HARAMBEE UNIVERSITY

ACCOUNTING AND FINANCE

LEVEL II
Learning Guide
Unit of Competence: Prepare and Use a Personal
Budget and Savings Plan
Module Title: -Preparing and use a personal Budget
and saving plan
Unit Code LSA ACF2 M07 0322

Elements of competency: -
LO1. Analyze and discuss budgeting as a financial tool

LO2. Develop a personal budget

LO3. Implement and monitor the personal budget

LO4. Discuss the place of saving and investing today

LO5. Understand risk as it relates to saving and investing

LO6. Develop your own savings plan

LO7. Implement your own savings plan

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Unit Descriptor This unit describes the performance outcomes, skills and knowledge
required to develop, implement and monitor a personal savings budget and
savings plan to achieve identified goals, including identifying savings goals,
understanding the role of the savings plan, the risk/return relationship and
how to determine appropriate savings vehicles to maximize savings.

LO1.Analyze and discuss budgeting as a financial tool

1.1. The role of budgeting in the lives of different groups and the importance of
budgeting appropriately to meet expenses are analyzed and discussed and related
to different stages of life
Describing budgetary control

Budgeting is the most commonly used accounting tool for planning and controlling the daily &
long-term activates. For example,

- Budget for administrative regions

- Budget for federal government
- Budget for d/t governmental units and so on
Individuals also describe Varity of resource allocation decision as purchase of found items
closings; planning for vacation, as budgeting.

Budget is the quantitative expression of a proposed plan of action by individuals & management
of business for a future time period and is an aid to the coordination and implementation of that
plan

- Therefore, budgeting is the process of preparing a budget

- By looking in to the future, mangers will be able to anticipate and correct problems
before they happen.
Characteristics of Budgeting

The budgets of a business firm serve much the same function as the budgets prepared by
individuals informally. The main difference is that businesses budgets tend to be more detailed,
and are formal.

The following three are the basic characteristics of budgeting

i. Budget is quantitative
Budgets can be expressed both with quantitative and quantitative measures however, form
accounting point of view; we are interested primary on the quantitative description of the budget.

Quantitative data includes both financial (Birr value) e.g. Revenues, cast expense etc. or non-
financial figures such as unit produced or sold.

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 ii. Budget deals with some specified entity

A specific budget must apply to a clearly defined accounting entity. The entity cloud be an
individual, a family, business firm, governmental unit or non-profit organizations. For budgeting
purpose, entity consists of small part of a business such as section, unit, department, division,
branch specific activity and others.

iii. Budget is future oriented

A budget is prepared in advance and is derived from the long-term strategy of the organization.

Budget of quantify plans; plans are set of goals or objectives to be achieved in future time period.
Thus, organizations may prepare weekly budget, monthly budget, annual budget (commonly
used) or some other specified time period.

Planning and controlling

The two basic management functions are planning and controlling

Planning deals with it the preparations of budgets for a specific take and the amount of money
required to accomplish it.
Controlling deals with the evaluation and day today inspection of the implementation of the plan.
- When the controlling is carried out through the help of budgets. The process sis
known as budgetary control.
Budgetary control is a control technique where by actual results are compared with budgets.

 Six Key Purposes of Budgets

• A method of planning the use of resources
• A means for forecasting
• A means of controlling the activities of various groups
• A means of motivating individuals to achieve performance levels agreed and set.
• A means of communicating the wishes and aspirations of senior management
• A means of resolving conflicts of interest between groups with the organization

Budgeting through time period

While preparing budgets, time should be specified unless, the budget does not give a since. For
example, if a business budgets to earn an income of br 100,000, unless the time is specified, it
doesn’t give any since

- As mentioned above, budgets can be prepared for a week, month, year or longer period.
- The most commonly used budget period is one year. This annual budget is often
subdivided by months, for the first quarter and by quarter, for the remainder of the year.

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 - The budget data for a year are frequently revised as the year unfolds and the budget for
the next year is changed in light of new information.
i. Strategic plan:-is a plan that sets the overall goals and objectives of an individuals &
organizations.
- it doesn’t to deal with specific time frame
- it doesn’t produce forecasted financial statement.
ii. Long range planning (budget) is a plan that involves producing forecasted financial
statements for five-to-ten year periods.
iii. Capital budget: is a budget that details the planned expenditures for facilities,
equipment, new products, and other long-term investments.
- It is coordinated with long-term plans
- It is also made for long-time
iv. Master budget; - is a budget that summarized the planned activates of all sub units of an
individual’s & organization for one year of the long-term plan.
- Some managers pay attention to the day-to-day operation while others emphasize on the
long-term budgets. Thus, a manager, who focuses in between (one year budget), prepares
a master budget.
- A master budget is periodic business plan that includes a coordinated set of detailed
operating schedules and financial statements.
- It includes forecasted sales, expenditures, cash receipts and disbursements and balance
sheets.
v. Rolling budgeter continuous: - budget is a common form of master budget that adds a
month; a quarter or a year in the future e as the month, quarter or the year end is just
dropped.
- It his budgets, managers always think about the 12 moth by considering the past and the
further months.

Budget
Considered
Preparation
Considered

Advantages of budgeting
1 2 3 4 5 6 7 8 9 10 11 12
Budgeting has several advantages. Some of them are:

i. Formalization of planning

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 Planning is an important prerequisite to almost all successful activates. The budgeting process
on the other hand creates a formal planning framework that provides specific, uniform periodic
deadlines for each phase of the planning process.

ii. Provision of frame of reference for performance evaluation

A budget serves as a realistic estimate of acceptable performance for an entity. Thus, it is

used as a standard against which the actual results are compared.

iii. Enhancement of communication and coordination

Ideally, budgets are prepared on participative management style so that the final budget is accepted
by all parties involved (from top to bottom). Thus, each party involved should know & strive to
achieve the set budget through coordination of resources.

Once the mangers clears the goals and objectives of the organization on directives the employees
and lower level mangers informs higher-level managers how they plan to achieve the goals &
objectives. Moreover, budgeting coordinates various section of the company. For example, the
purchasing department with the production department; the production department, with marketing
department; the marketing department, with delivery department; and all departments, with
finance.

iv. Employee motivation

As indicated above, if budgets are prepared by individuals & by employees participation, the
goals and objectives become the individual’s & employee’s goals & objectives. So that the
will strive to active them.

1.2 The importance of setting financial goals is analyzed and discussed

Financial goals may include:
 accumulating a set amount of money by a specified date in the future for the purposes of:
 purchasing assets
 financing holidays, educational expenses, home renovations and other known
future expenses
 establishing a deposit for an investment such as a home or investment property
 aiming to repay existing debts and be debt free
 establishing a regular savings plan
 handling income and expenditure responsibly and avoiding financial difficulties.

Developing goals
You must first determine some of your short-term goals and long-term goals. A short-term goal
can be accomplished within a year. An example of a short-term goal might be to buy a new coat.
A long-term goal would take longer to complete. An example of a long-term goal might be to

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 take a vacation in California. You need to be careful that the money you spend on short-term
goals does not wipe out the money you need for your long-term goals.

Estimating cash
In order to estimate available cash for saving or spending, you must keep track of both income
and expenses. A simple method of keeping track of cash would be to write down daily all cash
earned, and all cash spent. Keeping track of money, you spend will give you the elements to
include in your budget. You must determine what your total income and total expenses are and
make a list of each over a period of at least one month.
For example, Sally takes home $200.00 a month from working at the Weis Markets in town. Her
expenses for the month include clothing - $74.00, gas for her car - $40.00, savings - $60.00.
Sally would keep track of her income and expenses in the following way:

Income: Salary $200.00

Expenses:
Clothing $74.00
Gas 40.00
Savings 60.00
Miscellaneous 26.00
Total $200.00 $200.00
1.3 Obstacles that might prevent financial goals being achieved are analyzed and discussed
with the types of behaviors and skills required for successful budgeting explored and
analyzed
Obstacles that might prevent financial goals being achieved may include:
 being unemployed, particularly long term unemployed
 insufficient income to afford items that are beyond the
 individual's means
 unexpected circumstances such as:
 losing a job
 falling ill
 not being able to work.

