7.

1
Tyshawn wants an iPhone but his parents refuse to buy it for him. Sharonda
wants to get a job so she can purchase a car when she turns 18 years old.
Maybe you want designer shoes, or the latest trendy clothes, but you just
don't have enough money. It's possible to save for the things you want, big
or small, if you have a financial plan. People who are successful didn't get
that way by accident, they made a financial plan and stuck to it. In Module
7, we will learn the five steps needed to create a financial plan.
A personal financial plan is an important component of money management
that can help you meet the financial needs you have today while you plan
for future dreams. In general, it involves five steps.
The Financial Planning Process

Tyshawn decided to work part-time after school to earn enough for an

iPhone and cell phone service plan. Sharonda has already saved $1,000
towards her car by working at a supermarket on the weekends. What do
they have in common? They set financial goals and are using a plan to reach
them.
When you create a financial plan you set short-term, mid-term, and longterm goals, develop a plan to achieve them, and put that plan into action.
Your plan is like having a money road map for how you spend, save, use
credit and invest. There are many software programs that can help you
develop a financial plan on your own. If you need assistance, you also have
the option of using a financial planner.
A plan should be designed according to your personal needs. If you make a
plan and follow it, it will help you to manage your money effectively, avoid
debt, bring you a sense of freedom from financial worries obtained by
looking to the future, and achieve your financial goals. If you don't make a
financial plan, you may always worry about having enough money for the
things you need and want.

7.2
Step 1 - Needs and Wants
The first step in developing a Financial Plan is to understand the difference
between what you need and what you want to do with your money. Your
personal values can determine what you consider needs and
wants. Values are the beliefs and practices in your life that are important to
you. So many things can influence your values - family members, friends,
your religion, things you read, and the experiences you have. A 2010 survey
found that parents had the greatest influence on teen spending and saving
habits.
The point is that you have a set of values and they impact the choices you
make, including your choices about money. Your values will change over
time as you learn new things, but knowing what they are makes it easier to
create a plan for getting the things you want. The number one reason so
many people fail at financial planning is that they don't recognize the
difference between needs and wants.
What are Needs and Wants?
Needs - the basic necessities of life.

Wants - things that make life more

interesting and fun.
You may find that when you examine your values you'll find needs disguised
as wants, which may be keeping you from saving money to reach your
financial goals. Is a cell phone a want or a need? Everyone has wants, but
when funds are limited you have to focus on needs first. You will examine
your own needs and wants in Step 1 of creating a financial plan.

7.3
Step 2 - Assessing Your Current Financial Situation:
Income & Spending
The second step in developing your financial plan is to find out where your
finances currently stand. First, you need to list all of your assets or what
you own and add up the total. Example of assets are cash, checking and
savings accounts, CDs, investments (stock, bonds, mutual funds, etc...),
retirement plan, the value of a house, car, and personal property. Then, you
need to list your liabilities or what you owe and add up the outstanding
balances. Examples of liabilities are current unpaid balances on credit
cards, mortgage, auto loan, college loan, and other debts. Subtract your
liabilities from your assets to determine your personal net worth.
Net Worth = Assets - Liabilities
Preparing a list of current asset and debt balances gives you a foundation
for developing your personal financial plan. You might not have a lot of
assets and probably no liabilities now. However, once you graduate from
high school and move on to college or start working your situation will
change. Periodically calculating your net worth, the value of your assets
minus your liabilities, is the best way to measure and track your financial
well-being.
Now, let's look at what you most likely have: income and expenses.
Teenagers have access to a variety of sources of income. In 2010, teens
from 15-17 years old had an average income of $4,023 from paying jobs,
allowance, as needed money from parents, and gifts of cash.
Income

Do you receive an allowance, have a job or own your own business? Is your
source of income regular? A salary from a job is considered regular, while
birthday money is not. Think about where your personal income comes
from. The chart below lists examples of various sources of income.
Type of Income

