UNIT II: The Science of Handling Money (PDF)

UNIT II. THE SCIENCE OF HANDLING MONEY Overview This unit introduces key ideas to help students develop a clear understanding of the science of handling money. This objective is to explain the important elements of finance, such as understanding where your money comes from (your income), whe...

UNIT II. THE SCIENCE OF HANDLING MONEY Overview This unit introduces key ideas to help students develop a clear understanding of the science of handling money. This objective is to explain the important elements of finance, such as understanding where your money comes from (your income), where your money goes (taxes and expenses), and how you can manage that money (budgeting and saving.) Learning Objectives: At the end of the unit, I am able to: 1. explain what is personal finance; 2. discuss the golden rules of personal finance; 3. enumerate the steps of opening a bank account in the Philippines; 4. define, create and manage a budget; 5. differentiate the types of budgets to create a personal budget; 6. illustrate the importance of a family budget; and, 7. explain budgeting in business. Setting up Name: _____________________________________________ Date: __________________ Course/Year/Section: ___________________________ DRAW YOUR DREAMS What You Need:  Bond Paper  Colored markers Purpose of Activity:  This activity helps the students to identify financial goals and create realistic action steps to make their dreams a reality. Activity Instructions:  Think about your different money-related goals. Examples might be establishing a small business, buying a vehicle, or taking a nice vacation.  Choose a goal and draw a picture that represents it. Under the picture, list at least three action steps that you need to take to reach the dream goal.  Present your output with the class. Talk about how having a goal to work toward can keep you motivated to make wise financial decisions. Goals should be SMART: specific, measurable, attainable, realistic, and timely. Lesson Proper Good financial sense – sticking to a monthly budget and living within your means is part of money management. But it also takes study and effort. You have to learn how to keep an eye out for bargains and when to avoid a bad deal on a purchase. As you progress in your career and earn more money, understanding how to invest it wisely becomes important to reaching milestones One of the biggest steps toward leading an independent life is financial independence. This means taking control of your money - both the money that you earn and the money that you spend. Money is necessary to live and live well in our society, but you don't need a lot of money to be independent, successful, and happy. You do need to know how to manage the money you have and make it work for you. DEFINITION OF PERSONAL FINANCE A personal finance definition varies based on the institution that is being asked. While a concrete personal finance definition may not exist, the major government agencies and financial education programs agree on the basics of what constitutes personal finance. It deals with the management of an individual's personal capital in a prudent manner that is conducive to asset growth and good financial health. Personal finance deserves to be a cornerstone in any well-crafted financial education program. The following are some of the most accepted definition of personal finance:  Possessing the skills and knowledge on financial matters to confidently take effective action that best fulfills an individual's personal, family, and global community goals. – National Financial Educators Council  Personal Finance is made up of various parts but can be summarized as budgeting, setting spending and saving priorities, cash flow planning, and efficiently maximizing benefits through rewards programs. – Anthony G. Lanza, Spectra Investment Management  This is anything pertaining to the financial picture for an individual and/or family. This would include budgeting, savings, retirement planning and evaluating different scenarios, investment management, evaluating insurance needs, benefits from employers, estate planning, tax planning, etc. – Glenn Moore, Gibraltar Financial  The ability to read, analyze, manage, and communicate about the personal financial conditions that affect material well-being. National Endowment for Financial Education THE GOLDEN RULES OF PERSONAL FINANCE Money management advice is everywhere you turn these days. News programs, business news cable channels, online financial sites, and even your friends and family are eager to share their opinions about how you should manage your money. But despite all the advice, tips, ideas, and new digital tools to manage your personal finances, these three golden rules will never change. Golden Rule #1: Don't spend more than you make Basic money management starts with this rule. If you always spend less than you earn, your finances will always be in good shape. Understand the difference between needs and wants, live within your income, and do not take on any unnecessary debt. Golden Rule #2: Always plan for the future Get into the habit of saving money by paying yourself first. On payday, transfer money to your savings account even before you pay bills. Many banks will let you set up a recurring transfer from checking to savings through online banking, so you can save money automatically. Planning for the future means preparing for the unexpected, and building up