ACCOUNTING ANDFINANCE

LEVEL – II
Based on November, 2022, Curriculum Version II

MODULE TITLE: Developing and Using a Personal

Budget and Savings Plan
Module code: LSA ACF2 M05 1122
Nominal duration: 100 Hours
Prepared by: Ministry of Labor and Skill

November, 2022

Adama, Ethiopia

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Table of Contents
Acknowledgment .................................................................................................................................. IV

Acronyms ............................................................................................................................................... V

Introduction to the Module ...................................................................................................................... 1

Unit One. Analyzing and discussing budgeting as a financial tool ............................................................ 3

1.1. Discussing the role of budgeting in the lives of different groups ................................................... 4

1.1.1. Overview of personal budgeting ........................................................................................... 4

1.1.2. Role of budgeting in the lives of different groups ..................................................................... 6

1.2. Explaining iimportance of budgeting .......................................................................................... 11

1.3. Importance of setting financial goals .......................................................................................... 12

1.4. obstacles that prevent financial goals .......................................................................................... 16

1.5. Types of behaviours and skills ................................................................................................... 17

Unit Two. Developing a personal budget ............................................................................................... 20

2.1. Estimating income and expenses ................................................................................................ 21

2.1.1. Develop personal budge format .......................................................................................... 21

2.2. Develop spreadsheet ............................................................................................................... 25

2.3. Identifying fixed and variable expenses ................................................................................. 29

2.4. Subtracting total expenses from the total income .................................................................... 32

2.5. Exploring reason for a deficit budget .......................................................................................... 32

2.6. Investigate ways to reduce expenses or increase income ............................................................. 36

2.7. Exploring and identifying allocation of surplus fund .................................................................. 37

Unit three. Implement and monitor the personal budget ......................................................................... 40

3.1. Following the budget according to plan ...................................................................................... 41

3.2. Recording and comparing actual expenses and income of the budget .......................................... 41

3.3. Modifying the budget ................................................................................................................. 43

3.4. Discussing Handy hints .............................................................................................................. 43

3.5. Conducting ongoing review of the budget .................................................................................. 46

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Unit Four Discuss the place of saving and investing today ..................................................................... 49

4.1. Discussing impact of high cost of living ..................................................................................... 50

4.2. Discussing increasing levels of consumer debt in Ethiopia ......................................................... 51

4.3. Discussing different attitudes to savings and investment ............................................................. 54

Unit Five Understand risk as it relates to saving and investing ............................................................... 57

5.1. Explaining the concept of risk versus return ............................................................................... 58

5.2. Determining risk profile of an individual's .................................................................................. 60

5.3. Discussing the impact of inflation .............................................................................................. 63

Unit six . Develop your own savings plan .............................................................................................. 65

6.1. Identifying and quantifying personal savings goals .................................................................... 66

6.2. Developing personal budget ....................................................................................................... 67

6.3. Investigating financial product options ....................................................................................... 68

Unit Seven: Implement your own savings plan ...................................................................................... 70

7.1. Identifying requirements to open an account .............................................................................. 71

7.2. Open relevant savings accounts or other investigated financial products ..................................... 72

7.3. Adjusting savings goal ............................................................................................................... 75

Developers’ profile .............................................................................................................................. 78

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Acknowledgment

Ministry of Labor and Skills wish to extend thanks and appreciation to the many representatives
of TVT instructors and respective industry experts who donated their time and expertise to the
development of this Teaching, Training and Learning Materials (TTLM).

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Acronyms

SMART Specific, Measurable, Attainable, Realistic, and Timely

ATM Automated teller machines
FDIC Federal Deposit Insurance Corporation
TTLM Teaching, Training and Learning Materials

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 Introduction to the Module

Budget is very important to improve our live standard. The aim of personal budgets is to put
people at the center of their own care and support. A personal budget recognizes an individual’s
strengths and preferences, and enables them to gain more choice in, and control over, the support
they require to live their own lives. Simply Budget is a financial plan for a specified period. Plan
your financial future early, and then live your plan. So this manual share concrete ideas and
experiences on how you can apply the create budget process to the personal finance area, how
you can create your vision of what you want to become, set goals, develop a plan, work on
constraints, and then communicate it to help you accomplish your vision. This process is
applicable to all areas of your Personal financial Plan. Catching the vision for your life is not
simply writing a list of goals you would “like” to accomplish. Rather, it is a process of
understanding yourself, who you really are, your aspirations, desires, values, and what you
want to become and accomplish. Think all these like and encourage yourself.

So, according to that context, this learning module covers the knowledge, skill and attitude
relative to the competence required to analyze and discuss budgeting as a financial tool,
Develop a personal budget, Implement and monitor the personal budget, Discuss the place of
saving and investing today, Understand risk as it relates to saving and investing, Develop your
own savings plan, Implement your own savings plan.

This module covers the units:

 Analyze and discuss budgeting as a financial tool

 Develop a personal budget
 Implement and monitor the personal budget
 Discuss the place of saving and investing today
 Understand risk as it relates to saving and investing
 Develop your own savings plan
 Implementing your own savings plan.

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Learning Objective of the Module

 Understand budgeting as a financial tool

 Perform a personal budget
 Carry out the personal budget
 Identify the place of saving and investing today
 Understand risk as it relates to saving and investing
 Prepare your own savings plan

Module Instruction
For effective use this modules trainees are expected to follow the following module instruction:
1. Read the information written in each unit
2. Accomplish the Self-checks at the end of each unit
3. Perform Operation Sheets which were provided at the end of units

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Unit One. Analyzing and discussing budgeting as a financial tool

This learning guide is developed to provide you the necessary information regarding the following
content coverage and topics:
1.1. Discussing the role of budgeting in the lives of different groups
1.2. Explaining the importance of budgeting
1.3. Discussing the importance of setting financial goals
1.4. Discussing obstacles that prevent financial goals
1.5. Analysing types of behaviours and skills
This guide will also assist you to attain the learning outcomes stated in the cover page.
Specifically, upon completion of this learning guide, you will be able to:

 understand role and importance of budgeting in the different groups

 Analyze importance of setting financial goals

 Understand obstacles that might prevent financial goals

 Explain types of behaviors and skills

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1.1. Discussing the role of budgeting in the lives of different groups
1.1.1. Overview of personal budgeting

Budgeting is a planning and control system. Budget is the system of planning. Planning is
determining the activities to be accomplished to achieve goals. According explained in
introduction, every person of every age should create, use, and update a personal or family
budget. If you don’t have one already, this Module help you create one. A budget is simply a
plan for how you are going to spend the money that is available to you. To create a budget, you
determine your spendable income and allocate it to different categories of expenses. Then you
track your actual spending against your budget. It is acceptable to go over in some categories if
you are under by the same amount in others. A budget is a living document that is modified as
conditions warrant.

Budgets generally include categories for food, housing, utilities, clothing, transportation,
medical, recreation, debt reduction, and miscellaneous expenditures. It is often this last budget
category, the miscellaneous category, which gets overlooked. Unexpected expenses always come
up that don’t fit neatly into your budget categories: a car repair, perhaps an engagement ring or
even a wedding. In a marriage relationship, it is important that both the husband and the wife
have a say in budget creation, and that they help each other live within their means and claim
joy. In many marriages, one partner is a saver, and the other partner is a spender. Both play an
important role. Early in a marriage, it is a great blessing when the saver can help the spender stay
within the budget.

Generally Personal budgeting refers to preparation of a formal plan, which is expressed in

financial term and limited to a time horizon. A personal budget allocates future incomes towards
living expenses, savings and debt repayment. When income is less than expenses, you have a
budget deficit too little cash to provide for your wants or needs. A budget deficit is not
sustainable; it is not financially viable. The only choices are to eliminate the deficit by
increasing income, or reducing expenses, or borrowing to make up the difference.
Borrowing may seem like the easiest and quickest solution, but borrowing also increases

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expenses, because it creates an additional expense: interest. When income for a period is
greater than expenses, there is a budget surplus. That situation is sustainable and remains
financially viable.

Categories of Household Expenditures

Housing expenses consist of shelter (mortgage payments, property taxes, or rent; maintenance
and repairs; and insurance), utilities (gas, electricity, fuel, cell/telephone, and water), and house
furnishings and equipment (furniture, floor coverings, major appliances, and small appliances).
Mortgage payments included principal and interest payments. Overall, principal payments
constituted 15 percent of overall housing expenses.

