Families and Financial Stress in HBFT

Module Sections:

Establishing a Common Ground

What is Personal Finance?

Establishing a Common Ground

This module will provide a brief introduction to personal finance. Personal finance is the process of planning the spending, financing, and investing to optimize the financial situation of an individual or in this case a family. Many families do not manage their financial situations well (Madura, 2002). Consider these statistics:

  • The level of savings in the United States is about 1 percent of income earned.
  • About half of all surveyed people in the U.S. who are working full-time state that they live from one paycheck to the next, without a plan for saving money.
  • About 40 percent of people who work full-time do not save for retirement.

By having a personal financial plan, individuals and families can track and predict their spending, develop financial goals and outline a plan for saving for their future.

A financial plan covers an individual or family's decisions regarding the following:

  1. Budgeting and tax planning
  2. Managing liquidity
  3. Financing large purchases
  4. Protecting assets and income (insurance)
  5. Investing money
  6. Planning retirement and estate

Madura, 2002

Below is a chart with examples of financial details covered in each component of a financial plan.  Following the chart, each of the components is discussed in more detail.

A Plan for:

Types of Decisions

Budgeting and tax planning

What expenses should you anticipate?

How much money should you attempt to save each month?

What debt payments must you make each month?

Managing liquidity

How much money should you maintain in your checking/savings account?

Financing large purchases

How much money can you borrow to purchase a car?

What type of mortgage loan should you obtain to finance the purchase of a house?

Protecting assets and income

What type of insurance do you need?

Investing money

How much money should you allocate toward investments?

What types of investments should you consider?

Planning retirement and estate

How much money will you need for retirement?

How will you allocate your estate among your heirs?

Budgeting and Tax Planning
Budgeting is the process of forecasting future expenses and savings, requiring the consumer to make decisions about saving and spending. Without a budget, spending and saving are left at the whim of impulse and can lead to poor decision making and economic hardship. The first step in creating a budget is to assess financial positions. This includes your income, your expenses, your assets and your liabilities. Assets are anything you own and liabilities are any debt you owe. Net worth is the difference between what you own and what you owe. Saving and investing money increases assets thus increasing net worth. Budget planning gives a clear picture of your financial position, allowing you to make decisions that can increase your overall net worth.

A key component of budgeting is estimating or forecasting your upcoming expenses. If you underestimate, you may not be able to reach your savings goals. Budgeting is influenced by income, which is influenced by education and career decisions. Clients with less income will have less money available to set aside for a savings plan, possibly making their financial goals more long term.

Managing Liquidity
A liquid asset is an asset that can be converted into cash quickly. These include cash on hand, money in checking or savings, stocks, and bonds. Liquidity is the ability to cover short-term cash deficiencies using these liquid assets. It is important to maintain a sufficient amount of liquid assets, such as a checking or savings account, so you are able to access the money in the event you cannot cover an unexpected expense. It is important to manage these assets in terms of cash inflow and outflow, so as to enhance liquidity.

Financing Large Purchases
Loans are needed to finance large purchases, such as college tuition or a new car. The amount of financing needed is equal to the difference between the cost of the item and how much money you have on hand. Managing loans involves determining how much you can afford to borrow, deciding on length of loans, and finding competitive interest rates.

Protecting Assets
Protecting you assets, or what you own, involves purchasing insurance. Insurance planning involves determining the types and amount of insurance needed to protect your assets. Types of insurance most people will come across include automobile insurance, home or renter's insurance, and health insurance.

Investing Money
It is suggested that any funds you have after your usual expenses and liquidity needs are covered should be invested. This is an area where most people are not familiar with the potential financial gains available. These funds can be used to invest with the goal of gaining high return.  Some investment possibilities include stocks, bonds, mutual funds and real estate. When determining how much and where to invest your money, you could consider how much risk you are willing to take on and how diverse you want your investment portfolio to be.

Planning for Retirement and Estate
Retirement planning involves determining how much money you should set aside each year for retirement and how you should invest those funds. Today's families are facing job insecurity and job loss at high rates and plans for retirement become less of a priority. Retirement planning must begin well before you near retirement so you can invest your funds wisely, allowing them to reach their highest financial potential. Estate planning is determining how your wealth will be distributed before or upon your death. This ensures that you wealth and assets are distributed in a manner that you desire.                               

Madura, 2002

For the purposes of this module, we will focus on how you can help your clients make small changes to how they manage their household finances that can provide a clearer picture of where their money is going. Many times, once cash flow becomes clear, people are able to start making behavioral changes to improve their financial situation. If you find that the exercises and suggestions given here are not sufficient for your client's financial situation, use an internet search engine to locate financial counseling services in your area. Use keywords like "financial counselor, Kansas" or visit the Financial Planning Association's website, www.fpanet.org, to locate services in your area. Often more remote areas of the state will not have direct access to these specialized services; consider calling a financial planner or counselor and asking for a phone consultation.

Journal- Which of the six parts of financial planning is most appropriate for the families I work with and how can we make a plan together to address this issue?