 Behaviors and skills required for successful budgeting may include:

 controlled spending
 disciplined approach to money
 organizational skills
 Record keeping skills.

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Four obstacles to financial success
As you begin trying to accumulate wealth, you’ll encounter four major obstacles. The first is the
deadliest, but if you think it’s the economy or taxes, you’re wrong. Your biggest enemy is
yourself. Without question, procrastination is the most common cause of financial failure.
Procrastination
It’s easy to see why financial planning is often postponed.

Spending Habits
Again, the problem is you, not the economy or world politics.

Inflation
Inflation, the most onerous of money’s enemies, is perhaps the best illustration of how the rules
of money have changed.
Taxes
It’s the one we all love to hate: taxes. According to the Tax Foundation,

Priorities
Some people fail to achieve financial freedom because priorities can compete among each other.

Skill
Growing money is a skill that more often than not requires adeptness at applying a certain
amount of know how
Adaptability
Adversity can have a dramatic effect on financial goals, even those with financial know how
Capacity
Different people have varying capacity to obtain financial freedom. Capacity includes skill, but
is not limited to skill.
LO2. Develop a personal budget
2.1 All income and expenses for a six month period are recorded to assist in estimating
expenditure requirements
What is Personalization?

The word personalization is used to describe an approach to social and health care, education and
support services that sees children, young people, or adults as individuals with unique skills,
talents, aspirations, preferences and support needs.

Personalization, also known as ‘self-directed support’, sees individual children and their families
as citizens who are entitled to take control of their lives and be supported in ways which make
sense to them

Role of Budgets

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 • To aid the planning of the individuals or organization in a systematic and logical
manner that adheres to the long term strategy
• To communicate objectives, opportunities and plans various managers.
• To assign responsibilities.
• To allocate resources.
• To delegate without loss of control.
• To provide motivation for managers to achieve goals
• To motivate staff.
• To improve efficiency.
• To establish targets and standards which employees are motivated to achieve
• To evaluate performance against the budget
• To provide a framework for evaluating the performance of managers in meeting
individual and department targets
• To control activities by measuring progress against the original plan, making
adjustments where necessary
• To control income and expenditure
• To facilitates management by exception
• To take remedial action when there is deviation from the plan

What are personal budgets?

are an allocation of funding given to users after an assessment which should be
Personal budgets

sufficient to meet their assessed needs.

Personal budgets, or spending plans, are tools that can help you to meet your financial goals. The
process of building a budget can help you to take a hard look at your priorities and to determine
whether you're on track to reaching your financial goals.

Other terminology

Personal budgets can be confused with individual budgets and direct payments, but these are not
the same.
Individual budgets:
Individual budgets were piloted in a number of local authorities.
They were introduced by the Government to bring together a range of funding that disabled
people may be entitled to such as: social care funding, Independent Living Fund, Supporting
People, Access to Work, Disability Facilities Grant, and Independent Community Equipment
Services. The sum of these separate funds is added together to create the total individual budget
amount that could be spent by the individual.
Direct payments:

A direct payment is a way of receiving a personal budget, in cash, so that you can choose and
buy the support your child needs. Local authorities have a legal duty to offer you a direct

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payment, and would only refuse this if there were specific circumstances where it would not be
in the child or families best interest.

Setting Goals

Goals that motivate and inspire will help you stay on your spending plan. Once the goals are set--
like home ownership or retirement savings, the monthly savings required is entered into the
budget. By making savings plans a part of each month's expenses, depositing your money in a
savings account before other expenses reduce it.

 Financial goals may include:

 accumulating a set amount of money by a specified date in the future for the
purposes of:
 purchasing assets
 financing holidays, educational expenses, home renovations and other known
future expenses
 establishing a deposit for an investment such as a home or investment
property
 aiming to repay existing debts and be debt free

 establishing a regular savings plan

 Handling income and expenditure responsibly and avoiding financial difficulties.

Obstacles that might prevent financial goals being achieved may include:

 being unemployed, particularly long term unemployed

 insufficient income to afford items that are beyond the individual's means
 unexpected circumstances such as:
 losing a job
 falling ill
 Not being able to work.

Behaviours and skills required for successful budgeting may include:

 controlled spending
 disciplined approach to money
 organizational skills
 Record keeping skills.
2.2 spreadsheet for recording all budget information is obtained or developed and
established to record income and expenditure for a relevant period of time

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A spread sheet may:
 be simple or complex depending upon the extent of the individual's finances
 have one section for recording all money received as income and another section for
expenses both variable and fixed
 have a section to record the difference between income and expenses for the period, this
being the surplus or deficit financial situation for the period.
2.3 All sources of income and regular fixed expenses and variable expenses for the specified
period are identified and listed in a personal budget using the budget spreadsheet

Fixed expenses may include:

Fees:
School and university fees
Bank fees
Insurance
Loan repayments (if loan is based upon fixed interest rates)
Such as:
 personal loans
 car loans
 credit card debts
Higher Education Contribution Scheme
public transport
rent
subscriptions to:
magazines
newspapers
clubs
travel including public transport, petrol

Variable expenses may include:

 car maintenance
 living expenses such as:
food
clothing
medical
loan repayments if loan is based upon variable interest rates
miscellaneous expenses such as:
gifts
recreation
entertainment

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 fines
mobile telephone
mortgage repayments
utilities such as:
water
gas
electricity
telephone

2.5 Reasons for a deficit budget are explored if relevant and ways to reduce expenses or
increase income are investigated
Reducing Expenses

Tracking spending habits paves the way to identify ways to decrease expenses. Monthly tracking
can help you to look at the true cost of small and large expenditures, and to decide whether a
daily latte is more important than other financial goals. Often, the act of annualizing an expense
(multiplying a daily expense by 365, a weekly expense by 52 or a monthly expense by 12) can
provide insight in to the true cost of your habits. Ranking expenses in descending order
highlights the relative importance of each expense, the items at the top should reflect your
highest priorities.

 Ways to reduce expenses may include:

 comparing prices for essential items
 monitoring use of utilities such as electricity, gas and water
 moving back home
 reducing expenditure on discretionary items such as
 expensive clothing, magazines, eating out
 share accommodation
 using cheaper modes of transport

Ways to increase income may include:

 combining part-time work with studying
 investigating eligibility for student allowances or other relevant
 government benefits
 taking on a part-time job or holiday work.

 Budget Steps
1. Determine short- and long-range goals.
2. Estimate available cash (income) for spending or savings.
3. Prepare a budget plan.

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 Basic steps for preparing personal budget
The first step in personal financial planning:-
is controlling your day-to-day financial affairs to enable you to do the things that bring you
satisfaction and help you reach your goals.

Personal Financial Plan Step Two - Determine Where You Want To Be Financially

 Set specific, measurable one-year, three-year, and five-year goals as

well as longer-term goals.
 Establish an emergency fund
 Pay off credit card debt.
 Contribute to your employer's retirement plan if there is one.
 Pay off the mortgage.
 Achieve financial independence by a certain age
 Be sure your investments are diversified
 Minimize your taxable income
 Other personal financial goals
 Establish children's college fund

FOUR SIMPLE STEPS FOR SETTING FINANCIAL GOALS

Step 1: Identify and write down your financial goals,

Step 2: Break each financial goal down into several short-term (less than 1 year), medium-term
(1 to 3 years) and long-term (5 years or more) goals.