Source

Regularity

Summer job, $1800

Camp Daystar

Monthly in the summer

Allowance, $20/week

Parents

Weekly

Birthday money

Relatives

Yearly

Expenses
Now that we've looked at income, let's look at your expenses. Expenses are
what you spend money on -- your needs and wants. There are three types of
expenses: fixed, variable and periodic expenses. However an expense is
classified, you should have a plan to pay for the expense. Your financial plan
will help you plan ahead so you are able to pay your expenses and have
money available for what is important to you.
Types of Expenses
Fixed Expenses
The expense costs the same amount every time. A home mortgage is a fixed
monthly payment. You typically know exactly how much is needed each month
for a fixed expense. For example, a person might pay $250 every month to pay
off a car loan.
Variable Expenses
Expenses that fluctuate in amount, so you have more control over how much
theyll be. Food is a variable expense because eating out more or less
frequently will change the amount you spend. For example, food may cost
$100$200 per week for a family depending on what kinds and amount of food
is purchased, and how many times the family eats out.
Periodic or Occasional Expenses
Expenses you dont pay every month, but they can be either fixed or variable.
For example, some people pay their car insurance (a periodic expense) every
six months instead of every month. However, paying for auto repairs is an
occasional and variable expense. You only pay for repairs when something
happens to your car, and the expense will vary depending on what kind of
work is needed.

Example: Expenses
Are the expenses below fixed, variable or periodic?
Description

Fixed Variabl Periodi

?
e?
c?

Groceries
Guitar Lessons
Car Payment
Dinner at a
restaurant
College tuition
Outfit for
graduation
Check your answers.
Personal Spending Log
How much did you spend in the last week? Dont worrymost people dont
know off the top of their head how much theyve spent. Thats why
a Personal Spending Record can be a handy tool for tracking your cash
flow. Cash flow measures the money you receive and the money you spend.
How you manage your cash flow affects if, when, and how you reach your
financial goals.
Read the following article Deciding if Teens Should Work courtesy of the
University of Illinois Extension.
Read For Teens: How to Ace Your First Test Managing Real Money in
the Real World courtesy of the www.FDIC.gov.
Tips for Sensible Spending
As weve learned, teenagers have access to more money than ever before.
Allowances and gifts, income from chores, summer jobs or part-time jobs,
can add up to significant amounts of money. Teens have more money to
spend than previous generations and are developing spending patterns at a
younger age.

If you decide to purchase an item or service as part of your financial plan,

its important to spend the least amount of your hard earned money for it.
As well, sometimes we are tempted to shop when its not part of our
financial plan. Here are some simple tips for reducing spending costs and
resisting temptation. Well be discussing this further in Step 5 Monitoring
and Modifying your Financial Plan.
Considerations Before Buying
Ask yourself:
Do I really need the item? Is this purchase in my budget?
Have you checked and researched the item and its cost?
Can a less expensive item be substituted?
If "On Sale," is this really the best price you can get? Is this the best time to
buy the item?
Also consider:
Take a shopping time-out: Before buying something, do a quick time out
with yourself. Think about the which items you are about to buy represent
the lowest value for you, the lowest positive impact? Leave them behind and
do not purchase them.
Find the fluff and eliminate it: Find the unnecessary fluff in your
spending habits. These are wants and not needs. Do you buy an iced
coffee every morning? How about getting fast food every time you go to the
mall? Can you learn to live without these items if it means more money (and
better health)?
Be aware of the result of your spending decisions: Whenever we
purchase something, were deciding not to purchase or save for something
else thats called opportunity cost. Opportunity cost is what you give up
by making choices. It may refer to the money: if you choose to buy a new
pair of shoes every month, you might be funneling money away from other
goals like saving for a car or college. It may also refer to the time you spend
shopping around to compare brands for a major purchase. In either case, the
resources you give up (money or time) have a value that is lost.
Use reminders: There are countless strategies for motivating yourself to
spend better, for example post-its in your wallet can remind you of why
youre doing something (saving, paying down debt, being more
frugal). Whatever it take to help keep you constantly informed of your

financial goals, do it!

