Personal Financial Advisors & Financial Decision Making

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  • 0:00 Budgeting for Success
  • 0:41 The Income Statement
  • 1:33 Loans & Credit
  • 3:24 Retirement
  • 4:34 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll show the purpose of a personal financial advisor. You'll learn the importance of budgeting, maintaining good credit, and making smart financial decisions.

Budgeting for Success

Jason's graduating from high school in just a few months. His parents know college students can make poor financial decisions, which could affect them for a lifetime. They schedule a meeting for their son to meet with their family financial advisor, Ms. Sanders. Personal financial advisors provide a customized financial plan to ensure clients meet their financial goals.

Ms. Sanders starts by having Jason complete a questionnaire on his short and long term financial goals. Then she explains to him that they'll start with budgeting. Budgeting is an estimate of income and expenses, which sets the foundation of financial success.

The Income Statement

Most people don't realize a budget is simply an income statement of the individual's income and expenses. Income includes wages, monies from investing, or in Jason's case, the college loans he'll receive. They're all considered income.

The other component of an income statement is expenses. Expenses are the costs incurred to run a household. Examples include rent, food, utilities, and a car payment. The difference between income and expenses are discretionary income. Discretionary income is the money left over that is typically used for savings, emergencies, and non-recurring expenses. Ms. Sanders explains to Jason it's important to budget monthly, complete a comparison analysis of actual income and expenses, review any variances, and make adjustments for the next month.

Loans and Credit

Ms. Sanders explains it's important for young people to understand that no credit is bad credit! Credit is the ability to borrow money. If a lender can't assess your ability to pay bills on time, then they may deny you credit or charge a higher interest rate. An interest rate is a fee to borrow money.

While it makes sense to establish credit, paying off the balance at the end of every month, or paying more than your monthly payment will ensure a high credit score. A credit score is a consolidated numerical value of your payment history.

Jason asks if using a debit card will help increase his credit score now. A debit card allows one to make transactions which are directly tied to your checking or savings account. Ms. Sanders goes on to say, that since you're using your own money with a debit card, those transactions are not reported to the credit bureau (the companies who track money you borrow).

However, ensuring you do not overdraw your checking account and establishing a savings account at a financial institution will show favorably, if you apply for a loan at that institution. Jason asks Ms. Sanders if she can talk more about loans, since he's going to purchase a car soon. Ms. Sanders explains a car loan has three components:

  • The principal which is the amount borrowed
  • The interest which is the cost of the borrowing
  • The term or the length of the loan

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