Step 3: Educate yourself! Read Money magazine, or a book about investing, or surf the Internet's
investing web sites.

Step 4: Evaluate your progress. Review your progress monthly, quarterly, or at any other
interval you feel comfortable with, but at least semi-annually, to determine if your program is
working

2.6 Allocation of surplus funds towards saving and meeting identified financial goals is explored
Financial Information and Skills
Consumers will develop certain skills as they learn to manage their finances and these include:
• Managing – the ability to make informed decisions

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• Planning – the ability to plan for the short term and long term
• Spending – the ability to spend wisely by comparing products and prices
• Borrowing – the ability to understand how debt and credit work
• Investing – the ability to make investments that produce a return

Getting Started – Financial Goals

A good way to get started is to set some financial goals - your goals don't have to be big but
they will help you to focus on what you really want.
Factors that will influence your goals are:
• your age
• your family commitments
• your financial situation
Adjusting your budget
Now is the time for you to make changes to your budget to reduce spend
Be realistic. Be careful not to make plans that you can't achieve. If you plan on achieving your
goals by cutting out all your extras, chances are you won't succeed.
Remember - Taking control of your money doesn't mean you have to restrict your budget to the
are necessities.
Handy Tips for reducing expenses
• Consolidate banking and credit card accounts to save on fees and charges
• Pay off high interest loans first
• Eat out less and take your lunch to work
Handy Tips for increasing income
• Ask for a pay rise
• Get a new job with a higher income
• Work additional hours
Keep your budget up to date
Keep track of your actual expenses and income. It is important to record these figures and
compare them to your budget.

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LO3. Implement and monitor the personal budget
3.1 The budget is followed according to plan for a period of time
Prepare a Budget
Preparing your budget does not have to be complicated and will help you take charge of your
money. Knowing where your money comes from and where it goes is a good starting point
towards reaching your financial goals.
Creating a budget and keeping it up to date really pays off.
A budget will show:
• if you are spending more than you earn
• where you might be able to save money
• how you might be able to make better use of any spare funds
Timeframe
Once you decide on a timeframe, write it down and make sure all your other figures match it. If
larger bills such as Rates are paid annually simply divide the total bill by 12 to reach the monthly
amount.
Fixed and Variable Expenses
Some of your expenses are likely to be fixed which means the amount will be the same every
time you make a payment.
Other expenses will be variable. Payments such as your electricity bill could be different every
time you make a payment. For variable expenses, work out an average amount to match your
budget time frame
Handy hints may include discussing

 how to avoid getting into financial difficulties

 how to minimize fees and charges imposed by financial institutions
 how to use credit card debt effectively
 the problems of impulsive buying, particularly when under peer pressure
 ways to cut back on spending or change negative spending habits.
Building your Budget
There are many tools available to help build your budget. A simple budget can be done with
paper and pen.
If you have access to a computer you could create your budget using software such as
Microsoft Excel.
However there are many budgeting tools available on the web and can be downloaded for free.
Build Your Budget
Build your Budget to match the timeframe you have decided upon.
You don’t have to use the budget planner shown – if you prefer you can create your own
spreadsheet or use paper and pencil – simply use similar categories to those shown in the
example.
Income
Using the information, you have gathered, enter your income in the first part of the budget.

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• Remember to match the time frame you've chosen for your budget
• Stick to regular income like wages and savings interest and use after-tax figures if you can. If
your work is irregular and you don't get the same amount each pay, try to estimate an amount
close to what you are likely to get on average
• Don't include irregular income like a tax refund or an annual Christmas bonus because you may
not get it.
Expenses
Using the information, you have gathered, enter your expenses in the second part of the budget.
• Remember to match the time frame you've chosen for your budget
• You may not have expenses for each category shown – just leave them blank or rename the
expense to suit your budget
• Remember to include loan and credit card repayments
• Don't forget any savings you want to set aside
• Payments into savings should count as expenses in your budget. This will make sure you don't
spend the money on anything else
Work out the difference
Now you have finished building your budget you can clearly see:
• How much regular income you receive
• Where the money goes
• How much money is left once all your expenses are paid (subtract expenses from income)
Adjusting and Planning
Some questions you may want to consider:
• Is the result what you were expecting?
• Does your budget show you are spending more than you earn?
• Are you OK with week-to-week expenses but find yourself scrambling to pay periodic large
bills?
• Perhaps you could be better prepared if you set aside a small amount each budget period.
• Do you want to start saving for a bigger goal, such as a house deposit or an overseas holiday?
• Or do you want to save for the long-term and build up your retirement nest egg?

3.2 Actual expenses and income for the period during which the budget is implemented
are recorded and compared to budgeted expenses and income with any differences in
budgeted and actual amounts looked at and the budget modified where necessary

Don’t include any ‘one off’ sources of income as you may not receive it such as:
• Tax rebates
• Christmas bonus

Expenses
Household Expenses Education Expenses
• Rent • School fees

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• Repairs • University / TAFE fees
• Gas • Tuition
• Electricity • Books / uniforms
• Water • Camps / excursions
• Telephone / mobiles
• Rates
• Internet
• Cable / TV
• Appliances
• Groceries
• Gardening
Debt Repayments Transport Expenses
• Mortgage • Car registration
• Car Loan • Insurance
• Credit Cards • Parking
• Store Cards • Fuel
• HECS payments • Repairs / maintenance
• Lay Bys • Public transport
Personal Expenses Medical Expenses
• Clothes and Shoes • Doctor
• Hair and beauty • Medicines
• Dentist
Insurance Savings
• Home & Content • Superannuation
• Health • Regular savings
• Income protection • Regular investments
• Life
Other Expenses Other Expenses contd..
• Child care • Newspapers and Magazines
• Child support payments • Movies and DVDs
• Gifts • Restaurants and takeaways
• Donations • Alcohol and cigarettes
• Hobbies and Sports • Pet food
• Subscriptions • Other pet expenses

Example 1

Ato Alemu is salaried employee in XYZ manufacturing company in Dire Dawa having net salary
of 750birr per week .in January 2016 the company paid two month net salary bonus for which
employee for their performance in the year 2015.Ato Alemu has fixed and variable expenses for

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the month, fixed expenditures are 100birr for university fee ,200birr for transport ,300birr for
rent and 40 birr for magazines and variable expenses are 50 birr for cloth ,25 birr for mobile card
,100birr for recreation and 70 birr for gas .in order to increase his saving Ato Alemu understand
to changes behavior and plans to decrease variable expenditures by 5%Starting from February
based on the above information perform the following tasks.

Task 1.1 calculate the total amount of saving for the month January 2016.

Task 1.2,Calculate the total amount of saving for the month February 2016.

SOLUTION

Monthly income =750*4=3000

Ato Alemu has 6000 birr bonus January 2016 so his total income is equal to
3000+6000=9000birr

Expenses Fixed expenses

University fee------------------100 birr

Transport expense--------------200 birr

Rent expense --------------------300 birr

Magazine expense --------------40 birr

Total fixed expenses------------=640 birr

Variable expense

Cloth expense -------50birr

Recreational expense -----100

Gas expense-------------------70

Total variable expense =245birr

Total fixed and variable expense=885birr

Task 1.1 Total amount of saving for the month January 2016

9000- 885=8115

Task 1.2.Total amount of saving for the month February?

