• Tax Records
• Keep copies of tax returns, W-2s, and all other
  receipts verifying tax return for 3 years
• IRS has legal right to audit your returns and
  supporting records for three years (longer if
  fraud or intentional wrongdoing can be proved)

10
Legal Documents

• Contracts and Agreements
• Contract is a legally enforceable agreement
  between two or more parties to do or not to do
  something
• Contracts are part of almost all personal
  business situations
• Some situations require written contracts or
  agreements
• Retail credit plan (fig 8-5 p.183)
• Mortgage
• Lease

11
Legal Documents
Contd

• Agreements may be unwritten (implied)
• Drivers license (you agree to abide by the rules
  of the road)
• Video rental (you agree to return it in working
  order by the specified date)

12
Legal Documents
Contd

• Some contracts must be written in order to be
  legally binding
• Real estate
• Lasting longer than one year
• Involving gt 500
• When one person is paying the debt of another

13
Legal Documents
Contd

• A legally enforceable contract/agreement must
  have the following six elements
• Agreement
• Consideration
• Contractual Capacity
• Legality
• Genuineness of assent
• Legal form

14
Legal Documents
Contd

• Agreement
• Mutual assent contract is offered and accepted
  by parties involved
• Consideration
• Consideration is the price involved
• May be in the form of an object of value, money,
  a promise, or a performed act
• Contractual Capacity
• Competence (legal ability) of the parties
  involved
• Any person 18 or older who is not mentally
  deficient is considered competent
• Married persons lt 18 are considered competent to
  enter into agreements

15
Legal Documents
Contd

• Legality
• The purpose of a legally enforceable contract
  must be of a lawful nature
• Genuineness of Assent
• Parties involved did not enter into contract
  under misrepresentation, a mistake, duress, or
  undue influence
• Legal Form
• State laws provide that contracts must contain
  necessary information to be enforceable
• Date, duration, persons involved, consideration,
  terms of agreement, etc

16
Legal Documents
Contd

• Valid Contracts
• Contracts that contain all of the (6) essential
  elements
• Void Contracts
• Contracts that are missing one or more of the (6)
  essential elements
• Voidable Contracts
• Contracts that can be enforced or avoided by one
  of the parties
• Ex. A car payment agreement entered into by a
  minor. A minor may declare the contract voidable
  because contracts with minors do not meet the
  competent party test of a legally binding contract

17
Legal Documents
Contd

• Consumer Responsibilities in Agreements
• Understand all terms before signing
• Keep a copy
• Be sure date is correct
• Be sure all blanks are filled in correctly
  (initial all pages to prevent additional pages)
• Be sure all provisions agreed upon are written
  clearly to avoid misinterpretation
• Check all dates, amounts, and other numbers
• Be sure proper disclosure is made by seller
  (interest rates, finance charges, cash price,
  etc)
• Be sure all cancellations and adjustments are made

18
Negotiable Instruments

• Negotiable means legally collectible
• Negotiable instrument is a document that contains
  promises to pay monies and is legally collectible
  (checks, promissory notes)

19
Negotiable Instruments
Contd

• A negotiable instrument must have the following
  conditions
• In writing
• Unconditional promise to pay a definite amount of
  money
• Payable on demand or on a fixed date
• Payable to the order of a particular person
• Must be delivered to the payee

20
Negotiable Instruments
Contd

• Creator of the note and the person who agrees to
  pay is the maker
• Person who receives the note (is made payable to)
  is the payee
• Creditors can require a cosigner
• Cosigner is a person who is established (has good
  credit) and promises to pay the note if the maker
  fails to pay
• Cosigner must also sign note

21
Warranties

• A warranty (guarantee) is an assurance of product
  quality or of responsibility of seller
• All products contain implied warranties
• The product will do what it is supposed to
• Some products have written guarantees also that
  specify certain terms
• Warranties do not protect against normal wear and
  tear

22
Filing Systems for Personal Records

• Manual filing system
• File cabinet with folders and labels
• Used to keep information that will assist in
  budgeting, writing to companies about problems,
  etc
• Electronic filing system
• Advantages include ease of updating and storage,
  speed of new computations, calculations, and
  comparisons
• Spreadsheet program sets information into charts
  where numbers and words can be visualized
• Database management program allows for storage
  and use of information so that all or parts of it
  can be recalled, combined, and manipulated