7.4
Step 3 - Developing Financial Goals
In the lesson 7.1, Tyshawn wanted to save for an iPhone and Sharonda was
saving for a car. These are their financial goals, the reason for making a
financial plan. When you set financial goals, you chart your future and
decide what you want to accomplish and when. Now that you have a better
understanding of your needs and wants (Step 1) and know about your
current financial situation (Step 2) it's time to take Step 3 and create
financial goals based on your needs and wants, income and expenses.
Specific financial goals are vital to financial planning. Avoid setting vague
financial goals, such as becoming rich in 5 years. Determine how much
money you will need for each of you goal. Make sure your goals are realistic
and do not focus on too many goals at once. Prioritize each of your personal
goals in order of importance. Based on your goals, you will need to develop
a regular savings and/or investment program. For short-term goals you
might want to use a savings account or a money market. For long-term
goals, such as saving money for a house or retirement savings you might
want to look into different investment options, such as retirement plans,
stocks, bonds, etc. There are many resources available to assist you in
making personal financial decisions: printed material (books, periodicals),
financial institutions (banks, credit unions, investment and insurance
companies), school courses and educational seminars, online resources, and
financial specialists (financial planners, bankers, accountants, insurance
agents, tax preparers).
Many factors influence financial planning decisions. Some of them are life
situation, personal values, and economic factors. And whenever you make a
choice, you have to give up, or trade off, some of your other options. When
making your financial decisions and plans, you will need to carefully
consider personal and financial opportunity costs. We have already
mentioned opportunity cost in lesson 7.3. Opportunity cost is what you give
up by making a choice. Examples of personal opportunity costs are time,
knowledge, skills, health. Examples of financial opportunity costs are how
much spend, save, invest. Is it more important to spend your money now or
to save for the future? Would you rather get a job right after high school or

continue your education? Would you rather cut back on downloading tunes
and purchasing clothing and spend the savings on guitar lessons?
In preparing your financial goals we will be using the SMART goal
framework.
SMART goals are

Specific Measurable Attainable Realistic

Timely & Tangible

Aspects of SMART Goals

Specific
Well-defined.
Clear to anyone who reads it.
Measurable
Know if the goal is obtainable and how far away completion is.
Know when it has been achieved.
Attainable
Identify goals that are important to you, and ways to make them attainable.
Realistic
Within the availability of resources, knowledge and time.
Time Based
Enough time to achieve the goal, but not too much time.
The T in SMART can also stand for Tangible. A goal is tangible when you
can experience it with one of the senses -- taste, touch, smell, sight or hearing.
When your goal is tangible you have a better chance of making it specific and
measurable, and therefore attainable.
Your SMART goals must also be meaningful to you, something you really
want to achieve. Meaningful goals give you motivation to stick with your
plans. You should always write your goals down and keep them in a place
where youll see them often, as a reminder of what youre working toward.
Example: SMART Goals
SMART Goal: Tyshawn will save a total of $300 to buy an iPhone by next
December. He will save $25 a week from his part-time job salary.
How is this a SMART goal? It's SMART because it is...
Specific: Save $300 for an iPhone.

Measurable: Save $25 a week until December.

Attainable: yes
Realistic: yes
Timely: Complete saving by December.
SMART Goal: Sharonda wants to save $5000 for a used car by her 18th
birthday, which is one year away. She will save $100 a week from her parttime job salary.
How is this a SMART goal? It's SMART because it is...
Specific: Save $5000 for a used car.
Measurable: Save $100 a week until 18th birthday, one year away..
Attainable: yes
Realistic: yes
Timely: Complete saving by 18th birthday.
Practice: SMART Goals
SMART Goal: Jen wants to to go to Florida for spring break.
Is this a SMART goal?
Specific:
Measurable:
Attainable:
Realistic:
Timely:
Check your answer.
Goal Time Frames
The T in SMART goals refers to the time-frame of your goal. It is
important to decide if your goal is short-term, intermediate-term, or longterm. If you goal is intermediate- or long-term you will need to
practice delayed gratification, which means giving up something now so
you can save for a future goal. Many Americans are in credit card debt
because they opt for instant gratification buying something as soon as
they see it.
Goal Time Frames
Short-term Goals (0 3 months)
Example: Save $25 by the 10th of next month to buy mom a birthday gift.
Intermediate-term Goals (4 months to 1 year)

