30 August 2022

Planning and Budgeting

Mariam Ter-Sahakyan
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 Personal Finance Pyramid

INDEPENDENCE

Adapted from Personal Finance Pyramid, Wendall Kerr 2

 One of the most common financial mistakes is no
planning and budgeting. As a result:
• We worry about running short of money each
month, about unexpected emergencies,
• We are stressed because of missed opportunities
…

“Too many people spend money they

haven’t earned, to buy things they don’t
want, to impress people they don’t like.”
3
Will Smith
 PERSONAL FINANCE MNGT

Plan & Budget

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 PERSONAL FINANCE MANAGEMENT

Current Situation Risk Management

• SMART • Budget
• Balance • Tools
Sheet

Goals Plan

5
 GOALS

GOALS
Define where you want to go,
setting the goals

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 Identifying the values

Your Values Your Vision Your Mission Your Goals

Values drive Vision; Vision

drives Mission; Mission drives
Goals

Values are relatively permanent

personal beliefs about what you
regard as important, worthy,
desirable or right.*

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* Debra Pankow, North Dakota State University
 Creating the vision

Values drive Vision; Vision drives Mission; Mission drives Goals

Your Values Your Vision Your Mission Your Goals

It’s all about “the big picture”.

A vision statement describes what you want to

achieve in the future.
The vision statement answers the question “Where do I want to be?”
It defines the optimal desired future state—the mental picture—of what you want to
achieve over time, say in five, ten or more years.
It inspires you to give your best and shapes your understanding of why you are
doing what you do.

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 Your personal Mission

Values drive Vision; Vision drives Mission; Mission drives Goals

Your Values Your Vision Your Mission Your Goals

A mission statement acts as an invisible hand that guides you to

your big picture

Mission Effect, something to be accomplished,

what you do
Vision Cause, something to be pursued for that
accomplishment, what you want to be, future

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 Goals

Values drive Vision; Vision drives Mission; Mission drives Goals

Your Values Your Vision Your Mission Your Goals

Long-Term Goal: Objective that you aim to reach sometime after 3-5
years
Intermediate Goal: Objective that should be attained in 1-3 or 5
years
Short-Term Goal: Objective that should be reached in less than 1
year

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 Financial Goal examples

Long-Term Goals:
To buy a house
To save enough for retirement …
 Intermediate Goals:
To be financially independent
To have high yield and safe savings accounts
Short-term Goals:
To eliminate credit card debt and establish a
rainy day fund
To save for education
To be insured
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Are your goals SMART ?

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 Balance Sheet

BALANCE SHEET
Define where you are, what is
your current situation?

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WHAT DO YOU HAVE – YOUR STARTING POINT

Assets = what you

own

Liabilities = what
you owe

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*http://www.finlosophy.com/
 Planning & Budget
Define how you move forward?

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 Budgeting

A budget is a plan for your future

income and expenditures that you can use
as a guideline for spending and saving.

Where your money comes from Where your money goes out

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 Gain, Loss
Income > Expenses => You have Net gain, you saved money
Income < Expenses => You have Net loss, you need to get a debt

It’s your personal Balance sheet, it’s always in balance

Assets and Liabilities

Expenses
Income

Expenses

Income 18
 NEEDS vs WANTS

Analyze your spending habits!

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 Opportunity cost

It’s the cost of an alternative that must be forgone in

order to pursue another option*

VS.

* Walker, Walker “Personal Finance” 20

 Expenses

Essential Nonessential
Have to have in Don’t have to have in
order to live: order to live:
 Food It’s more subjective!
 Health Do I really need this
 Education video game?
 Transportation
…

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 Expenses/costs

Income vs.

• Income: wage, gift from family …

• Fixed costs are monthly contractual
Ex.: rent, utilities, University tuition fee …
• Variable costs not contractual, vary each month
Ex.: groceries, eating out, clothes, entertainment …
Do not forget about Seasonal Effects !
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 Make it easy!

Keep a Spending Journal

You also might consider using one of the popular personal financial software
products, such as:

Mint.com Level Money Acorn

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 Risk Management
Define how you will handle the
risks along your way?

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 RISK MANAGEMENT
Mitigation, insurance, self-insurance, all
Income risk
Asset risk
Inflation risk
Identity theft
Health, life, disability
Longevity risk
….
We will find out about risks and ways to manage those during
whole course

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DISCIPLINE

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 Track your habits

PDCA or Deming cycle is

a continuous quality
improvement model

PLAN: plan ahead for

change. Analyze and predict
the results.

DO: execute the plan, taking

small steps in controlled
circumstances.

STUDY: check, study the

results.

ACT: take action to

standardize or improve the
process.

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20/80 Rule = Pareto Principle

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Financial TIPS

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 10-10-80 Rule
- Allow us to be generous with 10%.
- Provide us with a financial buffer or margin of
10%.
- Cover all of our day-to-day living expenses
with the remaining 80%.
Read more: Huffington Post titled Habits of
Supremely Happy People

Before you pay your bills, before you buy groceries, before
anything else, set aside a portion of your income to save and
invest.