Food expenses consist of food and nonalcoholic beverages purchased at grocery, convenience,
and specialty stores, including purchases with Food Stamp Program (now the Supplemental
Nutrition Assistance Program) benefits; dining at restaurants; and household expenditures on
school meals.

Transportation expenses consist of the monthly payments on vehicle loans, down payments,
gasoline and motor oil, maintenance and repairs, insurance, and public transportation (including
airline fares).

Clothing expenses consist of children’s apparel such as diapers, shirts, pants, dresses, and suits;
footwear; and clothing services such as dry cleaning, alterations, and repair.

Health care expenses consist of medical and dental services not covered by insurance,
prescription drugs and medical supplies not covered by insurance, and health insurance
premiums not paid by an employer or other organization. Medical services include those related
to physical and mental health.

Child care and education expenses consist of day care tuition and supplies; baby-sitting; and
elementary and high school tuition, books, fees, and supplies. Books, fees, and supplies may be
for private or public schools.

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Miscellaneous expenses consist of personal care items (haircuts, toothbrushes, etc.),
entertainment (portable media players, sports equipment, televisions, computers, etc.), and
reading materials ( non-school books, magazines, etc.).

Personal budget for different groups means:-

Budget can be prepared for different groups. Every person of every age should create, use, and
update a personal or family budget. Different groups are;

 Families
 governments
 individuals like:
single
married
elderly
 students
 tourists, travelers etc are required budgeting for education fees, emergency fund, monies
for buying a car or home, finances for starting a family, finances to use during
retirement etc.

1.1.2. Role of budgeting in the lives of different groups

Personal budget plan is very role play in your live standard. Budgeting is the process of creating
a plan to spend your money. This spending plan is called a budget. Creating this spending plan
allows you to determine in advance whether you will have enough money to do the things you
need to do or would like to do. Creating and using a budget is something everyone can benefit
from and do. Budgeting is a powerful process that can help you develop a financial plan and
build financial capability and empowerment. Your success with budgeting may depend on your
perspective. Some think budgets are meant to be restrictive, take the fun out of life, and make
you feel shameful about spending. Others may view budgets as too time consuming to make or
too difficult to follow.

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In reality, budgeting is an empowering process. It puts you in control of directing your money
towards what you really want in life, including having fun. With this in mind, taking the time to
create a realistic budget you can follow will be well worth it. If you develop your own Personal
budget, you plan for live (Vision and Goals). Budget created what is good in man mind. This
application of budget process is critical to your accomplishing all you need to in life. The right
type of budgeting plan for you can be determined by various factors:

 Income
 expenses, and
 spending habits

Basically, a budget is a spending plan that maps out the amount of income versus the amount of
expenses during a specific period of time. Many bills such as housing costs, utilities,
subscriptions, and more are due on a monthly basis so the typical budget is prepared for an entire
month.

Preparing a Budget

Establish goals

Before you write out your budget you need to write down your goals. Short term and long term
goals are important and will play a part in how you create your budget. Think about the goals
you have. Common goals include purchasing a home and/or car, earning a degree, owning a
business, writing a book, vacationing, traveling the world, and many more. Some of these
goals should be saved for (education and travel) while others need to be paid for (home and
cars). If you implement your goals into your budget, you maximize the potential of
accomplishing them when and how you want. That’s really what budgeting is all about; creating
a plan to accomplish your goals, hopes, and dreams.

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Determine income

A key element to preparing a budget is to do so before you actually receive any income, so
before your next paycheck and before the month begins. This is crucial because you are not
tempted to spend your earnings before creating a plan for how you really want to spend them.
Determine all types of income you will receive such as wages, gifts, refunds, etc. All that money
that comes to you should be considered income.

Tithes and gifts

Once you have determined your budgeted income, you can move on to tithes and giving. Tithing
is a command brought to us in the Old Testament and mentioned again as a something Christians
should do in the New Testament. Deuteronomy 14:22 states: “Be sure to set aside a tenth of all
that your fields produce each year.” Again in Proverbs 3:9 it says: “Honor the Lord with your
wealth, with the first fruits of all your crops.” While Christians no longer set aside produce

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anymore as an offering to the Lord, we set aside the first 10% of our income to give back to the
Lord through our local church as a tithe. This is why tithes are recorded just below income on the
budget. Additional gifts after tithes such as donations, sponsorships, etc. can be recorded below
the tithes.

Determine saving

By including a section to save a portion of your money, you are able to visually and physically
allocate funds for the future. Savings can be on a pre-tax basis from your payroll deductions like
retirement. It can also be a post-tax basis from your net income by putting it aside for an
emergency fund, your next car, your next house, or a vacation. These post-tax savings goals
are known and unknown upcoming expenses. Known expenses such as a house down payment
are simple to save for as you know how much money will be needed for the expenses. It is
crucial to prepare for the unknown through an emergency fund although it is slightly more
difficult to plan for emergencies that may occur. An emergency fund is meant to cover
unforeseen financial expenses such as medical bills, plumbing problems, a car breakdown, and
so forth.
Debt payments

Debt payments include mortgage payments, auto loans, student loans, credit cards, and any other
outstanding account balances.

Insurance

After debt payments, you’ll list out all of the insurance payments you have for one month.
Insurance payments typically include renter’s or homeowner’s insurance (unless it’s added in to
the monthly cost), auto insurance, life insurance, and health insurance. There may be more in
your life, so if there are be sure to add them to your budget!

Bills

Bills and living expenses can often be the main focus of a budget as they consist of the primary
expenses that individuals (young and old) experience. Some financial planners do not separate
bills from expenses; however for the purpose of this article they have been separated. The

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distinguished items allow individuals to prioritize their expenses and clearly see what expenses
are optional (non-essential) and essential. All bills are essential which basically means they are
nonnegotiable. No matter what, these expenses must be paid each month.

 Utilities
 Water
 Electricity
 Telephone
Living expenses

These expenses are purchases you make in relation to your lifestyle. How many times you eat
out and what grocery stores you shop at determine the amount of money you spend on food.
Same with the type of car you drive and the commute to work also contributes to how much you
spend on gasoline in a month. Food and transportation specifically are month essential expenses
while the rest shown are optional. This means that other than food and transportation the
remaining items could be eliminated from the budget because they are not essential.

Understanding the difference between essential (non-discretionary) and nonessential

(discretionary) expenses will help you in the event of loss of income when you no longer can
afford all the usual items in your budget.

The key concepts of budget are:

 Vision- your vision is what you want to become or how you want to live your lives. It is
your ultimate destination and what you want to be like.
 Goals- Goals constitute your destination or where you want to get to become your vision.
 Plans- Plans are your tactical strategies or plans that will allow you to accomplish your
goals.
 Constraints- These are the conditions or circumstances that are critical for you to
accomplish your goals.
 Accountability- Finally, accountability is how you let others know what you are trying to
accomplish and how you enlist their help in your process.

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Activity .1.

1. Did you have Own plan for live? If you say ‘’yes’’, explain what you will want to be? And
your vision and goal, if you say no, why? Discuss.
1.2. Explaining iimportance of budgeting

A budget helps create financial stability. By tracking expenses and following a plan, a budget
makes it easier to pay bills on time, build an emergency fund, and save for major expenses such
as a car or home. Overall, a budget puts a person on stronger financial footing for both the day to
day and the long term. Since budgeting allows you to create a spending plan for your money, it
ensures that you will always have enough money for the things you need and the things that are
important to you. Following a budget or spending plan will also keep you out of debt or help you
work your way out of debt if you are currently in debt. The importance of budgeting cannot be
understated. A budget, also known as cash flow, is arguably more important than the actual cash
that you have in your bank and investment accounts. Your cash flow is what allows you to pay
for everything (or not). Without knowing your cash flow, you could be putting yourself into a
bad financial situation and not even know it. You can only get by without knowing your cash
flow for so long before you get into financial trouble, so make the time you know the flow of
your cash. Budgeting should be something that everyone does, regardless of their financial
situation.

Budgeting is a wonderful tool for managing your finances, but many people think it's not for
them. Some importance of budgeting are:-

 Helps put you in control.