Example: Save $10 a week for the next six months to buy a dress for the
prom.
Long-term Goals (longer than 1 year)
Example: Save $2,000 from a summer job for the next three years for a down
payment on a car.
Look at the goals below. Consider how long it will take to meet the goals
listed. Less than three months? Less than a year? More than a year?
Practice: Goal Time Frames
Categorize each goal as short-, intermediate- or long-term.
1. _____ Save money to buy a birthday present for your friends birthday next
month. Check your answer.
2. _____ Save money for your senior year school trip in 6 months. Check your
answer.
3, _____ Buy new tires for your car in two months. Check your answer.
4, _____ Save to buy a new cellphone for five months, to replace your phone
that is damaged. Check your answer.
5. _____ Set aside money to pay your first semester of college tuition. You
graduate from high school in two years. Check your answer.

7.5
Step 4 - Creating a Budget
In Assessment 7.3, you looked at your personal spending and income. In
Assessment 7.4 you created your personal financial goals. In this lesson you
will learn how to create a budget based on spending, income, and financial
goals.
What is a Budget?
A budget is a plan for managing the money during a given time period.
Budgets are an integral part of running any business efficiently. For
business owners a budget is a plan of action for the business firm. Without a
budget, the business owner is literally shooting in the dark when it comes to
trying to plan expenditures (various types of expenses) for the business and
match them to sales revenue. Budgets are also a tool for performance
evaluation at the end of a specific time period for a business manager or

owner. Public budgets are crucial to economic growth of the country. Public
budgets are governments decisions on how much revenue to raise, how to
raise it, and how to use these funds to meet the countrys needs, from
security to improving health care to alleviating poverty.
How budgeting can help you? A good budget is your financial road map to
helping you make smart choices about your spending options. Budgets help
you find more money for the important things in life, often by just skipping
little purchases you dont care that much about. As with your financial
goals, your budget will change as your income grows and your priorities
change.
Did your spending log include any daily food expenses, like lunch out, coffee
or a bagel? If you spend $4 on a soda and piece of pizza after school, it may
not seem like much at the time but it can add up quickly. If you bought pizza
and soda every day for a month, it would cost you $120. Maybe an after
school snack every day is important to you, but is there something else
you'd rather spend this $120 on? When you create a budget, you prioritize
your spending and saving.
Pay Yourself First
Saving is the most important part of budgeting. You should always pay
yourself first when setting your spending priorities. If you receive a birthday
gift, a paycheck, or other money, put some into savings right away. If you
are consistent, your savings account will grow quickly. If you have a job,
your employer can direct deposit part of your paycheck into your savings
account. After a while, you won't even notice your money is missing. Your
bank can also be instructed to transfer funds from your checking account to
your savings account every month. Or, when you get your next raise, add
that amount to your monthly savings. If you pay yourself first you'll have
money for the things that are important to you. Your financial goals can only
be reached if you have savings to pay for them.
Saving for My Financial Goals
How much do you need to save each week to meet your financial goals?
First, think about how much reaching your goal will cost and put a dollar
amount on it. Then decide how long you will need to save to reach your
goal.
Example: Saving to Meet Your Goal
Eduardo wants to buy a $600 video camera. He is adding this goal to some of

his other financial goals listed on the chart below.

Total Cost of
Goal

Amount to Save Each Week

Buy a video
camera.

$600

Save $25 a week from salary, for 24

weeks (6 months). This is an
intermediate-term goal.

Purchase a new
car.

$10,000

$100 a week for about 2 years. This is a

long-term goal.

Goal

Visit grandparents
$250
in Florida.

Save $50 a week for 5 weeks. This is a

short-term goal.