Income=3000birr

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The variable expense is decreased by 5%=245-(245*5%

=245-12.25=232.75birr

So the total of saving =3000-(640+232.75)

=3000-872.75=2127.25

Example 2

The following data shows yeakob’s personal budget for six months

Item July august sept Oct Nov Dec Total

Food expense 2000 2100 2000 2100 2300 2100
Rent expense 1200 1200 1200 1200 1200 1200
Transport 1000 850 1000 700 900 1000
expense
Overtime 4000 4000 4000 4200 4220 4300
Utility expense 1000 1000 1200 800 800 700
Basic salary 15000 15000 15000 15000 15000 15000
Cloth expense 1000 800 1200 700 1200 800
Part time 2000 2000 2200 1000 1000 2500
Education fee 2300 2300 2300 2300 2300 2300
Required:-prepare budget for yeakob?

Solution:-

Item July august sept Oct Nov Dec Total

Income
Basic salary 15000 15000 15000 15000 15000 15000 90,000
Over time 4000 4000 4000 4200 4200 4300 24,700
part-time 2000 2000 2200 1000 1000 2500 9700
Total 21,000 21,000 21,200 20,200 20,200 21,800 125,400
income
Fixed expense
Rent expense 1200 1200 1200 1200 1200 1200 7200
Education fee 2300 2300 2300 2300 2300 2300 13,800
Total fixed 3,500 3,500 3500 3500 3500 3500 21,000
expense

Variable

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 expense

Food expense 2000 2100 2000 2100 2300 2100 12,600

Transport 1000 850 1000 700 900 1000 5,450,

expense

Utility expense 1000 1000 1200 800 800 700 5,500

Cloth expense 1000 800 1200 700 1200 800 5700

Total variable 5000 4750 5400 4300 5200 4600 29,250

expense

Total expense 8,500 8,250 8,900 7,800 8,700 8100 50,250

Personal 12,500 12,750 12,300 12,400 11,500 13,700 75,150

saving

Formula;

Personal saving=Total net income –Total expense

Total expense=total fixed expense +total variable expense

Example 3.

Ato Biruk is one of the employees of ABC corporation who earns net income of birr 10,000
,30%of his income covers fixed cost and remaining income are allocated (distributed )to the
variable expense and personal saving ,personal saving is 20% of variable expense. for the month
of December2014 .the actual variable expense is 80%of the budgeted variable expenses.

Task 1.1,prepare Budget performance report for the month of December 2014

Task 1.2,calculate total saving at the end of march 2015.

Solutions

Task 1.1.Required:-Budget performance report for the month of December 2014?

Fixed cost =30%(10,000)=3000

Remaining amount =10,000-3000=7000

Variable expense (VE)+personal saving (PS)=7000

PS=20%VE=0.2VE

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VE+0.2VE=7000/1.2

VE=5833.33

PS =20%(5833.33)

=1166.67

Actual variable expense (AVE)=80%(5833.33)=4666.67

Budget surplus =5833.33-4666.67saved

Ato Biruk

Budget performance report

For the month ended Dec,2014

Description Budgeted Actual Difference

amount budget
income
Net income 10,000 10,000 -
Total 10,000 10,000 -
income
Expense

Fixed cost 3000 3000 -

Variable 5833.33 4666.67 1166.67
expense
Total 8,833.33 7,666.67 1166.67
expense
Personal 1,166.67 2333.34 1166.67
saving
Task 1.2 prepare personal budget report of march 2015?

His income will increase by 15%from February 2015

Net income =10,000+15%(10,000)

=10,000+1500=11,500

Fixed expense (FE0=30%(11,500)=3450

Remaining =11,500-3450=8050

Variable expense(VE)+personal saving (PS)=8050

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VE+20%VE=8050/1.2VE=6708.33

PS=20%(6708.33) PS=1341.67

Personal budget report of Ato Biruk for march 2015

For the month of march 2015

Description Amount
Income
Net income 11,500
Total income 11,500
Expense
Fixed expense 3,450
Variable expense 6708.33
Total expense 10,158.33
Personal saving 1,341.67
Task 1.3 required total saving at the end of march 2015

Since his income increase by 15%Strarting from February 2015

Net income =10,000+15%(10,000)

=10,000+1500=11,500

Fixed cost =30%(11,500)=3450

Remaining =11,500-3450=8050 VE +PS =8050VE+20%VE=8050

8050/1.2VE=6708.33

PS =20%(6708.33)PS=1,341.67

AVE=80%(6708.33)=5,366.67

Total expense =fixed expense +variable expense =3450+5,366.67=8,816.67

Personal saving =Net income –expense

Personal saving of February =11,500-8816.67=2683.33

Saving of march

Total saving at the end of March 2015 is equal to the summation of

December month saving -----------2,333.34

January month saving ---------2,333.34

21
February month saving --------2,683.33

March month saving ---------2,683.33

Total actual at the end of March 2014 ---------10,033.34

LO4.Discuss the place of saving and investing today

4.1.The impact of increasingly high cost of living in society
Definition

Saving will have different meanings. The following are the most frequently stated definitions.

 The portion of disposable income not spent on consumption of consumer goods but
accumulated or invested directly in capital equipment or in paying off a home
mortgage, or indirectly through purchase of securities.
 Saving is putting away or storing money for future use. Depending on what you want to
save for, you can put money away for a short or long time, for example, saving for a
fridge can take a number of months, whereas saving for your retirement will take much
longer.
 Savings is the portion of income not spent on current expenditures. Because a person
does not know what will happen in the future, money should be saved to pay for
unexpected events or emergencies.

There is some disagreement about what counts as saving. For example, the part of a person's
income that is spent on mortgage loan repayments is not spent on present consumption and is
therefore saving by the above definition, even though people do not always think of repaying a
loan as saving. "Saving" differs from "savings." The former refers to an increase in one's assets,
an increase in net worth, whereas the latter refers to one part of one's assets, usually deposits in
savings accounts, or to all of one's assets. Saving refers to an activity occurring over time, a flow
variable, whereas savings refers to something that exists at any one time, a stock variable. Saving
is closely related By not using income to buy consumer goods and services, it is possible for
resources to instead be invested by being used to produce fixed capital, such as factories and
machinery. Saving can therefore be vital to increase the amount of fixed capital available, which
contributes.

Benefits of Saving

The monetary objectives of an individual or organization that are often determined by their
future requirements of fund. For a business, its financial goals can be expressed as part of an
overall financial plan that might include profit targets, projected borrowing requirements,
covering operating expenses, and developing a debt payback schedule

22
  Saving gives you financial freedom as you do not need to rely on other people or
financial institutions for money. You will always have enough for your needs.
 Saving gives you buying power i.e. you can buy things that you need for cash, which
works out cheaper than buying on credit.

 You can get more money if you save with a financial institution because they will pay
you interest on the money you save.

Reasons for saving

1. Protects your family in case of a job loss
2. Provides reserves for health or other family emergencies
3. Gives you the ability to pursue attractive investment opportunities as they come along
4. Helps you negotiate lower prices on major purchases
5. Keeps you from losing money since you won’t need to sell other investments during
down markets
6. Allows you to avoid tax penalties by having to pull money out of retirement accounts too
early
7. Reduces stress which increases health and well being
8. Eliminates numerous marital arguments
9. Creates a cushion to use for major household repairs
10. Enables you to pursue bargain buying at someone else’s expense (someone who
desperately needs cash)

Where to save?

Banking institutions

Are a financial institution and a financial intermediary that accepts deposits and channels those
deposits into lending activities, either directly by loaning or indirectly through capital markets. A
bank is the connection between customers that have capital deficits and customers with capital
surpluses.

Post office savings account

Post office savings accounts are especially suited for those living in rural and semi-rural areas
where the reach of banks is limited

Savings club (credit associations): is saving associations of individuals having the similar or
common future goals.
23
Insurance companies:

The basic function of insurance is a means of protection against economic loss. An arrangement ,
which relieves the individual from the uncertainty of the future and the attendant anxiety by
assuring adequate compensation for losses that he might suffer. To obtain the insurance coverage
individuals or organizations should save their money within insurance companies by purchasing
an insurance policy.