an emergency fund is the best way to handle life's unforeseen expenses. Having difficulty finding the money to pay yourself first? See Golden Rule #1. Golden Rule #3: Help your money grow Once your savings start to build, you should find ways to grow your money through investing. According to Investopedia, investing is putting money to work to start or expand a project - or to purchase an asset or interest - where those funds are then put to work, with the goal of income and increased value over time. The term "investment" can refer to any mechanism used for generating future income. This is especially important for long-term savings strategies, such as retirement planning. There are many investment tools available at various levels of risk, but always make sure you thoroughly understand the kind of product you're investing in. Remember, time is on your side for your retirement and other long-term goals when you start saving and investing as much as you can as early as you can. The most important personal finance rules don't change. There will always be newer, better tools to manage your money. However, spending less than you earn will always be beneficial. Investing your money will always be better than doing nothing with it. And planning for the future will always be better than blowing your paycheck as soon as you get it. OPENING A BANK ACCOUNT IN THE PHILIPPINES A bank is an establishment authorized by a government to accept deposits, pay interest, clear checks, make loans, act as an intermediary in financial transactions, and provide other financial services to its customers (BusinessDictionary). While it is certainly possible to store your money in physical cash, there are many reasons why you should have a bank account. These are the following:  Security is an important reason why people store their money in bank accounts. Unfortunately, keeping physical cash at home is not safe since your home is exposed to the risk of burglary and natural disasters such as floods and accidents such as fires. It is similarly unwise to bury your money underground since moisture and air will likely decompose your money. When you deposit money into your bank account, the bank will store your money in their secured vaults. Also, if you need to transfer a large sum of money to a friend who also has a bank account, your bank can do it for you safely.  Convenience is another major benefit of having a bank account. When you have a bank account, you are able to access physical cash wherever there is a bank branch or ATM. Alternatively, you can also pay for goods and services electronically through a debit card, which is linked to your bank account. Having a debit card also allows you to shop online, which gives you greater access to a variety of products from around the world.  Earning interest is another important reason to have a bank account. Having a savings account that earns interest protects you from inflation and the declining value of money. Finally, having a bank account allows you to better manage your saving and spending habits. Interest is also a source of income and encourages people to save regularly, which is a great habit to develop from an early age. Regular bank statements also display when and where money was spent, which can help people with planning and budgeting for the future. How to Open a Bank Account There are many different types of bank accounts: savings accounts, checking accounts, payroll accounts, time deposit accounts, and more. Choosing the right bank account will completely depend on you because each type has its own benefits and drawbacks.  However, when people talk about opening their first bank account, they usually mean a savings account. The simplest reason for this is that a savings account incurs the least cost with a few added benefits. What is a savings account? This is a bank account where you can keep your extra cash or emergency fund, and it is available for withdrawal. You can deposit cash and checks, but you cannot issue checks with this type of bank account. One of the biggest reasons why you would want to start with a savings account is because the initial deposit and maintaining balance is typically much lower than other types of accounts. You can open one for as low as ₱100 with ₱2,000 as a maintaining balance. The biggest downside to it is that its annual interest rates are typically less than 1%. Like other accounts, you can also incur penalties up to ₱500 if your account goes below its maintaining balance for over 30 days. You're also limited to a specific withdrawal amount and even per transaction per day. This varies from bank-to-bank. What are the basic requirements for a bank account in the Philippines? Typical requirements for opening a savings account are:  2 Valid IDs such as School ID, Company ID, Passport, Driver's License, UMID, Postal ID, etc.  Two 1×1 ID pictures taken in the last six months  Proof of Billing like the electric bill, internet bill, water bill, etc.  