 Helps you create a visual spending picture.
 Helps you determine how much money you have to spend.
 Helps you decide how you want to spend your money.
 Helps you prevent impulse spending (the decision-making strategy of spontaneity).
 Helps you decide what you can and cannot afford.
 Helps you to keep track of how you spend your money.
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  Helps you create a savings plan.
 Helps you stay out of financial trouble.

In short, importance of budgeting is:-

 Manages your money

 Directs your money flow
 Increase your saving
 Avoid spending money unnecessary
 Achieves your personal goals.

1.3. Importance of setting financial goals

First of all when you want to financial plan, you must set financial goals. Personal financial
planning is the process of managing your money to achieve personal economic satisfaction. This
planning process allows you to control your financial situation. Every person, family, or
household has a unique financial position, and any financial activity therefore must also be
carefully planned to meet specific needs and goals.

You should analyze your financial values and goals. This activity involves identifying how you
feel about money and why you feel that way. Are your feelings about money based on factual
knowledge or on the influence of others? Are your financial priorities based on social pressures,
household needs, or desires for luxury items? How economic conditions affect your goals and
priorities? Specific financial goals are vital to financial planning. Others can suggest financial
goals for you; however, you must decide which goals to pursue. Your financial goals can range
from spending all of your current income to developing an extensive savings and investment
program for your future financial security. And also think about personal finance when you
setting goals. Personal finance relates specifically to how you as an individual or part of a
household manage your money. Personal finance is the financial management which an
individual or a family unit is required to do to obtain, budget, save, and spend monetary
resources over time, taking into account various financial risks and future life events.

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Personal Finance Activities

 Obtaining- Get resources from employment, investments

 Planning- Plan spending and saving through budgeting process
 Saving- Money for emergencies and short-term goals
 Borrowing- Wise borrowing habits; not misusing credit
 Spending- Considering consequences; spending < earnings
 Managing Risk- Adequate insurance coverage for risks
 Investing- Select securities for income and Long Term growth
 Retirement and Estate Planning- Financial security in later life.

A personal financial plan is a report that showing an individual’s current financial situation,
financial needs and future financial activities. Personal financial planning is the process
of managing your money to achieve personal economic satisfaction. The seven key areas
of personal financial planning are:

 Financial position planning: is concerned with managing the personal resources

available by examining your net worth (assets-liabilities)
 Financial cash flow planning : refers to the aggregating all the expected income
sources in a given year, minus all expenses that are expected within the same year.
 Adequate protection: is about conducting an analysis to determine how best a
household can be protected from unforeseen risks. The risks can be categorized as
property, liability, disability, death, health and long term care. Among the risks, there are
those that can be self-insured although most of them call for the purchase of an
insurance contract.
 Tax planning: income tax is typically the expenses that most individuals incur. Tax
planning therefore determining the amount that will be paid as tax and the time when the
taxes will be paid.

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  Investment and wealth planning: It is prudent to have regular savings behavior
while earmarking various areas of investments. It is prudent to diversify the
investments so as to reduce risks.
 Retirement planning: this involves understanding the cost of living after retirement, and
developing a plan to guard against any income shortfall. .

Principles of personal finance:-

 Financial literacy: The essential features of financial literacy are: actual and perceived
knowledge, skills for application of that knowledge, financial behavior and altitude
and financial experiences. It is important to boost your financial literacy.
 Always plan: for, education, savings, expenditures, borrowing, retirement etc. Failing to
plan is planning to fail.
 Time value of money: money received today is worth more than money received, say
after a year from now. This principle allows one to understand how investments grow
overtime
 Understand taxes: Personal financial decisions are affected by taxes. The principle
makes it possible for one to understand how taxes affect the return of an investment.
 Importance of liquidity: it is necessary to plan for the unexpected. It means that you
must have some liquid money available at any time to cater for the unexpected. 6. Smart
spending-avoid wastage and impulse buying
 Emergency fund: Protect yourself against major catastrophes e.g. Insurance can
protect one against major catastrophes like floods, hurricanes, earthquakes, fires etc.

Goal-setting guidelines

Financial goals are the long-term, short-term and intermediate plans you have for your finances.
The best financial goals align with your values and personal goal. Financial goals are savings,
investment or spending targets you hope to achieve over a set period of time. The stage of life
you’re in usually determines what type of goals you wish to achieve. For example, if you’re in
college, it may be an easy short-term goal like saving for a new pair of shoes or something more
challenging like saving for a car. On the other hand, a person with a growing family would have
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a long-term goal of going from renting a home to owning one. Saving for a child’s college
education and saving for your own retirement are other popular financial goals.

Goal setting is central to financial decision making. Your financial goals are the basis for
planning, implementing, and measuring the progress of your spending, saving, and investing
activities.

Make Your goals SMART

Setting goals is a skill that usually improves with experience. According to a popular model, to
be truly useful goals must be Specific, Measurable, Attainable, Realistic, and Timely
(SMART).

 S- Specific. Goals should be specific. Answer the questions of who,

what, where, when, and why. so you know exactly what your goals are so you can
create a plan designed to achieve.
 M- Measurable. Goals should be measurable. You must be able to
track progress toward your goal. With a specific amount. For example, “To save
birr1000, 000 in commercial bank within three years” is more measurable than “saving
into a Commercial bank.
 A – Attainable. Goals should be achievable. Achievable goals are
goals that your attitudes, abilities, skills, and interests can help you accomplish. Is
action-oriented. The action provides the basis of the personal financial activities you will
undertake. For example, “Reduce current debt balances” will usually mean actions to
pay off amounts owed.
 R- Realistic. involving goals that are set after considering your
life situation and income. For example, it is unrealistic for a full-time student to
expect to purchase a new car each year.
 T- time-based, indicating a time frame within which the set goals are
to be achieved. Setting a time frame helps one to measure the progress made
towards the financial goals. Designs of products and work places.

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Importance of personal financial plan

 Increases the effectiveness in obtaining, using, and protecting your financial

resources throughout lifetime.
 Boost your control of financial affairs by safeguarding against bankruptcy, excessive debt
and relying on others for economic security.
 Relieve you from financial uncertainties/worries because one is able to anticipate
future incomes and expenses
 They facilitate achievement of individual financial goals.
 Help realizing your personal financial independence.
 They enable your account for your money.
 They improved personal social relationships.

1.4. obstacles that prevent financial goals

Many factors influence daily financial decisions, ranging from age and household size to interest
rates and inflation. Three main elements affect financial planning activities:
 life situation
 economic factors, and
 . personal values
Details of factors affecting the financial planning
 Economic factors such as inflation, interest rate, loss of income, business cycles
and consumer prices affect the ability to implement the plans. Market forces of
demand and supply for goods and services usual affect the prices
 life situation or Personal factors such as age, income, size of households, marital
status, health, career choices, personal consumption patterns, personal beliefs, and ethics
and personal values affect the financial behavior .
 personal value :- In addition to being defined by your family situation, you are defined by
your values the ideas and principles that you consider correct, desirable, and important.
Values have a direct influence on such decisions as spending now versus saving for the
future.

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  Government policies e.g. tax policies may be favorable or not to your plans.

1.5. Types of behaviours and skills

Financial literacy Financial literacy as a combination of financial awareness (experiences),

knowledge, capability, attitude and behaviors necessary to make sound financial decisions and
ultimately achieve individual financial wellbeing. Financial experiences refer to the practices
individuals undergo in the credit and loan market as they manage their financial resources.
These practical experiences detail the processes undergone in the debt cycle such as
obtaining the loan, how to avoid, reduce or repay debt while maintain a good credit rating.
Individuals who adhere to responsible debt experiences report lower levels of financial
problems. Responsible financial experiences include debt restructuring, seeking financial
advice, seeking financial counseling and avoiding multiple loans.

Financial knowledge: A person is regarded as financially knowledgeable if he possesses

skills, education and current information on how to manage his financial obligations.
Financial knowledge is acquired through education and training. Financial capability refers to
the capacity to make financial decisions given a set of financial skills, education and
information. Financial capability covers four areas namely:-

 planning how to obtain

 managing obtained money
 making prudent buying decisions and
 Staying informed about financial realities.

Financially capable persons should therefore be able to keep track of their own finances,
and plan their future financial commitment by personal financial planning, budgeting and
budgetary control.

