7400.362 - Family Life Management
School of Family and Consumer Sciences
Instructor: David D. Witt, Ph.D.
Topic 13 - Managing Finances

Financial Management is a discipline all by itself, with trained professionals who graduate from business schools ready to consult with everyone from individuals to large corporations. Financial management is a transformational process.That gets transformed is one's assets - into greater assets. All of the terms and devices we've identified in the course so far should be at work in the process of managing one's money:

Planning requires:
    Identification of Financial Goals
    Collection of Information about one's financial picture
    Analyzing one's resources
    Making financial decisions
Action requires:
   Spending, Saving, or Investing
Post Planning requires:
    Evaluating the performance of our management techniques from time to time.
The keystone of any sound family financian management plan is a budget- a guide to spending. It is through a Budget that a family can aspire to a Standard of Living - the measure of goods, services, and resources a family has at their discretion. Families at differing Standards of Living afford themselves both a qualitatively and a quantitatively different set of experiences. Equivalent in kind to the Gross Domestic Product (a measure of a nation's collective wealth) are the measures of family wealth:These include Income, Net Worth, Savings and Credit.
  • Types of Income include:
  •    Discretionary income - money that an individual can use according to his/her own judgement, as in which debts to pay.
  •    Disposable income - is the money that is left after all deductions are made.
  •    Gross income - the combined income an individual or family has from all sources
  •    Psychic income - how rich or poor we feel - not an objective measure of anything
  •    Real income - uninflated income - the buying power of the money we possess.

Figuring One's Net Worth is accomplished by subtracting what is owed (liabilities) from what is owned (assets, including savings, insurance policies with cash value, all your stuff). Some, but not all of the items to be listed as Assets and Liabilities might be: 

Cash on hand 
Checking and Savings Accounts
Stocks, Bonds, other Investments
Real Estate
Retirement funds (IRA's)
Company Benefits
Personal Property
Insurance cash value
Debts others owe you
By assigning a cash value to each 
asset, and summing, we arrive at
Total Assets
Unpaid Bills
Personal Debts

By assigning a cash value to each
debt, and summing, we arrive at
Total Liabilities.

Good planning requires that we know both figures accurately - and that we budget for unforeseen circumstances to the best of our ability, such as creating an "emergency fund" - so that we can minimize debt, and live within our means. Credit should be seen as a tool and never mismanaged. Thus, paying off balances each month, owning only a few credit cards, shying away from charging on impulse. Establishing and maintaining "good credit" is easy to do and easy to ruin, as well. Decisions to use credit should always be made with your Financial Plan in mind. If it's not in the plan - don't make the purchase.

Steps toward establishing good credit are as you might imagine, maintaining a checking account, p aying bills promptly, carrying, using, and paying off each month a gasoline or department store credit card. But what really paves the way for a larger loan (i.e., a mortgage) are things like:
    -residential stability - whether or not you've moved around a lot
    -job stability - how long you've maintained the same job
    -previous home ownership
    -your ratio of debt to income

Liquidity refers to how quickly one can transform assets into cash - encumbered money is outside this definition, which means money tied up in a retirement or investment plan cannot be easily gotten to. Checking and savings accounts are highly liquid assets. Some Important Concepts:

  • Investments should be made with a trusted advisor and should be seen as long term in nature. Stocks, bonds, mutual funds, real estate, retirement funds - these are investments that may take many years to "mature" or turn liquid.  The investmentee's ability to count on the use of your money is precisely the reason they grow in value.
  • Investments should also be made from disposable income - money left after living expenses and debts are removed.
  • Insurance comes in many forms, and only live insurance has any potentially liquidity to it.
    Health benefits, accident insurance for your car, home owners or mortgage insurance - these are meant to protect the owner from catastrophe.  These are expensive, but the alternative to having such insurance is to risk financial ruin.  For many of these types of insurance, a "group" plan from work is available for those with such jobs.
  • Life insurance needs some scrutiny here. Typically, term life insurance is purchased to achieve a relatively short term goal - thus term insurance for a parent, to protect his/her children and surviving spouse in the event of their death, is more important when a family is in early to mid-life.  It would be a poor financial decision to purchase or maintain life insurance after retirement since a person's financial picture is, by-and-large, set or fixed.
  • In addition to term insurnance, there is whole life insurance. Whole life performs like term insurance with the added benefit of "maturing" and becoming liquid at some point toward the retirement age. The problem with whole life insurance is that is is largely an inefficient use of investment monies.  In fact, the difference in cost of whole life minus the same coverage in term insurance is substantial - and this is money that could be invested more efficiently in a long term mutual fund with a good history of performance (making profits for investors).

A note about saving (and this advice should be discussed prior to marriage and periodically during marriage with a trusted financial advisor).  If you know how to use a electronic spreadsheet - try this little trick. Suppose a family has their first child

  • Iif they were to put $10 a week under the mattress for 52 weeks a year there'd be $10400 under the mattress at the end of 20 years
  • If they were to put $10 a week in a savings account at 4% interest for the same time period - there'd be $16624 at the end of 20 years. ($6600 more)
  • If they were to move the money every year from savings to a higher yield savings device such as a Cash Deposit (CD) at 6% interest for the same time period - there be $22044 at the end of 20 years (over $12000 more)
  • Suppose your parents put did the 2nd and 3rd option when you were born, by the time you got to college you would have it almost completely paid for.

This is a highly conservative way to think about money, but the point is that saving requires discipline and long term commitment, but the results are undeniable.

Food, Housing, Transportation, Clothing, Health care - families cost money and this is without any fun included.

Notice what this list doesn't include:

     -no payment of student loans                          -no payment of any bank loans
     -no car payments                                           -no credit card payments of any kind
     -no emergency funds for sickness, pregnancy  -no coverage for other loss of income
     -no TAXES which hovers around 11% Federal, 4% state and 3% local in Ohio 18% total.
     -no movies, video rentals, stereo equipment, commercial recordings, alcohol
     -no entertainment of any kind                          -no vacations, presents
     -no christmas, no birthdays                             -no birth control devices
     -no personal grooming                                    -no diapers, baby oils, pediatrician money

Ideally, the budget graphic above doesn't change that much with the addition of children to the family. What does change is additional expenses, pediatrician visits, special considerations and equipment, day care. If it is true that raising a child up from birth to age 18 costs an additional $300,000 per child, then we must think of childrearing as an investiment in the future.

Like any investiment - children must be cared for and protected from ignorance - perhaps the main predator of young lives. Thus, an important aspect of early training and socialization has to do with developing a sense of money and responsibility.

Children learn most of their habits of thought and action through their parents first, followed by peers and the media. Teaching concepts of the Work Ethic and Financial Responsibility - as well as Stewardship of our possessions and the earth's natural resources - require parental effort to live the life they espouse. I remember my father - who meant more to me than any other person for most of my life) giving me a lecture about the evils of drug use - while holding a beer in one hand and a cigarette in the other. I also remember Dad making me go to work with him on days there was no school (try all summer long) - the point being to show me what he had to do in order to pay the electricity bill that made the television work.

Learning the lessons of financial responsibility begins with simple recognition of all the coins and dollar denominations.
A useful website for this purpose is Ron Wise's World Paper Money Homepage and coin collections of various types is an excellent way to introduce the idea of denominations and value.

Retirement Planning (see this thursday's special lecture)

Know the terms and definitions regarding Recession, depression, inflation, and unemployment.