Personal Finance - Lesson 1 PDF

PERSONAL FINANCE LESSON 1 : Basics of Financial Literacy and Budgeting  To discuss the following: today's agenda Introduction to Personal Finance Importance of Financial Literacy Personal goal-setting When d...

PERSONAL FINANCE LESSON 1 : Basics of Financial Literacy and Budgeting  To discuss the following: today's agenda Introduction to Personal Finance Importance of Financial Literacy Personal goal-setting When do you think will you get your first million? What would you do if money wasn't an issue? At what age do you plan on retiring? Financial Literacy Walker and Walker: the person’s ability “to understand finances, as well as understanding of the risks and potential rewards of financial investments and the types of financial products and services available to help you achieve your goals” Mandell: “the ability to use knowledge and skills to manage one’s financial resources effectively for lifetime financial security.” Huston: "Understanding financial literacy implies that a person is knowledgeable about personal finance, and applies such knowledge in dealing with one’s finances" B ENEFI TS O F B EI NG FI NANCI ALLY LI TE RATE 1.Ability to make better 2. Effective management of 3. Greater equipped to reach financial decisions money and debt financial goals BE NEF ITS O F BE ING FINA NC IA LLY LITE RATE 4. Reduction of expenses 5. Less financial stress and 6. Effective creation of a through better regulation anxiety structured budget  What are common financial problems that you face as a student? What were common financial problems of individuals during the pandemic? FACTS ONLY FACTS ONLY FACTS ONLY  DID YOU KNOW? According to a 2015 World Bank (WB) survey on adult financial literacy, Filipinos have the lowest financial literacy in the region, at 25%, compared to 59% in Singapore, 52% in Myanmar, and 36% in Malaysia According to BSP in 2019, only over half (53%) of the total adult population in the Philippines had savings One in every 100 Filipinos has been victimised by investment scammers, amounting to a total loss of over PHP25 billion. PERSONAL FINANCE the process of planning and managing personal financial activities such as income generation, spending, saving, investing, and protection the aforementioned activities can help you to be a more financially responsible person and to develop financial discipline spending saving income investing protecting  Income refers to a source of cash inflow that an individual receives and then uses to support themselves and their family  Spending includes all types of expenses an individual incurs related to buying goods and services or anything that is consumable  Saving refers to excess cash that is retained for future investing or spending. If there is a surplus between what a person earns as income and what they spend, the difference can be directed towards savings or investments INCOME - SAVINGS = EXPENSES  Investing relates to the purchase of assets that are expected to generate a rate of return, with the hope that over time the individual will receive back more money than they originally invested  Protecting refers to excess cash that is retained for future investing or spending. If there is a surplus between what a person earns as income and what they spend, the difference can be directed towards savings or investments  Wealth is the ability to fully experience life. Henry David Thoreau TODAY'S OBJECTIVES: define the concept and relevance of 1 budgeting dispel myths and establish facts on 2 budgeting 3 analyze spending patterns KNOW YOUR PURPOSE KNOW YOUR GOALS  PERSONAL FINANCIAL PLANNING - involves specifying financial goals and describing in detail the spending, financing, and investing plans needed to reach those goals -like a builder’s blueprint: It spells out every aspect of how to accumulate and grow wealth and provide for emergencies - it helps ensure that as you move forward in your life, you are making steady progress toward your financial goals A WELL-THOUGH-OUT FINANCIAL PLAN OFFERS THE following advantages: Effective use of one’s financial 1 resources Protection of one’s financial 2 resources all throughout his or her lifetime Secures one’s financial future and 3 independence A WELL-THOUGH-OUT FINANCIAL PLAN OFFERS THE following advantages: Gives one a sense of freedom from 4 financial worries Gives one more flexibility in making 5 decisions that affect his or her overall quality of life  6 STEPS TO FINANCIAL PLANNING 1.Determine your current financial situation. 2.Develop financial goals. 3.Identify alternative course of action. 4.Evaluate alternatives. 5.Create and implement a financial action plan. 6.Evaluate plan. FINANCIAL GOAL SETTING FINANCIAL GOAL SETTING: Short-term financial goals 1 Mid-term financial goals 2 Long-term financial goals 3 APPLY SMART PLANNING  SHORT-TERM GOALS tend to be narrow in scope, with a limited time horizon 0-36 months example: purchase of a new bag for college  MID-TERM GOALS 3-5 years to pull off i.e. developing multiple-income streams, travelling, saving for own funding of advance studies  LONG-TERM GOALS building your own future funding a comfortable retirement financing own home Why is trying not to spend so hard sometimes? myth or fact?  myth or fact #1 Budgets mean cutting back on fun. myth!  myth or fact #2 budgeting helps you ensure you don't spend money you don't have fact!  myth or fact #3 going over budget blows up everything! myth!  myth or fact #4 budgeting is for those who have more money to spend. myth!  myth or fact #5 budgets are too stressful since it needs to be highly detailed. myth! myth or fact #6 budgets need to be rigid. myth!  