Tax Identification Number  Initial Deposit (varies depending on the bank) How do I choose my bank? The following factors to consider when selecting a bank are the following:  Initial Deposit  Maintaining balance  Required balance to incur interest  Interest rates  Accessibility  Online banking services HOW TO CREATE AND MANAGE A BUDGET Budgeting has a bad reputation among a lot of households who view it as a way to strip all the fun out of spending money— no more shopping, no more eating out at restaurants, no more golfing on weekends. However, these are not the purpose of a budget. A budget is an estimation of revenue and expenses over a specified future period of time and is usually compiled and re- evaluated on a periodic basis. Budgets can be made for a person, a family, a group of people, a business, a government, a country, a multinational organization, or just about anything else that makes and spends money. What budgeting actually does is clearly show you how you allocate your money and present you with the choices on what stuff to enjoy – based on your financial limitations. It will save you the grief of overspending and being too much in debt. Budgeting does not stop you from enjoying stuff. It ensures that you enjoy stuff when you want it. Everyone can benefit from taking a pronounced and proactive approach to controlling their finances. Committing to your budget will help guide you into a much better financial position. Budgeting can improve your life because it:  Reveals waste. Creating a budget sheds light on areas that many people neglect on a day-to- day basis.  Directs priorities. A budget allows for people to look at the big picture of their spending habits and set new priorities to maximize their money's potential.  Creates new habits. When people get a clearer picture of how they've been using their money, it allows them to shift expenditures into different categories, making them more conscious of unnecessary spending.  Reduces stress. Finances are one of the top stress-inducing situations. When there is a sense of control over the money coming in and the money going out, the stress can transform into a feeling of empowerment.  Educates. Having a budget allows people to view money as a tool, shifting the mindset to focus on long-term goals and future needs. Who Should Budget? You should be budgeting if you are:  working on limited money;  trying to lighten your debt load and solve your debt problem;  working towards a financial goal;  planning to retire early; and  trying to make the best use of your money. Types of Budgets to Create Your Personal Budget Depending on your personal preference and financial circumstances, here are the five types of budgets or budgeting methods to help you create a personal budget. The Envelope Method – The envelope method is a way to track exactly how much money you have in each budget category for the month by keeping your cash tucked away in envelopes. At the end of the month, you can see how much cash is left by taking a quick peek in your envelope. This method is a way to force yourself to accurately budget discretionary expenses every month. It demands honesty, discipline, and commitment, but the reward is that you gain control of your finances. How to do it? 1. Label envelopes with different categories such as Food, Transport, School, Load, Going Out, etc. 2. Work out how much you spend on each category every month. 3. When you get your regular allowance/income, pay your bills. 4. Then take out the leftover in CASH and divide it between your envelopes.  5. Only spend out of the designated envelope for each category. If you are going to the supermarket – take the Food envelope with you. 6. Don't 'borrow' money from other envelopes. Once an envelope is empty, it's empty. You just need to carefully plan each envelope to cover what you need. Pros and Cons of the Envelope System Pros: It forces you into a disciplined budgeting system. It requires pre-planning before shopping excursions, instead of going to a store blindly and falling victim to impulse purchases. When you are out of cash in the envelope, you cannot overspend. Moreover, you avoid the overdraft and fee penalties associated with careless card swiping. Cons: Carrying cash is not a practical system for some consumers. The use of credit/debit cards gives an automatic and exact system for tracking purchases, which can't be replicated by using cash. Cards also allow you to accrue points and have cash-back options with purchases, a great option if disciplined spending is utilized. In addition to that, carrying cash around is less secure. Lastly, you need to be disciplined and work out how much cash you need to avoid being caught short. 50-30-20 Budgeting Method – The 50-30-20 budgeting method, coined by Elizabeth Warren and Amelia Warren Tyagi, is a super-easy way to organize your money and budget. Essentially, you'll spend:  50 percent of your income on living expenses (rent, mortgage, groceries, bills, transportation, etc.)  30 percent of your income on wants and lifestyle choices (fun and entertainment, dining out, etc.)  20 percent of your income toward debt payments and saving. The formula seems simple enough, and this is a solid option for beginners who are new to budgeting. It's important to get into the habit of knowing exactly where your money is going by dividing your finances up into these three distinct categories. The best part about this budget system is that you're still able to budget money for fun. The goal is to properly manage your money while living a comfortable life. How to do it? 1. Spend 50% of your earnings on living expenses (needs) such as rent, food, bills. 