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
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:
The keystone of any sound family financian
plan is a budget- a guide to spending.
It is through a Budget that a family can
to a Standard of Living - the measure of goods, services, and resources
a family has at their discretion. Families at differing Standards of
afford themselves both a qualitatively and a quantitatively different
Equivalent in kind to the Gross Domestic
(a measure of a nation's collective wealth) are the measures of family
wealth:These include Income, Net Worth, Savings and Credit.
one's financial picture
Analyzing one's resources
Spending, Saving, or Investing
Post Planning requires:
our management techniques from time to time.
- 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
what is owed (liabilities) from what is owned (assets, including
insurance policies with cash value, all your stuff).
Some, but not all of the items to be listed
and Liabilities might be:
Cash on hand
Checking and Savings Accounts
Stocks, Bonds, other Investments
Retirement funds (IRA's)
Insurance cash value
Debts others owe you
By assigning a cash value to each
asset, and summing, we arrive at
By assigning a cash value to each
debt, and summing, we arrive at
Good planning requires that we know both
accurately - and that we budget for unforeseen circumstances to the
of our ability, such as creating an "emergency fund" - so that we can
debt, and live within our means.
Credit should be seen as a tool and never
Thus, paying off balances each month, owning only a few credit cards,
away from charging on impulse.
Establishing and maintaining "good credit" is
to do and easy to ruin, as well.
Decisions to use credit should always be made with your Financial Plan
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 -
or not you've moved around a lot
-job stability - how long
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
- 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
- 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
If you know how to use a electronic spreadsheet - try this little
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
- 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
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
point is that saving requires discipline and long term commitment, but
the results are undeniable.
Notice what this list doesn't include:
Food, Housing, Transportation, Clothing, Health care - families cost
money and this is without any fun included.
-no payment of student
payment of any bank loans
credit card payments of any kind
-no emergency funds for sickness,
-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
-no christmas, no
birth control devices
diapers, baby oils, pediatrician money
Ideally, the budget graphic above doesn't change that much
addition of children to the family. What does change is additional
pediatrician visits, special considerations and equipment, day care. If
it is true that raising a child up from birth to age 18 costs an
$300,000 per child, then we must think of childrearing as an
in the future.
Like any investiment - children must be cared for and
ignorance - perhaps the main predator of young lives. Thus, an
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
parents first, followed by peers and the media. Teaching concepts of
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
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
Learning the lessons of financial responsibility begins with
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
is an excellent way to introduce the idea of denominations and value.
Retirement Planning (see this thursday's special
Know the terms and definitions regarding Recession,