Once Eduardo sees how much money he needs to save each week from his
paycheck, he can start to put together a weekly budget. With his current
goals, he needs to set aside $175 a week.
Building a Budget
The first step in building a budget is to decide if you will track your income
or expenses weekly or monthly. In Eduardo's case, he is paid weekly so he is
going to track his expenses that way. The second step is to list all the money
you have coming in, your salary, allowance, etc., then total up your income.
The third step is to list all the expenses you are responsible for each week.
You can list your savings as an expense since it is being subtracted from
your income. Don't forget to pay yourself first! The last step is to subtract
your total expenses from your total income. Do you have any extra money
left over? Consider adding it to your weekly savings. The final step is to
review your budget, did you forget any expenses? Will this budget work for
you?
Steps for Creating a Budget
Step 1: Decide whether to track budget weekly or monthly.
Step 2: List all income.
Step 3: List all expenses, including putting money into savings.
Step 4: Subtract income from expenses, is anything left over? Consider
adding it to your savings.
Step 5: Review your budget - is it realistic? Are you working towards meeting

all your financial goals?

Eduardo's Weekly Budget

Eduardo works as a cashier at a supermarket part-time after school. He
makes $250 a week after taxes. Eduardo lives with his parents and is
responsible for his cell phone bill of $60 a month. He also gets an allowance
of $20 a week for helping out around the house and watching his little sister.
He pays $10 a week in bus fare to get back and forth to work. He has no
other fixed expenses. Eduardo's budget will be tracked weekly.
Eduardo's financial goals: $600 video camera ($25 a week), $10,000 new
car ($100 a week) and $250 trip to grandparents ($50 a week).
Eduardo's Weekly Estimated Income
Paycheck

$250

Allowance

$20

Total Income

$270

Eduardo's Weekly Expenses

Savings (video camera, car & trip to
grandparents)

$175

Cell phone bill (weekly)

$15

Transportation

$10

Total Expenses

$200

Total Income - Total Expenses

$70 left over

When Eduardo completed his weekly budget, he realized that he had $70 left
over each week. He decided to put $50 weekly into a new savings account for
variable expenses (birthday presents, clothes, etc.) and add the other $20 a
week towards his financial goal of getting a new car. He will now set aside
$120 a week for his new car instead of only $100.
By organizing information on his income and expenses, Eduardo found an
extra $70 in his budget. He is now on his way to achieving his financial goals.
Tracking your Budget

There are many methods you can use to keep on track with your budget.
You can create a budget spreadsheet, use financial software, or even keep
track with your check register. Make sure your method includes listing your
expenses as you make them, so you can keep track and not spend too much.
It doesn't matter which method you use, as long as you are consistent.
Some people like to use the envelope system. Simply put the amount you
have to spend each week on different expenses into different envelopes.
When you need to spend money, take it out of the appropriate envelope.
When an envelope is empty it means you're done with this spending
category. It's helpful to note on the envelope the date and amount removed,
and for what purpose; this information is important if you find yourself
overspending.
Financial Documents
Keeping track of your budget means organizing your financial documents,
like pay stubs, bank statements and credit card statements. You can
purchase an accordion file and give each type of document its own section,
or use a filing cabinet and manila folders. There are many options available
to make keeping track of your budget easier. Below is a list of documents
you should hold on to for at least a year or longer.
Documents to Keep
Checking Account Statements
Balance your checkbook every month when your statement arrives. This way
you can catch things you may have forgotten to record (like ATM withdrawals
or debit card transactions). File away all statements, keep them for a year,
and then shred them.
Savings Account and Investment Statements
Always check these statements when you receive them, and then file them
away.
Pay Stubs
Employers do occasionally make a mistake, so you should definitely check
your pay stubs when you receive them.
Tax Documents
Hold on to your tax returns and related documents for at least 7 years.
Credit Card or Loan Statements
Keep your monthly statements for at least a year.

Receipts and Warranties

Keep receipts and warranties on hand for big purchases. Having this
information can help you return an item or get it fixed if needed.
View the interactive presentation Building Wealth (courtesy of Federal
Reserve Bank of Dallas) for more information on budgeting. If you have a
technical problem opening the interactive presentation you can view the pdf
version of the presentation Building Wealth.