Financial behaviors and attitudes involve certain traits, habits and biases usually
influenced by a range of personality, psychological and environmental factors. Example
of good financial behavior is self-control, self-confidence and self-independence. A self-control
problem refers to a situation where an individual is not able to balance between short-term and
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long-term preferences. It also influences saving choices and usually leads to impulse buying and
excess borrowing. Individual with higher level of self-confidence score higher in financial
literacy. On the other hand, self-confidence leads people to set and pursue ambitious goals
meaning it is an antecedent of motivation. Peer independence occurs when individual fail to
mimic others. Peer influence refers to how social interactions affect key financial decisions of
compatriots in the social group.

Self-check 1

Part-I: Choose the correct answer

1. According to personal Finance Activities one of the following is odd?

A. Obtaining B. Planning C. Saving D. none
2. One the following are key concepts of budget but not
one
A. Goal B. vision C. plan D. none
3. One of the following is elements affect financial planning activities:
A. life situation B. economic factors, C. personal values D. all

Part II Matching
Instruction: select the correct answer for the given column.

A B

1. Importance budget A. Vision and

Goals
2. Household Expenditures B. Increase your saving
3. You plan for live C. families or
individual
4. Budget for different group D. Food
5. Economic factors E. Inflation

Test III: short Answer writing

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Directions: Answer all the questions listed below.

1. Explain the criteria of setting

budget goal.
2. Discuss about obstacles that prevent financial goals

Part IV writing

1. Define the Budgets and budget plan.

2. Explaining and list the importance of budgeting
3. Explain categories of personal spending.

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Unit Two. Developing a personal budget
This learning guide is developed to provide you the necessary information regarding the
following content coverage and topics:
 Estimating Income and expenses
 Developing spreadsheet
 Identifying fixed and variable expenses
 Subtracting total expenses from the total income
 Exploring reason for a deficit budget
 Investigating ways to reduce expenses or increase income
 Exploring and identifying allocation of surplus fund
This guide will also assist you to attain the learning outcomes stated in the cover page.
Specifically, upon completion of this learning guide, you will be able to:

 Estimate all income and expenses for a six month period (semi-annual)

 Develop budget spreadsheet and records

 Use budget spreadsheet for all income, fixed expenses and variable expenses

 Calculate total expenses and subtract from the total income to determine a surplus or
deficit

 Understand reasons for a deficit budget and ways to reduce expenses or increase income

 Perform allocation of surplus funds towards saving and meet financial goals

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 2.1. Estimating income and expenses
2.1.1. Develop personal budge format

A budget is a summary of estimated income (money in) and expenses (money out) for a specific
period of time (such as a week, month or year). Budgeting is an important money management
tool that helps you to understand how you earn and spend your money. Anyone can use a budget
because it allows you to tailor it to fit your financial realities. A good budget has a detailed list of
your various sources of income and your expenses. Expenses should be separated and
categorized as necessary household expenses (food, shelter, and loan payments), optional
household expenses (soda or extra clothes), and savings.

In the ideal budget, your income is greater than or equal to your expenses. If your budget shows
that your expenses are greater than your income, you must correct this difference. You can make
this correction by finding additional sources of income such as seeking additional work, taking
out a loan, decreasing expenses, or using a bit of your savings. Creating a budget helps you to
make these decisions in advance before you spend any money or realize that you have already
overspent. In the budgeting process, you can choose your most important expenses, such as key
goals and necessary expenditures.

A budget is only a plan for how you want to spend your money. How you actually spend your
money based on your day-to-day realities may be different. Since a budget is for a specific
period, it is essential to carefully record and track how you actually spend your money and what
you earn during that period. Comparing how much you planned to spend and earn with the
amount you actually spent and earned can help you to make adjustments to the next budget.

Understanding income and expenses

Income is the money that flows into your household. It is the money earned from selling goods,
providing services, or other income generating activities. Money and goods received as gifts,
remittances and loan disbursements count as income. To estimate your total income, add up the
total value of all the money you expect to receive from all of your different income sources in a
given period.

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An expense is the money you spend. One of the first steps of money management is to
understand how you spend your money. A good way to start is to record each of your expenses
over a short period of time, such as a week. With this knowledge, you can prepare a realistic
budget. Planning your expenses for a specific period of time has many benefits. It can help you
plan how to cover major expenses and achieve your financial goals. Having a greater goal in
mind helps you reduce the temptation to buy things that are lesser spending priorities.

Steps in Budgeting

 Set financial goals

 Estimate your income
 Record what you spend
 Prepare one month Budget
A. Set Financial Goals
Make sure your goals are SMART

Specific- Clearly state what you want to do

Measurable- Measure by time and/or money needed

Attainable- Make sure your goal is realistic and possible

Relevant- Make sure goals fit your needs

Time related- Set a definite target day (day/month/ year)
Identify and write them down
 Long term
 Short term
B. Estimate Your Income

Make a list of each income stream that you receive on a regular basis each month. The key is to
only include that income you get every month. Include both monthly wages earned from your
job(s) as well as monthly supplemental income (i.e. child support, disability, etc.) Mark down the
date these are received, calculate the monthly income total. Building a budget takes a little
time. But it’s absolutely vital to financial health.

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 C. Record What You Spend

Track your expenses for a month to start a budget. What did you buy? What bills did you pay?
Basically, where did your money go? Then categorize your spending into groups such as
clothing, food, music downloads, auto, etc. Think of other areas in which you might spend
money on a regular basis. Don’t forget to include some money for savings.

Identify your income. Only include regular sources of income such as paychecks and
allowances. If you get paid monthly or semi-monthly, it is easy to calculate your monthly
income. If you get paid weekly or biweekly, multiply your weekly income by 52 or 26
respectively to get your annual salary. Then divide by 12 to get your monthly income. Now that
you have your expenses and income quantified, it’s time to examine and fine-tune your budget.

Subtract expenses from income. This is to determine how much money you have left over at
the end of the month. If you have more income than expenses, that’s good. If you spend more
money than you earn, you’re going to have to decrease your expenses or increase your income.
Keep in mind it’s easier to decrease your expenses.

Timing is important. If you get paid once a month, be sure to budget money to last the whole
month. If you get paid twice a month, but you have several large expenses at the beginning of the
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month, make sure you save some of your money from the end of the month to help with the next
month’s bill

D. Prepare one month budget

List all income and expenses required

Income
Salary Income, salary, wages from all sources
Investment income ,Dividends, interest, capital gains
Overtime
Rent Income
Other benefits etc
Total income (A)
Expenses
Health care expenses
Food expenses
Transportation expenses
Clothing expenses
Housing expenses
Child care and education expenses
Miscellaneous expenses
Total expenses(B)
Amount planned to save(A-B)

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Example of One month budget

Income
Net income 8000
Other income 6540
Total income(A) 14540
Expenses
Health care expenses 1200
Food expenses 7200
Transportation expenses 650
Clothing expenses 800
Housing expenses 2000
Total expenses(B) 11850
Amount planned to save(A-B) 2690

2.2. Develop spreadsheet

A spreadsheet is a large sheet having data and information arranged in rows and columns. As
you know, Excel is one of the most widely used spreadsheet applications. It is a part of Microsoft
Office suite. Spreadsheet is quite useful in entering, editing, analyzing and storing data.
Arithmetic operations with numerical data such as addition, subtraction, multiplication and
division can be done using Excel. You can sort numbers/ characters according to some given
criteria (like ascending, descending etc.) and use simple financial, mathematical and statistical
formulas. A personal budget spreadsheet offers an individual a way to determine the state of his
finances and help him or her plan spending over the course of a period of usually a month or a
year

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Create a Budget Spreadsheet

Budget spreadsheets can help an individual track his spending and plan his future expenditure. That is
why creating one is of greatest importance. So create a budget spreadsheet as follow:-

1. Firstly, making one requires a desktop or laptop computer with MS Excel already
installed.
2. Run the Excel program on the computer and open a new file or spreadsheet.
3. Put in the necessary details on the spreadsheet in order for it to calculate the figures
involved in the file. Basic budget spreadsheets are often labeled with Income and
Expenditure, which will be totaled by the file itself.
4. Indicate the months that are included in the duration of the budget. If it applies for half a
year, write January to June on every cell along one row.
5. Then, type Income on one cell a row below the different months of the year. Under the
category should be the types of income that you expect to receive each month.
6. After the types of income, skip one cell and then write Expenditure, under which are the
different types of expenses like shopping, groceries, bills, and others.
7. After they’ve been put on the spreadsheet, you can begin writing down the calculation or
formula which Excel will use at a later date once you need to see the total.
8. Choose the part of the spreadsheet where you can write the total.
9. Click the Menu button and click Autosum. Highlight the cells that you need to include in
the Autosum by clicking on them and dragging them.
10. Step 9 should be repeated with the Expenditure.