Retirement/Pension funds

Employees or other ordinary individuals may keep aside some amounts of money to fulfill the
basic needs at the time of retirement. It is a different type of retirement plan. It offers a set
monthly contribution that is based on the length of service and your salary. Some pension plans
have you make set monthly contributions, while others are fully funded by the employer.

How to Save

 Set a savings goal for yourself by deciding what you want to save for.
 Determine how much the item you want to save for costs and work out how much you
will need to save and for how long, to be able to afford it (savings plan).
 Save whatever amount you can afford. (it is advised that from the total net income 10-
20 percent should be saved.
 Decide how often you will save e.g. if you earn a weekly wage, you can save weekly
and if you earn a monthly salary, you can save monthly.
 Save instead of spending your money on items that you do not necessarily need.
 Shop around for bargains and compare prices before making a purchase.
 If saving on your own is difficult, join a savings club or group or start one. Knowing
that everybody else in your club or group is putting money aside and expecting you to
do the same will encourage you to save regularly.
 Decide where you will keep the money that you save. Different financial institutions
offer a variety of savings products for different periods (short or long term) and with
different interest rates. Ask for their advice and choose the right product for your
savings plan.
 You earn an interest on savings, but depending on how you save there can also be fees
and charges related to it. Ask for the fees and charges of different savings options
before deciding for a savings product.
 Keep record of your savings

4.2.Increasing levels of consumer debt in Ethiopia

Definition of 'Consumer Debt'
Debts that are owed because of purchasing goods that are consumable. Possessing high levels
of consumer debt is not typically beneficial for the average individual because it increases the
tension on one's sources of income to maintain regular payments. If not managed well, consumer

24
debt can lead to bankruptcy. Consumer debt is a broad term that covers all types of consumer
credit that is currently outstanding. It may include the following.

 credit card debt

 mobile telephone debt
 mortgages on residential and investment properties
 personal loans to purchase:
 motor vehicles
 travel
 store credit
 Student loans including the Higher Education Contribution Scheme.

Consumer debt may refer to:

credit card debt
mobile telephone debt
mortgages on residential and investment properties
personal loans to purchase:
 motor vehicles
 travel
 domestic white goods
store credit
student loans including the Higher Education Contribution Scheme.

4.3 The importance setting financial goals and developing a saving

Financial goals may include:

accumulating a set amount of money by a specified date in the future for the purposes of:
purchasing assets
financing holidays, educational expenses, home renovations and other known future
expenses
establishing a deposit for an investment such as a home or investment property
aiming to repay existing debts and be debt free
establishing a regular savings plan
handling income and expenditure responsibly and avoiding financial difficulties.

Developing a Spending/Savings Plan

25
A spending/savings plan helps you manage your money more effectively. A realistic plan
tailored to your situation gives you more control over how money is spent and saved. Developing
a spending/ savings plan takes time. Following it takes determination.
Talking About Money
Money is a common problem regardless of your income, age or education. Sometimes a lack of
income causes money hassles and arguments. More often inadequate discussion about money
and our feelings about money is the root of financial problems.
When household members have different attitudes about spending and saving money, or when
unrealistic goals are attempted, there is a potential for conflict. Preventing and overcoming
money problems takes honest and open communication. It also takes time and effort.
Be willing to arrange a specific time when all household members can talk about money. Choose
a location where you won’t be interrupted. Meet on a regular basis instead of waiting until
problems
When talking about money:
✓clearly identify the issue at hand.
✓ Recognize that whoever earns the money doesn’t also earn the right to dictate how it should
be spent.
✓Let each household member freely state wants, needs and personal feelings.
✓ Listen carefully.
Communication about money is critical for a spending/savings plan to work for the entire
household. When people don’t talk about money, even the most workable spending/savings plan
may face ruin.

Step 1 Identifying Goals

The first step of developing a spending/savings plan is to identify your goals.Goals may include
saving for emergencies, buying school clothes, paying off the balance on a credit card, buying a
new or used car, or saving for a child’s education.
Short-term Goals - Less than 1 year

26
Intermediate Goals - From 1 to 5 years

Long-term Goals - More than 5 years

Step 2 Setting Goals

During Step 2 of developing a spending/savings plan you'll be deciding on the goals you want to save
toward.

Priority Goal(s) Target Date Total Monthly Adjusted

saving monthly saving
Amount

12months birr1200.00 birr100.00 birr

September 20
1. Example: Down
payment for a car

2. Emergency Fund

3.

Total Monthly Savings/Adjusted Monthly Savings

Step 3 Recording Income

Step 3 of developing a spending/savings plan involves knowing how much income you have.

27
Monthly Income Chart

Wages/Salary (Take-Home birr

Savings/Investments birr

Child Support birr

Other birr

Other birr

Other birr

Total Monthly Income birr

Step 4 Determining Expenses

 Step 4 A Recording Monthly Expenses

 Step 4BRecording Periodic Expenses
Step 5 Developing Your Spending/Savings Plan

The outcome of Step 5 is to have Income = Savings + Expenses. Let’s see if your income equals
your savings and expenses.
Fill in the blanks:
Monthly Savings from Total Monthly Savings
Monthly Expenses from Monthly Grand Total of Expenses
Periodic Expenses from Periodic Monthly Grand Total
Total Monthly Savings + Expenses = birr

What are the things you want to save and invest for?
 a home
 a car
 an education
 a comfortable retirement

28
  your children
 medical or other emergencies
 periods of unemployment
 caring for parents

Why Open a Checking or Savings Account?

 Safety Carrying cash on payday or keeping large amounts of money at home can
make you a target for robbery and assault. Protect your family’s future and well-
being. Open a bank or credit union account. There are people ready to help you, and a
bank account comes with many other benefits.
 Money You may be spending a lot of money every year cashing checks or buying
money orders to pay your bills. A checking or savings account will help you better
control your budget and will allow you to pay bills directly without having to use
money orders.
 Credit Banks and credit unions make loans for cars, homes and many other items—
but first, you have to establish credit. Opening a checking or savings account is the
first step to establishing credit and making the dream of owning a home or new car
come true.
 Education Saving for your children’s college education is the most important thing
you can do to help them secure a bright future. Banks and credit unions offer options
for financing a college education—and savings accounts to help you make that goal a
reality.
 Convenience When making purchases at the supermarket, department store or
pharmacy, you can use a debit card or automated teller machine (ATM) card instead
of carrying cash or writing checks. It is the same as using cash but safer and more
convenient. Also, with an ATM or debit card, you have access to your money from
cash machines around the world.
Financial goals may include:
 accumulating a set amount of money by a specified date in he future for the
purposes of:
 purchasing assets
 financing holidays, educational expenses, home renovations and other known future
expenses
 establishing a deposit for an investment such as a home or investment property
 a aiming to repay existing debts and be debt free
 establishing a regular savings plan
 Handling income and expenditure responsibly and avoiding financial difficulties.

29
4.4 Attitudes to savings and investment

The attitudes towards saving and investment are highly different from individuals to
individuals. Some may believe it is essential in order to manage their money and achieve
future financial goals and others may lack interest in or the discipline to save and therefore
live from one pay packet to the next others occasionally think about saving but who do not
take active steps to save.

KNOW YOUR CURRENT FINANCIAL SITUATION

Sit down and take an honest look at your entire financial situation. You can never take a journey
without knowing where you’re starting from, and a journey to financial security is no different.
You’ll need to figure out on paper your current situation—what you own and what you owe.
You’ll be creating a “net worth statement.” On one side of the page, list what you own. These are
your “assets.” And on the other side list what you owe other people, your “liabilities” or debts.

