10
10-1
10-2
10-3
10-4
Slide 1
PREPARE A
BUDGET
Utility Expenses
Electronic Utilities
Charting a Budget
Cash Flow and Budgeting
Financial Algebra
© Cengage/South-Western
10-4
CASH FLOW AND
BUDGETING
OBJECTIVES
Develop and interpret a cash flow chart.
Develop and interpret a frequency
budget plan.
Develop and interpret a year-long
expense budget plan.
Slide 2
Financial Algebra
© Cengage/South-Western
Key Terms
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Slide 3
cash flow analysis
cash flow
pro-rate
envelope accounting system
frequency budget plan
year-long expense budget plan
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net worth
assets
liabilities
debt reduction plan
debt-to-income ratio
How do you plan for expenses, reduce debt, and
grow savings?
 What types of modifications might a person make
to their lifestyle based upon a budget?
 How do you plan for your monthly expenses?
Slide 4
VOCABULARY, p. 509
Define and differentiate:
 Income
 Fixed Expenses
 Variable Expenses
 Savings
 Cash Flow Analysis
 Cash Flow
 Pro Rate
Slide 5
Example 1
Dave and Joan want to chart their monthly cash flow.
Create a spreadsheet that will help them keep track of their
income and expenses for the month.
Document monthly amounts in these broad categories:
 Income—all after tax sources of revenue
 Fixed Expenses—same from month to month
 Variable Expenses—change from month to month
 Savings—should be considered a “bill” you pay
yourself; between 5-20%
Slide 6
Example 1
Cash Flow Analysis—
Documents current income and spending habits
NOT a budget
Details how much money comes in and how much goes
out over a fixed period of time
Cash Flow—the movement of your money, like a liquid
Pro Rate—divide annual expenses proportionally between
another pay period
Slide 7
CHECK YOUR UNDERSTANDING
Suppose that the cash flow had been −$160.
What advice might you give to Dave and Joan?
Slide 8
Example 2
The Consumer Credit Counseling Service suggests that
transportation expenses be between 6−20% of your
budget and savings be between 5−20%.
Using Dave and Joan’s cash flow analysis, determine
whether they remain within the guidelines.
Total TP = $469
469/6100 = 0.077 = 7.7% > 6% 
Total savings = $300
300/6100 = 0.049 = 4.9% < 5% 
Slide 9
CHECK YOUR UNDERSTANDING
Dave and Joan want to include a section in their cash flow
spreadsheet that will calculate the monthly percentage
allocated to certain categories suggested by the Consumer
Credit Counseling Service.
Write the spreadsheet formula that will calculate the
transportation percentage for the month.
Total category amounts ÷ net income = category %
Slide 10
APPLICATIONS, pp. 518-519
#6 — non-monthly expenses
#5 — % guideline comparison
Slide 11
VOCABULARY, p.512
Define and differentiate:
 Envelope accounting system
 Frequency budget plan
 Year-long expense budget plan
Slide 12
VOCABULARY, p.512
 Envelope accounting system—a way to manage your
money with real dollars and physical paper envelopes;
after placing cash in different budget envelopes, you
literally take out cash to pay for expenses
 Frequency Budget Plan—shows a budget in terms
of how often—what frequency—payments or credits
are made
 Year-long Expense Budget Plan—entries are placed
according to which months payments are made, i.e. a
schedule is built for when to pay each expected expense
Slide 13
EXAMPLE 3
Create a frequency budget plan for Dave and Joan using
their cash flow analysis from Example 1.
p. 513
Slide 15
CHECK YOUR UNDERSTANDING
The frequency budget, shown on the next slide, states
that Dave and Joan have an annual surplus of
$1,284.00.
How does this relate to the monthly positive cash flow
that was computed in Example 1?
Slide 16
EXAMPLE 4
Construct a year-long expense budget spreadsheet
using the cash flow data from Dave and Joan.
p. 515
Slide 18
CHECK YOUR UNDERSTANDING
Use the spreadsheet to create row 43 in which the
totals for each month will be calculated. What formula
would be used for January? What entries will appear
for each of the months in this row if the same formula is
applied to the remaining months?