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Formulas: In spreadsheets, formulas process data automatically. It takes data from the
specified area of the spreadsheet as input then processes that data, and then displays the output
into the new area of the spreadsheet according to where the formula is written. In Excel, we
can use formulas simply by typing “=Formula Name(Arguments)” to use predefined Excel
formulas. When you write the first few characters of any formula, Excel displays a drop-down
menu of formulas that match that character sequence.

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The basic components of spreadsheets are:

 Title Bar: The title bar displays the name of the spreadsheet and application.
 Toolbar: It displays all the options or commands available in Excel for use.
 Name Box: It displays the address of the current or active cell.
 Formula Bar: It is used to display the data entered by us in the active cell. Also, this
bar is used to apply formulas to the data of the spreadsheet.

Column Headings: the spreadsheet is named by letters or a combination of letters.

Row Headings: the spreadsheet is named by a number.

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Cell: In a spreadsheet, everything like a numeric value, functions, expressions, etc., is recorded
in the cell.

2.3. Identifying fixed and variable expenses

 Fixed expenses: Expenses, like bills, that must be paid each month and generally cost the
same amount. Some fixed expenses, like a utility bill, may also be variable because the
amount changes each month depending on usage. Look at your list of bills and note
which ones are the same every month or you expect will be the same for several months.
 Variable expenses: Expenses that change in amount from month to month.

Write down all of your current expenses and be sure to make an honest and realistic appraisal of
your spending. You can track your expenditure for a month or more for an accurate assessment
of how much you spend. It is useful to categorize your spending, such as fixed expenses, variable
expenses and discretionary expenses, as listed below.

Fixed expenses:-

 Mortgage payment/rent
 Vehicle loan or lease
 Other loans
 Insurance
 Education
 Savings plan if possible and etc any other expenses with fixed monthly/weekly payments

Variable expenses

 Groceries
 Utilities
 Phone
 Maintenance
 Clothing
 Transport

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  Medical

Discretionary expenses are any expense not directly essential to day to day living, such as:

 Entertainment
 Clothing
 Furniture
 Holidays
 Sport
 ‘Pocket money’ look the following:-

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Example Monthly Family Living Budget
Income Monthly Annual
Salary (take home) birr 3,000 birr 36,000
Income
Allowance 1,500 18,000
Total income 4,500 54,000
Fixed Expenses
Car payment 677 8,124
Child care 475 5,700
House payment 1,043 12,516 Fixed expenses
Retirement account 400 4,800
Insurance 200 2,400
Total fixed expenses(A) 2,795 33,540
Variable Expenses
Auto fuel 225 2,700
Auto repair 75 900
Clothing 70 840
Association 275 3,300
Dining out 75 900 Variable
Groceries 325 3,900
expenses
Medical 50 600
Telephone 105 1,260
Utilities 125 1,500
Christmas (save) 125 1,500
Discretionary expenses 255 3,060
Total variable expenses 1,705 20,460
Total Expenses (B) 4,500 54,000
Net Surplus/deficit(A-B) bir 0 birr 0 no deficit, no surplus is Balanced

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 2.4. Subtracting total expenses from the total income

For example, if you budget birr 120 for your monthly power bill and you only need to pay birr 80
during a mild spring month, then send the power company birr 80 and put the remaining birr 40
in an interest-bearing savings account. That birr 40 may not earn much interest, but it will earn
some. When you get a higher bill in the summer or winter, or other period of time you’ll have the
money in your savings account to cover the difference. Look the above example Monthly Family
Living Budget.

Example:-1

Total income of month (4500) –Total expenses of month (4500) =0

Income Monthly Annual

Total income (A) 4,500 54,000
Total fixed expenses 2,795 33,540
Total variable expenses 1,705 20,460
Total Expenses (B) 4,500 54,000
Surplus/deficit (A-B) 0 0 balanced

2.5. Exploring reason for a deficit budget

Surplus occurs when you have a positive cash flow. Deficit occurs when you have a negative
cash flow. Discretionary income is the money you have left over after paying for essentials.
Discretionary income is used to evaluate the strength of a person’s income. Represents the
money you can spend on wants. Generally when revenue greater than the expenses the deference
is called surplus, and when expenses greater than the income the deference is called deficit

Example

Total income------------------16400
Total expense------------------18400
Deficit Budget ----------------- (2000)
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 Budget surplus

A budget surplus occurs when income exceeds expenditures. The term often refers
to "savings" rather than a "budget surplus."

Example Monthly Family Living Budget

Income Monthly Annual
Salary (take home) birr 3,000 birr 36,000
Allowance 1,500 18,000
Total income 4,500 54,000
Fixed Expenses
Car payment 677 8,124
Child care 475 5,700
House payment 1,043 12,516
Retirement account 400 4,800
Insurance 200 2,400
Total fixed expenses(A) 2,795 33,540
Variable Expenses
Auto fuel 225 2,700
Auto repair 75 900
Clothing 70 840
Association 275 3,300
Dining out 75 900
Groceries 325 3,900
Surplus/
Medical 50 600
Telephone 105 1,260 personal
Utilities 125 1,500 saving
Christmas (save) 125 1,500
Total variable expenses 1,705 20,460
Total Expenses (B) 4,245 50940
Net Surplus/deficit(A-B) bir 255 birr 3055

A budget surplus might be used to make a purchase, pay off debt or save for the future

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 Budget deficit

When expenditures exceed income, the outcome is a budget deficit.

Example Monthly Family Living Budget

Income Monthly Annual
Salary (take home) birr 3,000 birr 36,000
Total income 3000 36,000
Fixed Expenses
Car payment 677 8,124
Child care 475 5,700
House payment 1,043 12,516
Retirement account 400 4,800
Insurance 200 2,400
Total fixed expenses(A) 2,795 33,540
Variable Expenses
Auto fuel 225 2,700
Auto repair 75 900
Clothing 70 840
Association 275 3,300
Dining out 75 900
Groceries 325 3,900
Medical 50 600
Telephone 105 1,260
Utilities 125 1,500
Christmas (save) 125 1,500 Deficit
Deficit
Discretionary expenses 255 3,060
Total variable expenses 1,705 20,460
Total Expenses (B) 4,500 54,000
Deficit(A-B) bir (1500) birr(18000)

A budget deficit occurs when expenditures/expenses exceed revenue. The term "budget deficit"
is most commonly used to refer to government spending rather than business or individual
spending. When referring to accrued federal government deficits, the term "national debt” is also
used. The opposite of a budget deficit is a budget surplus, and when total expenditure equals

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total Income, the budget is considered balanced. When individual or businesses experience
budget deficits, they have to borrow money in order to avoid bankruptcy/ decrease discretionary
expenses. Individuals use budget deficits to measure the overall health of their finance. While
Deficits are always a warning signal for individual/business, it is important to understand to find
solution why occurs deficit.

Example Assume that Obbo Oliqa has the following budgeted

Task Jan 1 budget Jan. 30 actual Deference

Income 12400 birr 1600 birr 0

Rent expense 500 400 0
Utility expense 300 350 (50)

Educational 200 250 (50)

payment
Gift & 100 90 10
contribution
Saving 200 200 0
House operation 300 280 20

Total shortage = 100

Total exess = 30

In general Obbo Oliqa personal budget performance is shortage by 70 birr

Saving –shortage =200-70 =130 decline the saving amount to 130

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 2.6. Investigate ways to reduce expenses or increase income

Financial independence is achieved by reducing spending, earning more, saving more, and
avoiding negative cash flow. A spending plan is a tool to assist one in tracking and monitoring
income and expenses and avoiding negative cash flow.
Reduce Spending
 Doing comparison shopping
 Using coupons
 Avoiding impulse purchases
 Buying items “on sale”
 Carpooling, walking, or riding a bike
 Eating at home
 Eliminating/reducing impulse purchases – vending machines, convenience stores, etc.
 Shopping at thrift stores
 Wearing hand-me-down clothes etc.
Increase Income

 After school/weekend job

 Additional chores around the house
 Yard work
 Babysitting
 Summer job
 House sitting
 Provide a service

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 2.7. Exploring and identifying allocation of surplus fund

A budget surplus occurs when income exceeds expenditures. Running a budget surplus means
additional money. It is allocated for the following purpose.
 It is important to pay off debts

 Reinvest

 Save for future

 A large surplus also reduces the need for borrowing.