KNOW YOUR INCOME AND EXPENSES

The next step is to keep track of your income and your expenses for every month. Write down
what you and others in your family earn, and then your monthly expenses.
FINDING MONEY TO SAVE OR INVEST

If you are spending all your income, and never have money to save or invest, you’ll need to look
for ways to cut back on your expenses. When you watch where you spend your money, you will
be surprised how small everyday expenses that you can do without add up over a year.

KNOW YOUR INCOME AND WHAT YOU SPEND

Monthly Income ________________

Monthly Expenses
Savings ________________

Investments ________________

Housing ________________

Rent or mortgage ________________

Electricity ________________

30
Gas/oil ________________

Telephone ________________

Water/sewer ________________

Property tax ________________

Furniture ________________

Food ________________

Transportation ________________

Loans ________________

Insurance ________________

Education ________________

Recreation ________________

Childcare ________________

Health care ________________

Gifts ________________

Other ________________

TOTAL ________________

Attitudes to savings and investment differ and may encompass those who:
o believe it is essential to manage their money and achieve
future financial goals
o lack interest in or the discipline to save and therefore live
from one pay packet to the next
o Occasionally think about saving but who do not take active
steps to save.

LO5. Understand risk as it relates to saving and investing

At the end of the Unit the trainee must be able to understand: -

 The concept of risk and risk versus return is explained and demonstrated
 An individual's risk profile is determined based on current and future requirements
and the individual's level of risk aversion
 The impact of inflation on the earnings power of money is identified, assessed and
discussed.
2.1 The concept of risk and risk versus return is explained and demonstrated
What is risk?

31
 There is no single definition of risk. Many writers have produced a number of definitions of
risk. These are usually accompanied by lengthy arguments to support the particular view they put
forward. Economists, behavioral scientists, risk theorists, statisticians, and actuaries each have
their own concept of risk. Some of these definitions are forwarded for your consideration.

 Risk is potential variation in outcomes. When risk is present, outcomes cannot be

forecasted with certainty. William, Smith and Young
 Risk is the variation in outcomes that could accrue over a specified period in a
given situation.
 Risk is the condition in which there is a possibility of adverse deviant from desired
outcome that is expected or hoped for.
However, looking at the definitions, there does seem to emerge some kind of common
thread running through each of them.

Firstly, there is the underlying idea of uncertainty, what we have referred to as doubt about
the future.

Secondly, there is the implication that there are differing levels or degree of risk. The use
of words such as possibility and unpredictability, do seem to indicate some measure of
variability in the effect of this doubt.

Thirdly, there is the idea of a result having been brought about by a cause or causes. This
does seem to tie in nicely with the working definition we used earlier of uncertainty about
the outcome in a given situation.

5.2.An individual's risk profile is determined based on current and future requirements
and the individual's level of risk aversion

Risk Profile:- Refers to the level of risk an individual is comfortable with when investing
the money.
Risk Management is the executive function of dealing with specified risks facing the
business enterprise. In general, the risk manager deals with pure, not speculative risk.The
risk manager has certain specific duties. These include:

1. To recognize exposures to loss; the risk manager must, first of all, be aware of the
possibility of each type of loss. This is a fundamental duty that must precede all other
functions.
2. To estimate the frequency and size of loss; to estimate the probability of loss from
various sources.

32
 3. To decide the best and most economical method of handling the risk of loss, whether it
be by assumption, avoidance, self-insurance, reduction of hazards, transfer, commercial
insurance, or some combination of these methods.
4. To administer the programs of risk management, including the tracks of constant
revaluation of the programs, record keeping and the like.

The concept of risk versus return refers to the general truth that:
 the higher the risk of the investment, the higher the expected return
 the lower the risk of the investment, the lower the expected return.

5.3 The impact of inflation on the earnings power of money

Meaning of Inflation

This is a controversial term to define and had undergone modifications since it was first defined
by the neo-classical economists. The following definitions were given:

 Friedman  Inflation is always and everywhere a monetary phenomenon---and can be

produced only by a more rapid increase in the quantity of money than output. He also
defined it as process of a steady and sustained rise in prices.
 Ackley  Inflation is a persistent and appreciable rise in the general level or average of
prices
 Johnson  Inflation as a sustained rise in prices.
 Professor Growther Inflation is a state in which the value of money is falling i.e., prices
are rising.
 Pigou  Inflation exists when money income is expanding more than in proportion to
income earning activity.
 Professor Paul Einzig Inflation is a state of disequilibrium in which an expansion of
purchasing power tends to cause, or is the effect of an increase of the price level.
 Keynes  So long as there is unemployment, employment will change in the same
proportion as the quantity of money and when there is full employment, prices will
change in the same proportion as the quantity of money. He does not deny that prices
may rise even before full employment but such a phenomenon he called “semi inflation”
or “bottleneck inflation”. True inflation, according to him is, after full employment is
reached.

All these definitions attach inflation with quantity supply of money. When there is an over-
expansion of money supply and too much money chasing too few goods, inflation occurs.
However, any rise in price level should not be taken to mean inflation. No doubt, price rise is an

33
 important feature of inflation, but it does not mean and always reflect inflation, as prices in a
dynamic economy do rise on account of other factors also. Inflation may sometimes occur
without a rise in prices. For example, when productivity increases, cost of production may fall
while prices are kept stable.
The main characteristics of Inflation

Some of the salient features of inflation are discussed as follows.

1. It is a long-term operating dynamic process.

2. It is a process of persistently rising price level
3. Inflationary price rise is persistent and is irreversible within a short time.
4. A cyclical movement is not inflation. It is a rising trend in the price level.
5. It is endogenous to the economic system. It is born within the economic system and is fed
by the action and interaction of economic forces.
6. It is fostered by the interaction of a multitude of economic factors
7. It is also a monetary phenomenon (by monetarists like Friedman)
It is characterized by an overflow of money and credit. The root cause of inflation is the
expansion of money supply beyond the normal absorbing capacity of the economy.

8. It in a real sense is a post-full employment phenomenon (Keynesian). Pre-full

employment situation as money supply increases, investment, employment, income,
expenditure, productivity increases proportionately. But after/post-full employment, as
money supply increases, investment, employment, productivity remains constant and
income increases which push price of goods and services up wards i.e., large amount of
money chasing a limited quantity of goods and services. If this situation stays long, that
will be inflation.
LO6.Develop your own savings plan

6.1 Personal savings goals are identified and quantified into dollar amounts and arranged in
order of priority
A spending/savings plan helps you manage your money more effectively. A realistic plan
tailored to your situation gives you more control over how money is spent and saved. Developing
a spending/ savings plan takes time. Following it takes determination.
Talking About Money
Money is a common problem regardless of your income, age or education. Sometimes a lack of
income causes money hassles and arguments. More often inadequate discussion about money
and our feelings about money is the root of financial problems.
When household members have different attitudes about spending and saving money, or when
unrealistic goals are attempted, there is a potential for conflict. Preventing and overcoming
money problems takes honest and open communication. It also takes time and effort.

34
Be willing to arrange a specific time when all household members can talk about money. Choose
a location where you won’t be interrupted. Meet on a regular basis instead of waiting until
problems.
When talking about money:
 Clearly identify the issue at hand.
 Recognize that whoever earns the money doesn’t also earn the right to dictate how it
should be spent.
 Let each household member freely state wants, needs and personal feelings.
 Listen carefully.
Communication about money is critical for a spending/savings plan to work for the entire
household. When people don’t talk about money, even the most workable spending/savings plan
may face ruin.
Identifying Goals
The first step of developing a spending/savings plan is to identify your goals. If your goals are
identified first, all your money won't be spent with little or none saved. By identifying goals first,
you will realize what you want to save toward and it will get you in the habit of saving. Goals
may include saving for emergencies, buying school clothes, paying off the balance on a credit
card, buying a new or used car, or saving for a child’s education etc.