7.6
Step 5 - Monitoring & Modifying Your
Financial Plan
Now that you've created a financial plan, do you see how all the elements of
the financial planning process work together? Your values impact your
needs and wants, and shape your financial goals. A budget meets your basic
needs and helps you reach those financial goals. And, as you follow your
budget, you will make spending decisions that affect how quickly you
achieve your financial plan. These elements are the basics of financial
planning - you control your money, it doesn't control you.
Just like life changes, your financial plan will change over time. You may get
a full-time job with a higher salary. Your financial goals may adjust as your
income changes. Spending habits will also change as you earn more money;
the more you earn, the more you tend to spend.
Reviewing and updating your budget and financial goals regularly is part of
any successful financial plan. Once you start implementing your financial
plan, review it monthly to make sure you're staying on track. You'll be able
to catch yourself before you stray off course. You should also review your
goals when you have significant changes in your life, like the birth of a
child, moving to a new city, or buying a home. When you achieve a financial
goal, cross it off your list and pat yourself on the back!
Reviewing Financial Goals
Review your current financial goals at least monthly, or whenever you have a

significant life change. Ask yourself the following questions:

1. Are my current goals still important to me?
2. Do I need to change any existing goals, or drop them from my list?
3. Do I have any new goals to add to my list?
If you need to modify your financial plan to meet new financial goals, take
the time to go through the spending and income tracking process again and
create a new budget.
Example: Modifying Your Financial Plan
It's been two years since Eduardo created his budget (see section 7.5), and he
just bought a new car. He is thrilled to have met such a major financial goal!
In fact, he has no other current financial goals as part of his financial plan.
After speaking with his parents, he decides to save money for college. He is
out of high school now and working full-time at the supermarket. Eduardo
plans to work for the next year and then attend college full-time. His
community college costs $1500 a semester, and he must save $6000 to pay for
his 2-year Associate's Degree in Culinary Arts. Eduardo will continue to work
part-time at the supermarket when he goes to school to pay for books and
transportation.
New financial goal: Save $6000 in 1 year (12 months) for
college tuition.
Eduardo will need to save $500 a month ($6000/12).
Because Eduardo works full-time he is now paid monthly, so he needs to
create a monthly budget. Now that he has a new car, he also has some
additional expenses like car insurance, maintenance and gas.
To review, below is Eduardo's previous weekly budget when he was working
part-time.
Eduardo's Previous Weekly Budget
Eduardo's Estimated Income (part-time)
Paycheck

$250

Allowance

$20

Total Income

$270

Eduardo's Expenses
Savings (video camera, car & trip to
grandparents)

$245

Cell phone bill (weekly)

$15

Transportation

$10

Total Expenses

$200

Total Income - Total Expenses

Eduardo's new full-time salary is $2000 a month after taxes. He no longer

receives an allowance. His car insurance is $300 monthly, he pays rent to his
parents of $400 a month, gas is $150 a month, and he wants to set aside $75
for car maintenance in his car emergency fund. He still pays his cell phone
bill. Since Eduardo makes more money now, he gives himself $200 a month for
spending money, including eating out occasionally, buying his own clothes,
and entertainment. He also wants to put any money left over into a savings
account for future financial goals, which he has not yet determined.
Eduardo's NEW Monthly Budget
Eduardo's Estimated Income (full-time)
Paycheck

$2000

Total Income

$2000

Savings (car emergency fund,

college tuition)

$675

Saving for future goals

$215

Cell phone bill (monthly)

$60

Gas & Insurance for car

$450

Rent to parents

$400

Spending money

$200

Total Expenses

$2000

Eduardo's Expenses

Total Income - Total Expenses

Now Eduardo has a new revised budget, and a new financial goal to complete
a 2-year degree program at his local community college. He also has extra
money in the bank for car repairs, and a savings account for future financial
goals. His financial plan is realistic and well-thought out, with plenty of
savings. Eduardo is doing a great job of paying himself first.