 By your wants

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Self-check 2

Part-I: Choose the correct answer

1. Which of the following not fixed expense?

A. Insurance B. Other loans C. Mortgage
payment/rent D. Utilities
2. One the following are basic components of spreadsheets
except one
A. Title Bar B. toolbar C Name Box D.
mouse
3. Which of the following is health expense?
A. Tele phone B. medicine C. food D. mortgage
4. One of the following is elements utilities expense?
A. Electric usage B. food expense C. discretionary expense D. all

Part II Matching
Instruction: select the correct answer for the given column.

A B

1. Expenses exceed revenue A. surplus

2. Revenue exceed expense B. deficit
3. Increase Income C. Holidays
4. Decrease expense D. Eating at
home
5. Discretionary E. After school/weekend job

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 Test III: short Answer writing
Directions: Answer all the questions listed below.

1. Explain fixed expense and

variable expenses
2. Discuss about surplus and deficit

Part IV writing

4. Explaining the step of develop budget

5. Explain all categories of personal income and expense.

Operation sheet 2.1: performance budget

 Operation title: Develop personal budget

 Purpose: To prepare personal budget
 Instruction: Using information prepare personal budget.
Task budget for October 1

 Income …………………….. 12000

 Rent expense ………………...700
 Utility expense ……………….200
 Saving ……………………… 1700
 House expense ……………… 8200
 Loan payment ……………….. 1200
Actual income and expense for October 30

Activity October actual

 Income …………………….. 12000
 Rent expense ………………... 700
 Utility expense ………………. 200
 Saving …………………………
 House operation ……………… 840
 Loan payment ……………….. 1200

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Unit three. Implement and monitor the personal budget
This learning guide is developed to provide you the necessary information regarding the
following content coverage and topics:
 Following the budget according to plan
 Recording actual expenses and income of the budget
 Comparing the actual and budgeted expense and income
 Modifying the budget
 Discussing Handy hints
 Conducting ongoing review of the budget
This guide will also assist you to attain the learning outcomes stated in the cover page.
Specifically, upon completion of this learning guide, you will be able to:

 Perform budget plan for a period of time

 Calculate and compare actual expenses and income for the period of budget plan

 Review handy hint of personal budget

 Carry out Ongoing review of the budget and ensure updates

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3.1. Following the budget according to plan

Moving on to reviewing

Compare what you budgeted for yourself at the start of the month with how much you actually
spent at the end of the month for each category. Did over/under your budget? Next, why did over
or under? Did you have control of why? Last is to revise your budget in the areas where it went
wrong. If you over spent and it was something you could control. Determine if you should
allocate more or less to certain items in your budget and keep adapting it until it works. Review
the budget at least monthly.

 On necessary adjustments for the situation.

 Consider the following in your review if :

Income sources
Income cover expenses
Where and when spending money
Saving regularly
Anything has affected your income, spending, and saving you are achieving your
personal and financial goals.

3.2. Recording and comparing actual expenses and income of the budget

Example implementation budget performance

Income Budget plan Actual deference

Net income 8000 8000 0
Other income 6540 6540 0
Total income(A) 14540 14540 0
Expenses
Health care expenses 1200 1500 (300)
Food expenses 7200 7500 (300)

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Transportation expenses 650 740 (90)
Clothing expenses 800 750 50
Housing expenses 2000 2000 0
Total expenses(B) 11850 12490 (640)
Amount planned to save(A-B) 2690 2050 (640)

Activity - The family budget

The total income of the family for the month of January is birr 15400 during the month of
January, and the family has the following budget allocation and actual expenditures for the
month of January. The budget allocation is 15%, 30%.10%, 10% ,5%,10% ,5% respectively,
then prepare budget performance report for the month of January

Description Budget allocation for Actual expenditure

January
Housing expense ----- 2300
Food expenuse ---- 4580
Transportation expense 1540 1530

Clothing ------ 1540

medical care 770 800
Education 1540 1540
Gift contribution 770 700
Saving ------ -------

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3.3. Modifying the budget

Review Spending .To fix your finances, you need to get a handle on your outlay first categorize
spending so you can make adjustments. Many people find that just by looking at aggregate
figures for discretionary expenses, they are spurred to change their patterns and reduce excessive
spending. Then Eliminate Unnecessary Expenses. Once you've got a sense of where the money
goes, it's time to tighten up. All cutbacks should start with items you wouldn't miss or habits you
should change anyway like reducing your fresh food purchases if you find ingredients spoiling
before you can eat them. Or preparing meals at home more instead of going to restaurants or
getting takeout. Some expenses you shouldn't drop but might be able to adjust could include
reducing your auto insurance rate by switching carriers. Monitor your progress for a few months.
You can do this by writing everything you spend in a notebook. How you track your money isn't
as important as how much you are tracking. Focus on ensuring that every cent is accounted for
by dividing your expenses into categories. Adjust the spending as needed after each month.

NEEDS
• Housing Cost SAVINGS DEBT
Emergency Fund Student Loans
• Groceries Essential Expenses Credit Card
• Utilities Retirement Savings Other
• Healthcare Costs Discretionary spending
• Transportation
Entertainment
Vacations
Technology

3.4. Discussing Handy hints

Handy hints is how to avoid getting into financial difficulties and, ways to cut back on spending
or change negative spending habits. Restructure your expenses set an amount of money that is
reasonable for you to spend each week/or each months after all your fixed and variable expenses
have all been accounted for. This requires that you realistically examine the expenses that you
can and cannot alter. Handy hint is very important for you to identify the expenses essential or
not. Your values are those ideas and beliefs that really matter to you. Your values will determine
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what you will do with your money. Asking yourself, “How do I use my money now?” will tell
you a lot about your money values. People use money two ways:-

 They buy things they need or want now

 They save for things they may need or want later. It’s not about how much money you
have, but how you use your money. It is all about the choices you make.

Difference between Needs and Wants

 Here’s a good rule about money: It is very important to make your needs come first. That’s why
it is important to know the difference between your needs and your wants. Before you start
planning how to use your money, let’s be clear about the difference between needs and
wants.

 A need is something you must have to survive, like a place to live and enough food to
eat.

 A want is something you might like to have, but you don’t have to have it right away.
You can save to have it later.

A. Spending Plan
Show you where to cut spending, provide methods for keeping good records of spending,
allow you to spend money without feeling guilty, create a way to measure your progress,
improve communication with other people, etc.
Assess Needs
Make a realistic list of needs and wants
Needs Wants
Food Lots of Money
Clothing Cell Phone
Housing Big TV
Transportation New Car
Child Care Designer Jeans
Insurance Vacations
Medicines

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Most people earn less income than what they need to purchase everything they need or want. to
help you decide which expenses to prioritize and include in your budget, label each expense as a
need or a want. It may be helpful to draw pictures of your expenses and separate them. After you
have separated your expenses, it will be easier to decide what to cut from your budget based on
your expected income. You may choose to add in savings towards one of your financial goals.
You can review your expenses to see which ones are most important to have now and those that
can be purchased at a later time.

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 3.5. Conducting ongoing review of the budget

Budget review means a meeting hold by the parties to review and discuss the draft Annual Budget.
“Brand” means brand name provided by operator according to star rating. Reviewing your budget is
the process of assessing, adjusting and fine-tuning the amount of money you have allocated to
the various budgeting categories. This small, important action gives the insight into your
financial habits, and allows you to find areas for improvement. So, if they are spending a little
more money than you originally planned in one area, and a little less in another, you can tweak
your budget to better align with your spending habits.