2. Spend 30% of your earnings on things you do not necessarily need (wants), such as going out, new shoes, etc.  3. Spend 20% of your earnings on financial goals such as savings, investment, or reducing your debt. For example, as a student, let us say you are regularly receiving a ₱2,500 allowance per month. Using the 50-30-20 budgeting method, you'd have ₱1,250 to spend on your living expenses such as transportation, school supplies, and food; ₱750 on wants and lifestyle choices and ₱500 to save. Pros and Cons of the 50-30-20 Budgeting Method Pros: A simple method which only needs a calculator (to work out the percentages). Easy to stick to, and the '20%' part will help you accumulate more money and build wealth faster. Cons: Not ideal for people who have an unsteady monthly income. Zero-Based Budgeting Method- Zero-based budgeting is a way of budgeting where your income minus your expenses equal zero. With a zero-based budget, you have to make sure your expenses match your income during the month. It does not mean you have zero pesos in your bank account. It just means your income minus all your expenses equals zero. How to do it? 1. Write down your monthly income. 2. Write down your monthly expenses. 3. Write down your seasonal expenses. 4. Track your spending throughout the month. Pros and Cons of the Zero-Based Budgeting Method Pros: Teaches you to stop spending more than you earn. Cons: It needs to be done every month, so it takes dedication. It also doesn't allow for unforeseen spending, the outgoing you might not know is coming in that month. This is where your emergency fund will come in handy. PERSONAL BUDGETING TIPS FOR FIRST TIMERS Developing a budget that you can maintain over the long term has been definitively linked to building wealth while simultaneously helping you get out of debt and cut expenses. 1. Decide to Start a Budget For many people, this is the hardest part. Read on to get started with the next steps. 2. Know How Much You Have If you have savings, checking accounts, investment accounts, or any other financial instruments, you will want to know how much money is in each account as well as the interest rates and expenses of each one. 3. Know How Much You Make For some people, this is easier than for others. Those on a salaried pay scale can easily find their monthly income. For hourly employees or those who work in a business where income may rise and fall unpredictably, this can be much more difficult. The most important consideration, regardless of how you earn your monthly income, is to determine the average monthly amount of income that you receive. A good way to do this, if you receive irregular income, is to average out the last 6 to 12 months of recurring income and use that figure. If  you want to be extra conservative, you can choose the lowest monthly amount you have earned in the last year, which will hopefully provide you with a worst-case scenario. 4. Know What You Owe Determining your monthly recurring debt payments should be your next step. This should be fairly simple to do, as long as you have stopped incurring additional debt in the short term. If you haven't been able to break your dependence on credit cards, that's okay, as building a budget will act as the first step for your next financial priority, which should be getting out of high-interest consumer debt. To find out what your monthly recurring debt payments are, calculate the total amount owed on each debt account as well as the minimum monthly payment. This includes car loans, mortgages, credit card debt, student loans, and all other debt that your family pays on a monthly basis. 5. Determine Your Net Worth Once you know how much money you have and how much you owe, you can easily determine your net worth. Just subtract what you owe from what you have, and you will derive a number. This number will tell you the value of your financial resources. 6. Determine Your Average Recurring Monthly Expenses This can be the hard part for many people. The best way to determine your monthly expenses is to make a stack of household expenses for a month. Keep your receipts, your utility bills, and any other expense that arises during a one-month period, and divide these bills into categories. 7. Enter this Information into a Database Software programs like Microsoft Excel and online budgeting tools like. 8. Look at the Bottom Line After entering all of the above information, you will discover the most important number in your budgeting process – the bottom line. This number will tell you whether you are overspending or underspending. Ideally, during this step, you will find that you are living within your means and maybe will even have a little leftover on a monthly basis. On the flip side, you may determine you must make adjustments to your monthly expenses in order to live within your means. 9. Make Adjustments Accordingly If the bottom line of your budget proved that you are overspending your monthly income, you would come to the most difficult step – making cuts to your monthly expenses. There are tons of resources here on Money Crashers that will teach you to be smarter with the income you have, help you cut your recurring monthly expenses, and establish your financial boundaries for personal budget planning. 10. Adjust Categories Based on Reality Life is full of surprises. Food gets more expensive, gas prices rise, and rent can get hiked when you least expect it. Each time you notice inflation creeping up on your expense categories, get a raise at work and begin to earn more money, or worse, suffer a financial setback like a pay cut or job loss, you must adjust your categorical expenses based on the realities of the world around you. 11. Pay Yourself First Depending on where you are in your budget, based on your bottom line, you may want to add a few extra line items to your monthly expenses. Moving money into savings and treating it like a recurring expense will allow you to slowly build up your savings without feeling like you must make these deposits from what is left at the end of the month. 