Encourage each member in your household to think of goals, including short-term (less than 1
year), intermediate (1-5 years) and long-term (more than 5 years). List all the goals from each
person in the household in the "Identifying Goals Chart" below

Identifying Goals Chart

Short-term Goals - Less than 1 year

1.___________________________ 5.___________________________
2.___________________________ 6.___________________________
3.___________________________ 7.___________________________
4.___________________________ 8.___________________________
Intermediate Goals - From 1 to 5 years
1.___________________________ 5.___________________________
2.___________________________ 6.___________________________
3.___________________________ 7.___________________________
4.___________________________ 8.___________________________

Long-term Goals - More than 5 years

1.___________________________ 4.___________________________
2.___________________________ 5.___________________________
3.___________________________

35
6.___________________________
7.___________________________
8.___________________________

Setting Goals
You need to decide what you want to achieve and then define that as your goal. When setting
goals it is important to be specific.
Your goals should be measurable so that you can assess your progress. It is harder to determine
your success if your goal is “to do well” in first year economics than if your goal was to “get an
A” in first year economics. Your goals should be challenging but realistic. If you can never
reach your goals you will become discouraged and want to give up. It is reaching goals that keep
you motivated to set higher goals for yourself.

36
It is very helpful to write out your goals and put them someplace visible, such as your bulletin
board over your desk. Then, when you are feeling overwhelmed by the amount of reading that
you have to do or if you are struggling with an assignment, looking up at your goals will help
you to refocus and be motivated again toward meeting those goals. If you only have your goals
listed in your head it can be too easy for you to forget them or to modify them based on how you
are feeling.
6.2 A personal budget is developed to reveal funds available to contribute towards savings
goals

Budgeting A budget is a plan to allocate resources towards living expenses, debt payment, and
savings. Its purpose is to allow the user to allocate resources in a manner that can achieve one’s
financial goals and objectives. A budget should be simple yet specific, flexible but defined. The
financial planner will review your current budget and/or suggest a new one.

What are your top financial concerns?

1. What if I lose my job?

 Increase emergency savings. If you're worried you may lose your job, save more today.
 Consider part-time and project work if you're unemployed, rather than waiting for the perfect full-
time job.
 Create more income with a second job.
2. How can I get out of debt?

 Pay off your credit card debt with the highest interest rate first.
 Reduce the interest rate on your credit card debt. See if you can qualify for a balance transfer to
move a balance from a higher-rate account.
 Take on more work, then use the extra income to pay down debt.
3. How can I control health care costs?

 Be fee conscious. If you need tests or medication, talk to your health care provider about your
lowest-cost options.
 Consider a high-deductible insurance plan. If you're in good health, a plan with a higher deductible
will charge a lower annual premium.
 Check if you're eligible for a Health Savings Account; it's a valuable tax-deferred way to save for
medical expenses.
4. How can I build my savings?

 Make it automatic. It's easier to save when you have automatic transfers set up.

37
  Scour your budget and reduce unnecessary expenses.
 Ask your bank how to limit monthly maintenance fees on your checking and saving accounts.
5. Will I have enough for retirement?

 Calculate your savings goal for retirement.

 Save automatically: payroll deductions through a 401(k) at work are a great way to save.
 Increase your savings a little each year. If your 401(k) contribution is 4% of this year's salary, raise
it to 5% next year. Keep up the annual increase until you save 10% to 15% of your income.
6. How can I pay for college?

 Know your savings priorities: retirement first, college second.

 Set aside savings in a 529 College Savings Plan, and withdrawals can be tax-free.
 Borrow smart. Students should borrow first with a Federal Stafford loan; the top fixed rate is 6.8%.
7. Can I cut gas and transportation costs?

 Join a carpool, use public transportation, or ask to telecommute once a week.

 Keep your car in tip-top shape. A well-tuned car will have better gas mileage.
 Trade in the gas-guzzler. Before you shop, call your insurance agent and ask which car models
have the lowest insurance premiums.
If you have other financial challenges, review the articles on learn.bankofamerica.com to see if we have
solutions to your money problems. And talk with your friends, family and financial advisors for ideas on
improving your financial security.

6.3 The range of financial product options available to maximize earnings on savings are
investigated and the most appropriate is selected according to own requirements
Product options may include:
 basic savings account
 cash management trusts
 fixed term deposits
 investments in debentures and secured and unsecured stock
 Online bank accounts offering higher rates of return.

38
LO7.Implement your own savings plan.

Learning outcome: At the end of the Unit the trainee must be able to:-

 The requirements to open an account and provide evidence of personal identity are
researched and steps taken to gather the necessary documentation
 Relevant savings accounts or other investigated financial products are opened and the
savings plan implemented and monitored for a short period of time
 Adjustments to the savings goal are made where it is realized that the goal is unattainable

The Savings Plan Information Sources

The Savings Plan makes saving easy. It lets you manage your account over the telephone through
a voice response unit, by speaking with a Participant Services representative, or by using the
plan’s website.

By calling Participant Services, you can:

• check your account balance and investment performance,
• Transfer between investment funds,
• request a withdrawal,
• update or change benefit or
• update or change personal information.
Elements of financial plan
The elements of a complete financial plan are as depicted in the chart and described below….
Budgeting
A budget is a plan to allocate resources towards living expenses, debt payment, and savings. Its
purpose is to allow the user to allocate resources in a manner that can achieve one’s financial
goals and objectives. A budget should be simple yet specific, flexible but defined. The financial
planner will review your current budget and/or suggest a new one.
College Planning
Planning for the expense of college, whether for oneself, a child, or grandchildren is often the
most pressing issue in financial planning due to the high (and rising) cost of a secondary
education. The financial planner will help you determine the projected costs of attending college
and suggest methods for meeting those costs.
Insurance
Insurance planning considers the risks one faces in life (financial, personal, health, and property)
and considers the many methods available to minimize those risks. The financial planner will
review your current policies and help determine if you are adequately covered.

39
Investments

Investments can help us achieve our goals but they also carry their own unique set of risks. The
financial planner will review your current holdings in light of your risk tolerance and objectives
and will help you establish appropriate asset allocation targets. Depending upon the scope of the
relationship, the planner will work with you to manage your investments.

Taxes

Tax planning is a critical element of financial planning. The proper use of investments and
planning tools can help to minimize the impact of taxes on an individual or family’s
finances. The financial planner can work with your tax advisor to measure the impact of taxes
on your finances and to offer suggestions to reduce that impact.

Retirement Planning

Other than planning for the expenses of college, retirement planning is often cited as the most
important element that people are concerned about. Helping clients meet their goals and
objectives for retirement is an integral part of the financial planning process. The planner will
work with you to determine your ability to achieve your goals and objectives. The planner will
thoroughly review your retirement accounts and offer suggestions for maximizing the impact
those, and other, tools may have on your retirement.

Estate Planning

Effective estate planning can help you control the eventual distribution of your assets in the
manner that you desire and can help minimize the effect of taxes upon your estate. Without
proper planning your estate could end up costing you more in taxes than necessary and/or end up
being distributed in a manner inconsistent with your desires. While we cannot practice law, we
can work with you and your legal advisors to make sure that your plans are carried out as you
wish.

Documents required opening a local currency accounts (Savings and Demand Deposit
Accounts)

 Individual (s)
 One valid and renewed I.D. card.
 Two recent passport size photographs for savings account and one for demand
deposit account.

