His balance sheet will not change substantially-value will just shift from one asset to another-but the money market account earns income, which the house does not, although there may be a gain in value when the house is sold in the future. Mark can finance this increase of asset value (his new roof) with another asset, his money market account. His cash flow statement will show unchanged operating cash flow, a large capital expenditure, and use of savings. Mark’s income statement will be virtually unaffected by the roof. He will lose the interest income from his money market account (which is insignificant as it represents only 0.09 percent of his total income), but the increases from his tutoring and sales income will offset the loss. He can continue saving for retirement with deposits to his retirement account and can continue improving his property with a new roof on his house.īecause Mark is financing the roof with the savings from his money market account, he can avoid new debt and thus additional interest expense. So, Mark can make progress toward his long-term goals of building his asset base. This favorable outcome is due to his efforts to increase income and reduce expenses and to macroeconomic changes that have been to his advantage. This means his goal is more attainable (and less costly) than in his original budget. An analysis of Mark’s budget variances has shown that he can actually pay for the roof with the savings in his money market account. Assuming the house needs a new roof, his decision is really only about his choice of financing. Mark has to decide whether to go ahead with the new roof. The usefulness of these tools is that they provide a clearer view of “what is” and “what is possible.” It puts your current situation and your choices into a larger context, giving you a better way to think about where you are, where you’d like to be, and how to go from here to there. Other tools include financial statements, assessments of risk and the time value of money, macroeconomic indicators, and microeconomic or personal factors. Whatever type of budget you create, the budget process is one aspect of personal financial planning, a tool to make better financial decisions. Identify factors that affect the value of choices.Demonstrate the use of budgets in assessing choices.Discuss the relationships between financial statements and budgets.Describe the budget process as a financial planning tool.
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