12. Track, Monitor, and Be Disciplined  Keeping track of your budget takes an hour or so a week. But this will save you a lot of time in the long run. Once you have an established budget, you will want to keep it in check. The discipline and associated knowledge that you are making good long term and short-term financial choices will provide you with a great deal of comfort and will take you from living paycheck to paycheck to being able to see the long-term results of your disciplined savings and financial planning. How to Budget When You are Broke? 1. Assess Your Financial Situation If you have more money going out than coming in, here's what your financial plan boils down to spend less and/or earn more. To figure out how to do this, first take an assessment of your income and expenses. This will help you develop a reasonable and realistic budget. 2. Categorize Your Expenses Break down your expenses over the past few months. Categorize and separate them into needs and wants. Separating will help you prioritize your finances. To get a clear idea of your needs and wants, consider creating a hierarchy of spending. Organize your debts, too. 3. Identify Your Problem Spending Areas Take note of your spending habits. Are there any specific stores you frequent? Do you have a coffee habit that can be cut? Many times, there are "leaks" in a budget that can be plugged. 4. Cut Back Your Spending Find ways to reduce your expenses. The first place to start is the "wants" category. It's important to allow yourself a little breathing room for fun in your budget. If you don't, you risk busting it—and that can make you want to quit altogether. But remember: the key to managing your money when you're broke is downsizing your lifestyle. If you can't afford to pay your bills, take a close look at what might be luxuries. 5. Save Money on Bills Once the wants are out of the way, take a look at your needs—you may find you can save a lot there, particularly on your bills. Check out our bill-by-bill guide to saving money on your monthly expenses for some ideas. 6. Be Frugal When you're struggling to make ends meet, frugality is your friend. Make the most out of your money and the things you spend it on. For example, you could:  Stretch your meals: Bring a packed meal or eat in the low-cost eatery.  Do It Yourself: One of the best ways to cut costs is to learn to do things yourself rather than pay for them.  Save on housing: Can you negotiate your rent? Can you move to a cheaper place? Since this is likely one of your biggest expenses, it's one of the best ways to make a dent in your spending. 7. Tackle Your Debt Whatever you choose to focus on, don't risk your finances unraveling by ignoring your debt. Late fees and interest can turn a small debt into an overwhelming one. Your debt should be a priority. 8. Pick a Repayment Method You'll have to come up with a debt repayment plan. To do this, first, pick a method:  The Debt Snowball Method – Pay your smallest debts first. Seeing your debts paid down will help you build the momentum to keep going.   The Debt Avalanche Method – Pay debts with the highest interest rates first. 9. Reduce Your Credit Card Interest Rate According to Bankrate, a national survey found that 56 percent of consumers who called credit card companies to ask for a lower interest rate had positive results. 10. Request Extensions or Payment Plans "Don't be afraid to request bill extensions or payment plans. These requests are often granted. If your biggest worry is eviction from your apartment, talk to your landlord, but, also, see if you can get extensions on any other expenses to free up money for keeping your home." 11. Draft Your Plan Every cent will be accounted for, making your budget pretty tight. At this point, a traditional budget strategy may not be suited for you. But don't miss blowing your budget, either. Avoid the following mistakes:  Not being realistic: Crunch the numbers realistically. Set a reasonable amount aside for each of your expenses.  Cutting out all the fun: It's important to give yourself some breathing room. "You may have to limit expenses if your budget is really tight, but such an extra little bit of money can prevent you from feeling deprived, which can lead to overspending." 12. Take Advantage of Opportunities Part of managing money when you're broke is increasing your income. For example, you might be able to:  Get a better job  Ask for a raise  Sell your stuff  Find a side gig THE IMPORTANCE OF A FAMILY BUDGET The standard of living of people is reflected in their family budgets. A family budget is a statement that shows how family income is spent on various items of expenditure on necessaries, comforts, luxuries, and other cultural wants. It shows the distribution of the family income over the various items of expenditure. These are the importance of a family budget:  To the householder, the study of this budget is very useful. He will be able to find out from the budget before him whether his income has been properly distributed among the various items of expenditure and also whether he has been able to balance his budget or not. If the householder is to derive maximum satisfaction from his limited income, then mapping out of expenditure beforehand is absolutely necessary.  