Slide 19
Applications, page 519
#7
#8
#10
#11
Slide 20
VOCABULARY
Define and differentiate:
 Net Worth
 Assets
 Liabilities
Slide 21
VOCABULARY
Define and differentiate:
 Net Worth—a number that states your financial status;
the difference between your assets and your liabilities;
can be a positive or negative amount
 Assets—what you own
 Liabilities—what you owe
Slide 22
EXAMPLE 5
Liam Brown is single, in his mid-twenties, and owns a condo in a big city.
He has calculated the following assets and liabilities.
Assets
Current value of condo:
$580,000
Current value of car (as listed in Kelley Blue Book): $17,000
Balance in checking account:
$980
Combined balance in all savings accounts:
$22,500
Current balance in retirement account:
$24,800
Current value of computer:
$2,900
Current value of collector bass guitar:
$6,700
$673,180
Current value of stocks/bonds:
$18,300
Liabilities
Remaining balance owed on home mortgage:
$380,000
Remaining balance owed on student loans:
$51,000
$432,600
Combined credit card debt:
$1,600
Calculate Liam’s net worth. Last year at this time, he calculated his net worth
as $205,780. Compare both values. What do the changes mean?
Slide 23
EXAMPLE 5
Liam Brown is single, in his mid-twenties, and owns a condo in a big city. He
has calculated the following assets and liabilities.
Assets
Liabilities
240,580 – 205,780 = $34,800
Slide 24
673,180
432,600
$240,580
CHECK YOUR UNDERSTANDING
What two general actions can Liam do to continue improving
his net worth trend?
Assets
Current value of condo:
$580,000
Current value of car (as listed in Kelley Blue Book): $17,000
Balance in checking account:
$980
Combined balance in all savings accounts:
$22,500
Current balance in retirement account:
$24,800
Current value of computer:
$2,900
Current value of collector bass guitar:
$6,700
Current value of stocks/bonds:
$18,300
Liabilities
Remaining balance owed on home mortgage:
$380,000
Remaining balance owed on student loans:
$51,000
Combined credit card debt:
$1,600
Slide 25
CHECK YOUR UNDERSTANDING
What specific action can Liam do to continue improving
his net worth trend?
Assets
Current value of condo:
$580,000
Current value of car (as listed in Kelley Blue Book): $17,000
Balance in checking account:
$980
Combined balance in all savings accounts:
$22,500
Current balance in retirement account:
$24,800
Current value of computer:
$2,900
Current value of collector bass guitar:
$6,700
Current value of stocks/bonds:
$18,300
Liabilities
Remaining balance owed on home mortgage:
$380,000
Remaining balance owed on student loans:
$51,000
Combined credit card debt:
$1,600
Slide 26
EXAMPLE 6
Tome’s monthly liabilities and assets are shown in the table.
Total Liabilities:
$8,300
Total Assets (debt): $3,400
Debt-to-income =
debt
= 3400 = 0.405 = 40.5%
ratio
pre-tax income
8300
Slide 27
CHECK YOUR UNDERSTANDING
Tome anticipates that next year, his car and student loans
will have been paid off and he will have received a 10%
salary increase. If everything else remains the same,
calculate that debt-to-income ratio.
+10%
Slide 28
APPLICATIONS, pp. 518-519
#4
#12
Slide 29
FINAL EXAM PREP
 Vocabulary Words from Chapter 10.4 (See earlier slides)
One problem each:
 Create and explain a Cash Flow Statement (example 1)
 Prorate expenses for Cash Flow Statement (example 1)
 Determine if budget categories are meeting a percent
allocation goal (example 2)
 Create and explain a Frequency Budget (example 3)
 Create and explain a Year-long Expense Budget (example 4)
 Calculate Net Worth and Debt-to-Income ratio
 Conduct Debt Reduction analysis
Slide 30