Reviewing Budget Important

Reviewing the budget helps you to better manage your spending habits, increase your savings,
and make progress toward your long-term financial goals. It’s an important component of proper
money management, and a key element of personal finance .Think about it, if you were to create
a budget once and never review it, how would the know if the drifting off-track in regard to the
financial dreams? Additionally, how would find areas for improvement in your spending?
Taking the time to look back and assess the budget will help you see beyond the day-to-day life,
and improve the future financial decisions

Reviewing Budget vs. Tracking Expenses

Before we get too much further into this post, I want to clarify something: reviewing your
budget is not the same thing as tracking and keeping up with the budget. In fact, there is a
very big difference. Reviewing the budget is the act of analyzing how accurate and
effective the budget has been all while looking for areas to improve the budgeting process.
In other words, reviewing the budget is the chance to assess what’s working, what’s not
working, and how can you improve the budget. That’s why you can get away with
reviewing your budget once a month.

Meanwhile, tracking the expenses (i.e. keeping up with the budget) is something should do
on a daily basis. After all, if you only track the expenses once a month, there’s no way to
adjust the spending habits in time to stay within the monthly budget. Think of it like this:

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reviewing the budget is how stay on track to achieve the long-term financial goals.
Whereas, tracking the expenses is how you stay on track to live within the monthly budget.
Look the following diagram about reviewing and tracking the expenses.

In order to stay on track with your budget, continuously update your incurred expenses
throughout the month. There a many different tools and apps designed to track your spending as
well.

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Self-check 3

Part I: short Answer writing

Directions: Answer all the questions listed below.

1. Discuss about need assessment

2. Explain Needs and wants
3. Discussing Handy hints

Operation sheet 3.1: Budget performance

Operation title: preparation of budget

 Purpose: To prepare performance budget
 Instruction: Using the information prepare performance budget.
The family budget

The total income of the family for the month of January is birr 14200 during the month of
January, and the family has the following budget allocation and actual expenditures for the
month of January. The budget allocation is 15%, 30%.10%, 10% ,5%,10% ,5% respectively,
then prepare budget performance report for the month of January

Description Budget allocation for Actual expenditure

January
Housing expense ----- 2300
Food expenuse ---- 4180
Transportation expense ----- 1230

Clothing ------ 1040

medical care ----- 800
Education ------- 1540
Gift contribution ------ 700
Saving ------ -------

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Unit Four Discuss the place of saving and investing today
This learning guide is developed to provide you the necessary information regarding the
following content coverage and topics:
 Discussing the impact of high cost of living
 Discussing increasing levels of consumer debt in Ethiopia
 Discussing different attitudes to savings and investment
This guide will also assist you to attain the learning outcomes stated in the cover page.
Specifically, upon completion of this learning guide, you will be able to:

 Understand the impact of high cost of living

 Understand levels of consumer debt in Ethiopia

 Explain importance of setting financial goals and developing a saving and investment
plan

 Understand different attitudes to savings and investment of individual's own spending

habits

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4.1. Discussing impact of high cost of living

What’s the Difference Between Inflation and Cost of Living?

People often use the phrases “cost of living” and “inflation” as if they were synonymous. They
are not the same, although closely related. Inflation is the big picture: As the cost of goods and
services rises, the buying power of the dollar falls. The inflation rate is often measured by the
Consumer Price Index(CPI).

Cost of living, on the other hand, is a more focused picture. This number averages the cost of an
accepted standard of living that includes food, housing, transportation, taxes and healthcare. Cost
of living is frequently used to compare life in different locations around the country.

When the Going Gets Expensive

It’s easy for most people to feel the effects of cost of living increases in their daily life. But rising
prices housing the lower and middle classes especially hard. Higher food, gasoline and utility
costs mean less money remains once these necessities are paid for, leaving little for savings or
discretionary spending. To compensate for the rise in prices, consumers tend to buy less, switch
to less expensive substitutes or drive farther to find bargains. High costs of living exert greatest
impact on persons, mainly retired persons, with fixed incomes composed of savings bank
interest, life insurance annuities, pensions, or social security benefits. Families of workers whose
wages are low also bear a heavy burden during times of inflation.

cost of living, monetary cost of maintaining a particular standard of living, usually measured by
calculating the average cost of a number of specific goods and services required by a particular
group. The goods and services used as indexes may be the minimum necessary to preserve health
or may be what is considered average for a given income group, depending on the purposes of
the index. Measurement of the cost of a minimum standard of living is essential in determining
relief payments, social insurance benefits, family allowances, tax exemptions, and minimum
wages. Measurements of change in the cost of living are important in wage negotiations. It is
difficult, however, to make precise comparisons over time, because consumer tastes and the

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availability of products change. Increase household expenses (food, school fees, medicine,
housing, weddings) etc

Consumer Prices as above mentioned inflation is a rise in the general level of prices. In times
of inflation, the buying power of the birr decreases. For example, if prices increased 5 percent
during the last year, items that cost birr100 one year ago would now cost birr 105. This means it
now takes more money to buy the same amount of goods and services. The main cause of
inflation is an increase in demand without a comparable increase in supply. For example, if
people have more money to spend because of pay increases or borrowing but the same amounts
of goods and services are available, the increased demand can bid up prices for those goods and
services. Inflation is most harmful to people living on fixed incomes. Due to inflation, retired
people and others whose incomes do not change are able to afford smaller amounts of goods and
services. Inflation can also adversely affect lenders of money. Unless an adequate interest rate is
charged, amounts repaid by borrowers in times of inflation have less buying power than the
money they borrowed. If you pay 10 percent interest on a loan and the inflation rate is 12
percent, the dollars you pay the lender have lost buying power. For this reason, interest rates rise
in periods of high inflation.

4.2. Discussing increasing levels of consumer debt in Ethiopia

There are many types of consumer debt in Ethiopia.

May refer to:
 credit card debt
 mobile telephone debt
 mortgages on residential and investment properties
 personal loans to purchase:
Motor vehicles
Travel
Domestic white goods
Student loans the Higher Education.
For these purposes the following services are provided banks.
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Checking Accounts
A checking account is a service that gives customers a way to pay bills by check, and to deposit
money. Checking accounts don’t often pay interest, or if they do, it is less than you can earn on
a savings account. A minimum balance is sometimes required. Some banks or credit unions
charge a monthly fee for checking accounts. Often banks and credit unions offer debit cards that
are linked to your checking account .

Savings Accounts

A savings account is a secure place to keep your money for future use. Some people use them to
save up for a vacation or to make an expensive purchase. Savings accounts normally pay you a
small amount of interest. Interest is money that you can earn on top of the money you already
have in your account.

Debit Cards

A debit card is a plastic card that is connected to your credit union or bank account. When you
make purchases using this card, money is immediately taken from your checking or savings
account to cover these costs. Debit cards can also be used for the withdrawal of cash. Often you
can withdraw cash along with making your purchase.

ATMs (Automated Teller Machines)

Almost every bank has Automated Teller Machines (ATMs) that allow you to skip the teller
window and conduct your basic banking tasks at the machine. Your bank will issue a card for use
at its ATMs. This card may also serve as a debit card if you give your permission.

Credit Cards

A credit card allows you to purchase items now and pay for them later. Credit cards are an
example of revolving credit. When you get a credit card, it will have a limit, also known as a
“line of credit.” Your first credit card may have a limit. Here are some important things to
remember about using a credit card: Every month you get a credit card bill for all the purchases
you made that month. On the credit card bill there will be a due date this is the date when your
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payment must be received by the credit card company. The credit card company does not require
you to pay your entire balance at the end of each month. You can pay the minimum monthly
payment. If you only pay part of the bill, the credit card company will start charging
you interest on the amount that you didn’t pay. This interest can add up, and what you purchased
can end up costing you twice as much.
Credit cards are essentially open lines of credit. Credit cards can be either
1. The single most destructive financial instrument in the history of the world, or
2. A tool to help us reach our personal and family goals. It depends on us! If we use them
to borrow money and get further into debt, they are destructive. If we use them to achieve
our personal and family goals, they can be helpful.
There are five main benefits for using credit cards:.
1. Emergencies: Credit cards can be useful when you don’t have cash on hand and need to
pay for something immediately, such as an auto repair or an insurance co-payment.
2. Reservations: Credit cards can be used to guarantee hotel rooms, rental cars, and other
rental items. This is an important use, especially if you travel.
3. Convenience: With a credit card, you can buy things over the phone or on the Internet.
Credit cards make purchasing things very easy. They also provide you with a record of
everything you spend, an important bookkeeping benefit.
4. Cash flow and timing: If something is on sale, and you know you have the cash coming
in a week, you can actually buy the item before you pay for it. In this way, you can take
advantage of sales (but remember, you do not save money by spending).
5. Free services: Often, credit cards offer rewards, such as extended warranties, travel
insurance, airplane miles, gasoline rebates, and cash rebates all of which can reduce the
overall cost of some items. While there are benefits to using credit cards, there are
drawbacks as well. Credit cards must be used wisely to avoid problems. The following
is a list of some of the problems associated with using credit cards:
Increased spending: People don’t take as much time to think about how much they’re
spending when they use a credit card. Research has shown that, on average, people spend 30
percent more with a credit card than they do with cash.