To the economist, the legislator, and the social reformer, the value of the study of family budgets is undoubtedly very great. They are able to form an idea of the standard of living of the people and the measure of economic welfare which is enjoyed by them. They are deeply interested in the economic welfare of the people, which very much depends on the way the income is spent. BUDGETING IN BUSINESS Time and money are scarce resources to all individuals and organizations; the efficient and effective use of these resources requires planning. Planning alone, however, is insufficient. Control is also necessary to ensure that plans are actually carried out. A budget is a tool that managers use to plan and control the use of scarce resources. A budget is a plan showing the company's objectives and how management intends to acquire and use resources to attain those objectives. The budgeting process involves planning for future profitability because earning a reasonable return on resources used is a primary company objective. A company must devise some method to deal with the uncertainty of the future. A company that does no planning whatsoever chooses to deal with the future by default and can react to events only as they occur. Most businesses, however, devise a blueprint for the actions they will take given the foreseeable events that may occur. A budget:  shows management's operating plans for the coming periods;  formalizes management's plans in quantitative terms;  forces all levels of management to think ahead, anticipate results, and take action to remedy possible poor results; and  may motivate individuals to strive to achieve stated goals. Companies can use budget-to-actual comparisons to evaluate individual performance. Many other benefits result from the preparation and use of budgets. For instance:  businesses can better coordinate their activities;  managers become aware of other managers' plans;  employees become more cost-conscious and try to conserve resources;  the company reviews its organization plan and changes it when necessary; and  managers foster a vision that otherwise might not be developed. The planning process that results in a formal budget provides an opportunity for various levels of management to think through and commit future plans to write. In addition, a properly prepared budget allows management to follow the management-by-exception principle by devoting attention to results that deviate significantly from planned levels. For all these reasons, a budget must clearly reflect the expected results. Failing to budget because of the uncertainty of the future is a poor excuse for not budgeting. In fact, the less stable the conditions, the more necessary and desirable is budgeting, although the process becomes more difficult. Obviously, stable operating conditions permit greater reliance on past experience as a basis for budgeting. Remember, however, that budgets involve more than a company's past results. Budgets also consider a company's future plans and express expected activities. As a result, budgeted performance is more useful than past performance as a basis for judging actual results. References Book Pascual, M. and Macaso, M. (ND). Personal Finance. Nueva Ecija University of Science and Technology. Websites Budgeting Income (ND). 10 Benefits of Budgeting Your Money. Retrieved from https://www.budgetingincome.com/10-benefits-of-budgeting-your-money/ Chen, J. (2019). Investment. Retrieved from https://www.investopedia.com/terms/i/investment.asp Coinsph (2019). Your First Savings Account: How to Open a Bank Account. Retrieved from https://coins.ph/blog/how-to-open-a-bank-account-philippines/ Dier, J. (2017). The three Golden Rules of money management. Retrieved from https://www.hancockwhitney.com/insights/the-three-golden-rules-of-money-management Fay, B. (ND). Dave Ramsey's Envelope System Explained: Pros, Cons, and Alternatives. Retrieved from https://www.debt.org/advice/dave-ramseys-envelope-system-explained/ Fay, B. (ND). How to Create and Manage a Budget. Retrieved from https://www.debt.org/advice/budget/ Ghanti, A. (2019). Budget. Retrieved from https://www.investopedia.com/terms/b/budget.asp Lumen Learning (ND). Introduction to Budgeting and Budgeting Processes. Retrieved from https://courses.lumenlearning.com/sac-managacct/chapter/introduction-to-budgeting-and- budgeting-processes/ Maddox, C. (2019). The 50-30-20 Budget Explained - An Easy Budgeting Method To Follow. Retrieved from https://www.moneyunder30.com/50-30-20-budgeting-method Money Nugets (2017). Different Budgeting Methods to Suit YOU - Which Will You Choose? Retrieved from https://www.moneynuggets.co.uk/different-types-of-budgets/ National Financial Educators Council (ND). Personal Finance Definition. Retrieved from https://www.financialeducatorscouncil.org/personal-finance-definition/ Ramsay, D. (ND). How to Create a Zero-Based Budget. Retrieved from https://www.daveramsey.com/blog/how-to-make-a-zero-based-budget Rhaiti, A. (2016). Why it is Important to have a Bank Account. Retrieved from https://rightforeducation.org/2016/09/important-bank-account/ Seth, T. (ND). Family Budgets: Meaning, Importance, and Engle's Law of Family Expenditure. Retrieved from https://www.economicsdiscussion.net/articles/family-budgets-meaning-importance-and- engles-law-of-family-expenditure/1457