In Engineering Project must
define budget as well and project
expectations and monitor them.
Personal Financal model is
example to make it real (and other
other benefits)
From Status to Goals To Plans
 Where are you now? (financial statements)
 Where do you want to go? (financial goals)
 Tools to help you get there
– Budget
– Spreadsheets
– Wise use of credit
 Monitoring progress (financial statements)
Personal Financial Statements
 Balance Sheet: shows position at point in time
– Assets listed at market values
– Liabilities
– Assets – Liabilities = Net Worth
 Income & Expense Statement: shows where
money came from & where it went
– Gross income
– Expenses
– Income – Expenses = Surplus (or deficit)
Example Balance Sheet
December 31, 2005
Liquid Assets
Checking
Money Market
Current Liabilities
$
500
Credit Card
3,500
Total LA
$
Total pers pr.
TA
2,000
4,000
3,000
3,000
Personal property
Furniture
$
Long-term liabilities
Total inv.
Car
2,000
Total CL
Investments
IRA/401K
$
12,000
Car loan
5,000
Student loan
8,000
Total LT L
13,000
TL
15,000
1,000
13,000 Net Worth (Assets - Liabilities)
$ 20,000 Net Worth
$
5,000
Income Statement Surplus or
Deficit:
Effect on Balance Sheet (P&L)
 If income > expenses => Surplus (Profit)
 If income < expenses => Deficit (Loss)
 In many Balance Sheets and other
accounting, negatives are shown in RED
to highlight them. (Option for excel!)
Deficit Spending (being “in the
Red) DECREASES
Net Worth!
Being in the red can kill aproject
unless initial investment is large
enough
Budgeting
 Why budget?
 What is a budget?
– Short-term forecast of income & expenditures (I.e.
revenues and costs a project)
– Tool to monitor & control spending
Budgeting
 Creating a budget (short term model)
– Determine how you spend money now.
– Evaluate your spending in light of your goals.
– Create a forecast (budget) of your monthly income and
expenditures.
– Track your spending and adjust as necessary.
 Financial Model (longer term model)
– Future income/costs very approximate, be careful
 Use Excel or financial planning software.
Financial models of the future
Expense models
Build your Expense Statement
Measured 2006, and estimated 2011, 2021, 2041.
Break expenses into
required costs,
expected costs,
discretionary costs.
5 different “income” models can either yield
different balances or allow more of
expected/discretionary costs.
Why Financial Goals?
 Use resources in a way that results in the greatest
utility (satisfaction) to effort.
– How much do you enjoy that daily Starbucks?
$4 per day x 260 days per year = $1,040 annually for 30 years
Invest it: what would it be worth in 30 years?
Direct “Investment” returns “return”-inflation.
What if used to avoid debt (e.g. CC debt) and keep
budget netural?
Assumptions & Calculations
PV
(Present Value)
PMT
(Payment)
N
(# of Payments)
I/Y (Interest/Year =
Investment – Inflation)
FV?
$
0
$1,040
30
9–3=6
Can use formula or just
“simulate” in excel.
 Value = lastval *(1+ yield)+
new_Savings
 Use relative formula for
“state” and absolute formula
for “rates”.
 Can more easily adjust for
changes over time and 1-time
adjustments. Can understand
the impact process.
 Given values in states at time,
can build a graph using plot
functions.
 Do this yourself now…
90
80
70
60
50
East
West
North
40
30
20
10
0
1st
Qtr
2nd
Qtr
3rd
Qtr
4th
Qtr
Financial Goals
 Short-term (< 1 year) (Budget
adjustments)
 Intermediate term (1 to 5 years)
 Long-term (> 5 years)
Defining Goals
 Dollar amount
 Time frame
 Prioritize (Why?)
Wise Use of Credit
 Some debt is appropriate: an asset purchased on
credit should outlive loan.
• Education
• House
• Car
 Pay off credit card debt.
– Pay highest interest rate card first.
– Roll high interest rate debt onto low interest rate card
– Pay more than minimum payment.
 Control spending
Credit Reports & Credit Scores
 Borrowing costs $$ and the cost depends on risk.
(For companies and for people…)
 Free copy of personal credit report annually from
each of 3 major reporting agencies
 Check your credit reports & FICO score before
applying for a loan
 FICO scores range from 500 (bad) to 850 (good)
 Factors that hurt your FICO score
–
–
–
–
Delinquency on accounts
Amount owed on accounts
High balances relative to credit limits
Recent credit applications (so trying and failing is bad)
Financial models of the future
Expense models
Already have your Expense Statement
Measured 2006, and estimated 2011, 2021, 2041.
Break expenses into
required costs,
expected costs,
discretionary costs.
Now add
5 different “income” models can either yield
different balances or allow more of
expected/discretionary costs.
Budget For your project ideas
 Roughly estimate costs of design, development
and production. Include discussion of your
estimates.
 Roughly estimate the “sales/value” and market
size.
 List Your data sources/assumptions.