Retail Therapy Impulse Buying Panic Buying Deserve ko 'to! Budol Culture  emotions and unconscious biases affect our spending in lots of invisible ways 4 Psychological Principles that could be behind your bad spending decisions: 1.Lifestyle Inflation 2.Delayed Reward Discounting 3. Scarcity Principle 4.Anchoring  Lifestyle Inflation - refers to an increase in spending when an individual's income goes up - is what causes people to get stuck in a cycle of living paycheck to paycheck where they have just enough money to pay the bills every month  Delayed Reward Discounting - the preference for smaller, more immediate rewards as opposed to larger, yet delayed rewards - sometimes referred to as instant gratification - refers to the temptation, and resulting tendency, to forego a future benefit in order to obtain a less rewarding but more immediate benefit  The Scarcity Principle - the less available something is, the more desired it becomes - you might feel more pressure to buy something because you think it could become unavailable soon  Anchoring -involves how people evaluate price points when making decisions about purchases - by concentrating on the anchor, we are actually thinking more about the amount we are saving than the amount we are spending  BUDGET - the process of forecasting future expenses and PLANNING income. In other words, it involves asking how much you plan to spend next week or next month, and what is the expected source of that money Purpose: to plan your spending and saving, given your income level, so that you can meet your needs and wants  INTENTIONAL SPENDING means getting to know your personal values better, then aligning your goals and choices with them so that money-saving tradeoff decisions can feel easier, better, and more meaningful. BUDGETING METHODS 1.Weekly Allowance 2.Fixed Expenses 3.Wants 4.Excess Funds 5.Do you budget your money? 1.Analyze your spending habits 2. Determine your net worth. 3. Establish your income. 4. Identify your expenses. 5. Prepare the budget. 6. Follow and evaluate your budget. 7. Revise your budget. income - savings = expenses income - expenses = savings  What is the 50-20-30 budget rule? The rule states that you should spend up to 50% of your NET income on needs and obligations that you must-have or must-do. The remaining half should be split up between 20% savings and 30% to everything else that you might want. Php 250.00  NECESSITIES 50% of P250 = Php 125 TRANSPO FOOD SCHOOL RELATED EXPENSE P50 EXPENSES P25 P50  WANTS 40% of P250 = P100 REFRESHMENTS PICK ME UP AFTER SCHOOL P50 P50  SAVINGS 10% of P250 = P25 Piggy Bank Emergency Savings Fund P15 P10 Php 1,000.00  NECESSITIES 50% of P1,000 = Php 500 SCHOOL RELATED TRANSPO FOOD REFRESHMENTS EXPENSES EXPENSE P200.00 P100.00 P50.00 P150.00  WANTS 30% of P1,000 = P300.00 PICK-ME UP DATE WITH P150.00 FRIENDS P150.00  SAVINGS 20% of P1,000 = P200 Piggy Bank Emergency Deserve ko Fund Skin Care Savings Fund P50 Fund P50 P50 P50 Php 25, 000.00  NECESSITIES 40% of P25, 000 = 10,000 BILLS FOOD and DEBT PAYMENT TRANSPORTATION INSURANCE 3,500 GROCERIES 1, 000 1, 500 500 3,500  SAVINGS 36% of P25,000 = P9,000 LONG-TERM EMERGENCY TRAVEL FUND INVESTMENT SAVINGS FUND P1,000 FUND P2,750 P1,500 P1,000 MASTERS FUND CAPITAL FOR P1, 750 BUSINESS P1,000  WANTS 24% of P25,000 = P6,000 RETAIL THERAPY FAMILY TREAT DATE WITH FRIENDS P500 P2,500 P1,500 HOBBY PICK-ME UP MAINTENANCE P1,200 P300  What is the 80-20 budget rule? sometimes called the "pay yourself first plan" separates savings from everything else the first 20% goes straight to savings and the rest goes into one big spending pile BOTH the 20% and 80% needs to be subdivided still 6 Jars Budgeting Method T. Harv Eker - using this system, you split your money up into six different accounts, and you have percentages of your money to put into each account - you can use bank accounts or actual jars Envelope Method - commit to thoroughly planning out your budget and creating physical envelopes for individual categories of expenses - put a specific amount of cash into each envelope at the beginning of the month and you do not spend any more that the fixed amount. No overdrafts.  Zero-Sum Budget money in equals money out every month every dollar gets assigned to something  Opportunity Cost - the value of what you lose when choosing between two or more options IT's not about how much you make, it's about how much you save and the why behind it. Set your goal and your own timeline for it! FINANCIAL GOAL SETTING: Short-term financial goals 1 Mid-term financial goals 2 Long-term financial goals 3 APPLY SMART PLANNING  SHORT-TERM GOALS tend to be narrow in scope, with a limited time horizon 0-36 months example: purchase of a new bag for college  MID-TERM GOALS 3-5 years to pull off i.e. developing multiple-income streams, travelling, saving for own funding of advance studies  LONG-TERM GOALS building your own future funding a comfortable retirement financing own home