Use bicycle instead of car,

audit your heating and cooling
efficiency, windows …

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Summing up

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 LETS SUMMARIZE

Define your goals

Identify your situation – your net worth
Create a plan and budget
Identify where your money comes from (income) and where your money goes (expenses)
– keep a spending diary
Consider your wants and needs
Consider opportunity costs
10/10/80 rule

Personal Balance Sheet

Discipline yourself
Deming cycle  to improve life quality
80/20 rule
Track your habits
Stick to your plan

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PRACTICING

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Values

Vision Cause, something

to be pursued for, what you
want to be, future

Mission  what you do,

effect

Goals  Short term

SMART

Medium term

Long term

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 EXERCISE: Defining your Financial Values
“If you had an extra AMD 100 000, on which of the two items would you spend your money?
• Housing (Dream Home/Vacation Home) • Hobbies/Sports
• Retirement Savings/Investments • Church/Charitable Giving
• Education: Self/Others • Vacation/Travel
• Vacation/Travel • Personal Appearance/Grooming/Clothes
• Retirement Savings/Investments • Church/Charitable Giving
• Hobbies/Sports • Social Activities/Eating Out
• Social Activities/Eating Out • Housing (Dream Home/Vacation Home)
• Car • Retirement Savings/Investments
• Education: Self/Others • Hobbies/Sports
• Housing (Dream Home/Vacation Home) • Housing (Dream Home/Vacation Home)
• Personal Appearance/Grooming/Clothes • Church/Charitable Giving
• Car • Social Activities/Eating Out
• Retirement Savings/Investments • Personal Appearance/Grooming/Clothes
• Hobbies/Sports • Vacation/Travel
• Hobbies/Sports • Retirement Savings/Investments
• Car • Social Activities/Eating Out
• Housing (Dream Home/Vacation Home) • Education: Self/Others
• Vacation/Travel • Car
• Vacation/Travel • Personal Appearance/Grooming/Clothes
• Church/Charitable Giving • Education: Self/Others

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 Financial Values

Now total the number of times you circled each item in the pair activity:

Car
Charitable
Giving
Hobbies/Sports
Housing By knowing your values, you can make
Personal Care sure your vision, goals and attitudes reflect
your values. The closer they all match your
Retirement
spending plan, the easier it will be to reach
Social your financial goals and financial security.
Travel

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 Your own vision
Create Your Personal
Vision Statement !
What you want o be

Use a mind map to create a vision for your future

How do you picture your life in 10, 20, 30, 50
years?
What do you want to be known for as you reflect Ex.:
back on your life in your final days?  All my loans are paid off,
What would your “perfect” financial life look like in including my mortgage
the future?  I have a savings account and
enough money to travel and
see the world
 My retirement account is
sufficient to meet
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my retirement objectives …
 Your own Mission

3 Minutes

Create your Mission

statement!
What you do

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Your personal goals

Write your long-term,

intermediate and short-term
goals!
Long-Term Goals:
 To buy a house
 To save enough for retirement
Intermediate Goals:
 To be financially independent
 To have high yield and safe savings accounts
Short-term Goals:
To eliminate credit card debt and establish a
rainy day fund
To save for education
To be insured
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 4 Min
Your Short-term Budget, do it for yourself!

Personal cash flow statement

Income Amount in drams
Cash
Gift card
Part-time job …

Total Income
Expenses Amount in drams
Rent
Utilities
Phone …

Total Expenses
Net Cash Flow Amount in drams
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HOMEWORK

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 HOMEWORK, due Sept 7

DEFINE

VALUES
VISION
MISSION
GOALS = Personal + financial

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Values

Vision Cause, something

to be pursued for, what you
want to be, future

Mission  what you do,

effect

Goals  Short term

SMART

Medium term

Long term

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 HOMEWORK: Do you Deming/PDCA cycle
for Aug 31 – Sept 7 (1week), due 7 Sept

Plan of DAY Check Suggestio

at the end of day. is it n to
Put main things to do, those done? Why? What you standardiz
which are targeted to you life failed? e/improve
goals

24 Jan 15.00- 1 hour study of English +

16.00
19.00- Homework for math - Was very tired Plan for
20.30
morning
… Shopping, not spending more / Overspend 3000
than 5000 AMD
Make daily financial budget +

25 Jan 15.00- Having fun with friends 3 hours / Partially Keep timing
18.00
stayed 3 hours more
….

31 Jan

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 Your Short-term Budget, do it for yourself! Due 7 Sept.

Personal cash flow statement

Income Amount in drams
Cash
Gift card
Part-time job …

Total Income
Expenses Amount in drams
Rent
Utilities
Phone …

Total Expenses
Net Cash Flow Amount in drams
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