 Individual trader (sole proprietorship)

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  One valid and renewed I.D. card
 Renewed trade license
 One recent passport size photograph
 Tax Identification Number(TIN)
 Private Limited Company
 Renewed trade license in the name of the company.
 Memorandum and article of association attested, registered and sealed by the civil status
documentation and registration office.
 Letter of request to open and operate the account, which shall be signed by the authorized
person stated in the memorandum and article of association and bears the
companyofficial stamp.
 Valid and renewed I.D. card of the authorized person to operate the account.
 Tax Identification Number (TIN).

Organizations legally incorporated in the form of:

 Partnership
 Renewed trade license and investment certificate in the name of the partnership.
 Partnership agreement attested, registered and sealed by the Civil Status Documentation
and Registration office.
 Letter of request to open and operate the account, which shall be signed by the official
stamp of the partnership, if any.
 Valid and renewed I.D. card of the authorized person to operate the account.
 Tax Identification Number (TIN)

 Share Company
 Renewed trade license in the name of the share company
 Memorandum and article of association attested, registered and sealed by
 Documents Authentication and Registration Office
 Minutes of the board of directors with regard to the opening and operating of the account.
 Letter of request to open and operate the account, which shall be signed by the board
chairman and bears the company seal.
 Valid and renewed I.D. cards of the authorized person to operate the account.

Deposits Type

Special Demand Deposit Account

Description

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  Special Demand Deposit Account (SDDA) is a non-interest bearing deposit account
operated by a saving like passbook and vouchers.

Features

 A non-interest-bearing deposit account.

 The initial deposit for opening a Special Demand Deposit Account is Birr 50.

Benefits

A deposits account service for those customers demanding non-interest bearing saving deposit
account.

Eligibility

 Individuals
 Trade operators
 Organizations
 Cooperatives and associations
 Domestic banks
 Financial institutions
 Government Local/Central
 Private sector
 Public Agencies and Enterprises.
Documents Required
 Valid Identity Card acceptable to the Bank and three passport-size
photographs.
Acceptable ID Cards to the Bank is:
 Kebele ID Card
 Farmers Association ID Card
 Employing Organization ID Card
 School, College, and University, ID Card renewed for the current
academic year
 Driving License
 Valid Passports
 Work or Resident Permit
 Foreign National of Ethiopian Origin Identification Card along with a
valid passport.
 All the above types of ID Cards should be renewed as long as they are
renewable.

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7.2 Relevant savings accounts or other investigated financial products are opened and the savings
plan implemented and monitored for a short period of time
Saving Account
Description
It is an interest-bearing deposit account.
Features

 Opened with an initial deposit of Birr 50.

 Rate of interest on saving account is 3% per annum.
 Interest will not be paid on balances below Birr 50.
 Interest is computed on the minimum outstanding balance of each month.
 Interest is paid half-yearly in June and December.

Benefits
Among the several reasons for people to save their money, the following are some:

 To consume in the time of emergency.

 To purchase expensive goods.
 To earn interest by depositing in the bank.

Eligibility

 Individuals and organizations.

 Resident and non-resident.
 Non-literates and minors.

Documents Required

 Valid Identity Card acceptable to the Bank and three passport-size

photographs.

Acceptable ID Cards to the Bank are:

 Kebele ID Card
 Farmers Association ID Card
 Employing Organization ID Card
 School, College, and University, ID Card renewed for the current
academic year
 Driving License
 Valid Passports
 Work or Resident Permit

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  Foreign National of Ethiopian Origin Identification Card along with a
valid passport.
All the above types of ID Cards should be renewed as long as they are renewable.
Types of Savings Account
Private
 Individual Persons’ Accounts
 Literate
 Non-literate persons
 Blind Customers Accounts.

Company Accounts
Accounts of Churches, Mosques, Missions etc.
Earmarked Accounts

 Club Accounts
 Private Accounts
 Idir Accounts.

Special Accounts

 Tutor accounts are opened in the name or names of minors followed by

the word “minor” or “minors.”
 Liquidators’ account is opened in the name of a person or company but
appointed by court as liquidator in bankruptcy.
 Interdicted accounts are saving accounts opened in the name of the
interdicted person.
 Staff accounts are saving accounts like the individual accounts opened for
the employee of the Bank.

Non-Private Accounts

 Thrift and credit co-operatives society.

 Mandate file is a must to open such an account.
 The opening of such accounts must first be approved by a regional
organization of the co-operatives, and the approval letter, indicating the
names of the persons authorized to operate the account, must be submitted
to the Bank.

Fixed Deposit

Description

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 A time-deposit account is a deposit account that bears interest based on the
duration of the deposit.

Features

 No restriction as to the initial deposit.

 Minimum deposit period three months.
 Granted repayment of principal and interest at agreed rate.

Benefits

 Interest rate is unaffected for the duration of the deposit, irrespective of

market fluctuations.
 Safety of principal and deposit.
 No maximum limit for deposit.
 Premature withdrawals permitted at no rate of interest.

Eligibility

 Individuals
 Sole-proprietorship
 Partnership.

 Documents Required
 A valid Identity Card (I.D) acceptable to the Bank.
 Acceptable ID Cards to the Bank are:
 Kebele ID Card
 Farmers Association ID Card
 Employing Organization ID Card
 School, College, and University, ID Card renewed for the
current academic year
 Driving License
 Valid Passports
 Work or Resident Permit
 Foreign National of Ethiopian Origin Identification Card
along with a valid passport.
 All the above types of ID Card should be renewed as long as they are
renewable.

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 Current Account

Description

A non-interest bearing deposit account that is operated by checks.

Features

A non-interest-bearing deposit account with a check book facility.

It can be interchangeably called “checking account” or “demand deposit.”
 Overdraft facility permitted.
 The initial deposit for opening a current account for:
-An individual is Birr 500.
-Private Sector, Public Agencies, Enterprises, Cooperatives, Government, International
and other mass organizations Birr 1,000.

Benefits

 Enhances business transactions

 Decreases circulation of money
 Strengthens credit system
 Facilitates documentation of flow of fund and enterprises.

Eligibility

 Individuals and organizations.

 Resident and non-resident.
 Non-literates and minors.
 Documents Required

-Proper Identification Card.

-Photocopy of trade license for trade operators.

-Certificate of registration, rules and regulations of the associations, and

minutes of the resolution of the members for cooperatives and
associations.

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 -License from the National Bank of Ethiopia for domestic banks.

-For public agencies and enterprises, the Chairman of the Board of the
enterprise should produce a letter of appointment from the Public
Enterprises Supervising Authority.

Classification of Demand Deposit

As per the chart of accounts of the Commercial Bank of Ethiopia, demand deposits are
classified under the following categories:

2. Demand Deposit Non-resident

 Correspondents their Accounts
 Non-Resident Foreign Currency Account (NRFCY)
 Non-Resident Non-Transferable Birr Account (NRNT)
 Non-Resident Transferable Birr Account (NRT).
3. Demand Deposit Resident

Cooperatives and Associations: accounts opened for mass organizations such as Kebeles,
Farmers Association, Trade Unions, Savings and Credit Associations, etc. are classified under
the above categories.
Domestic Banks: accounts of local banks are included in this category. A license from the
National Bank of Ethiopia should be obtained to open accounts for commercial banks.
Financial Institutions: These are accounts of insurance companies. Government Accounts:
(Local and Central) all accounts opened in the names of Ministries (Offices, Bureaus) budgetary
and town developments of municipalities are classified under this account. The authority to open
these accounts emanates from either the local or the central Finance Bureau and local or central
urban development and housing offices.
Private Sector: the following demand deposit accounts are subsumed under this account.

 Private individuals
 Private companies
 Ikubs, Edirs, Religious Private and International Organizations.

Public Agencies and Public Enterprises: The chairman of the Board of the enterprise should
produce a letter of appointment from the Public Enterprises Supervising Authority.

The End!

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