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 Losing track of spending: It’s easy to lose track of what you spend with your credit card. It
requires discipline to track the charges you make.

The difference between debit and credit cards

Both debit and credit cards allow you to make purchases and cash withdrawals, but there are
a few key distinctions. The main difference between debit and credit cards comes down to
how each payment method works. When you make a purchase with your debit card, the
purchase amount is immediately withdrawn from your checking account. Credit cards work a
little differently; instead of immediately withdrawing funds from your checking account, you
borrow money from your credit card company whenever you make a purchase.

With debit cards, you don’t need to worry about receiving a monthly bill, since your
purchases are automatically taken out of your bank account. However, when you use a credit
card, you will receive a monthly statement outlining your credit card balance. You have the
option to pay the minimum amount, pay your balance in full, or pay anything between the
minimum and full amount. But, you’ll accrue interest if you carry a balance month to month.
If you pay your balance on time and in full, you avoid interest and late fees.

4.3. Discussing different attitudes to savings and investment

Gross domestic savings in Ethiopia are affected by age dependency ratio, real exchange rate, real
interest rate, real gross domestic product, foreign capital inflow and money supply both in the
short and long run. Elasticity of exchange rate with respect to domestic savings is high and
significant in the long run. The level of savings in underdeveloped countries is very small mainly
because their level of national income or per capital income is very low. As a result much of the
income is consumed and little is left for investment purposes. New investors today choose from
a wide selection of investment options through financial institutions and online investment
firms. Whether you prefer to make your investment decisions on your own or with the help of
a professional, there are several factors to consider when selecting options for your portfolio.

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Think about each factor carefully to ensure you make the investment choices that best suit
your needs and plans.

Saving

Saving is the portion of income not spent on current expenditures. In other words, it is the money
set aside for future use and not spent immediately. Why should we save money? Saving can be
used to accomplish objectives in the short-term such as buying a mobile phone, or in the longer
run such as continuing to study, or else buying a car or a house. Saving money can also help us
cover unexpected expenses, such as an illness, replace an appliance that cannot be repaired or
make an emergency trip.

In addition, savings can be invested and, as a result, you get a profit on the money you have set
aside. That is to say, not only will you have the funds available to spend later, but you will also
earn money in the process. Saving money is a healthy habit that is built on a day-by-day basis.
You should start today to get in a lot of practice in saving until it becomes a habit.

Quick summary of factors that influence saving levels

 Interest rates – higher interest rates make saving more attractive.

 Rising income enables higher savings. People on very low incomes cannot afford the
luxury of saving
 Economic growth – high growth and high consumer confidence encourage relatively
higher spending and a fall in the savings ratio.
 The age of individuals – People in their 40s and 50s tend to save for retirement. Old
people run savings down.
 Cultural trends – some cultures have a stronger ‘saving culture’ – others pursue
higher spending and borrowing.
 Wealth – Rising house prices increase household wealth and diminish the need to
save in other forms.
 Inflation – high inflation may discourage cash saving, but encourage the purchase of
fixed assets.

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Self-check 4

Part I: short Answer writing

Directions: Answer all the questions listed below.

1. Explain factors that influence

saving levels
2. Main benefits for using credit cards
3. Impact of high cost of living

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Unit Five Understand risk as it relates to saving and investing
This learning guide is developed to provide you the necessary information regarding the
following content coverage and topics:
 Explain the concept of risk versus return
 Determine risk profile of an individual's
 Discuss the impact of inflation
This guide will also assist you to attain the learning outcomes stated in the cover page.
Specifically, upon completion of this learning guide, you will be able to:

 Understand concept of risk and risk versus return

 Determine an individual's risk profile is based on current and

 Identify the impact of inflation on the earnings power of money

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5.1. Explaining the concept of risk versus return

To maximize share price, the financial manager must learn to assess two key determinants: risk
and return. Each financial decision presents certain risk and return characteristics, and the unique
combination of these characteristics has an impact on share price. Risk can be viewed as it is
related either to a single asset or to a portfolio (a collection, or group, of assets.). In the most
basic sense, risk is the chance of financial loss. Assets having greater chances of loss are viewed
as more risky than those with lesser chances of loss. Some risks directly affect both financial
managers and shareholders.

Interest Rates In simple terms, interest rates represent the cost of money. Like everything else,
money has a price. The forces of supply and demand influence interest rates. When consumer
saving and investing increase the supply of money, interest rates tend to decrease. However, as
consumer, business, government, and foreign borrowing increase the demand for money, interest
rates tend to rise. Interest rates affect your financial planning. The earnings you receive as a
saver or an investor reflect current interest rates as well as a risk premium based on such factors
as the length of time your funds will be used by others, expected inflation, and the extent of
uncertainty about getting your money back. Risk is also a factor in the interest rate you pay as a
borrower. People with poor credit ratings pay a higher interest rate than people with good credit
ratings. Interest rates influence many financial decisions. The relationship between risk and
return is a fundamental investment concept. The concept states that an increased probability for
return is highly correlated with the increase in the level of risk taken. The return is expressed as a
percentage and refers to the gains or losses made from an investment, whereas the risk element is
associated with the volatility of that return. In theory, an investor could expect higher return on
investment only if willing to accept a higher level of risk.

Risk cannot be completely eliminated; it can be managed by holding a diversified portfolio of

varying, low correlated asset classes. Investors should be aware that the right mix in the portfolio
depends on the individual’s risk tolerance level as well as end-goals from the investment. The
lower risk assets that usually offer lower but more predictable rate of return include: money

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market instruments and fixed income securities. On the other hand, equities, commodities, and
derivative securities are considered a higher risk and can offer the potential for higher returns.

Types of investment risk

Market risk

The risk of investments declining in value because of economic developments or other events
that affect the entire market. The main types of market risk are equity risk, interest rate
risk and currency risk.

 Equity risk – applies to an investment in shares. The market price of shares varies all the
time depending on demand and supply. Equity risk is the risk of loss because of a drop in
the market price of shares.

 Interest rate risk – applies to debt investments such as bonds. It is the risk of losing
money because of a change in the interest rate. For example, if the interest rate goes up,
the market value of bonds will drop.

 Currency risk – applies when you own foreign investments. It is the risk of losing
money because of a movement in the exchange rate.

Liquidity risk

The risk of being unable to sell your investment at fair price and get your money out when you
want to. To sell the investment, may need to accept a lower price. In some cases, such as exempt
market investments, it may not be possible to sell the investment at all.

Credit risk

The risk that the government entity or company that issued the bond will run into financial
difficulties and won’t be able to pay the interest or repay the principal at maturity. Credit
risk applies to debt investments such as bonds. You can evaluate credit risk by looking at
the credit rating of the bond. For example, long-term Canadian government bonds have a credit
rating, which indicates the lowest possible credit risk.

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Reinvestment risk

The risk of loss from reinvesting principal or income at a lower interest rate. Suppose you buy a
bond paying 5%. Reinvestment risk will affect you if interest rates drop and you have to reinvest
the regular interest payments at 4%. Reinvestment risk will also apply if the bond matures and
you have to reinvest the principal at less than 5%. Reinvestment risk will not apply if you intend
to spend the regular interest payments or the principal at maturity.

Inflation risk

The risk of a loss in the purchasing power because the value of your investments does not keep
up with inflation. Inflation erodes the purchasing power of money over time – the same amount
of money will buy fewer goods and services. Inflation risk is particularly relevant if you own
cash or debt investments like bonds. Shares offer some protection against inflation because most
companies can increase the prices they charge to their customers. Share prices should therefore
rise in line with inflation. Real estate also offers some protection because landlords can increase
rents over time.

Horizon risk

The risk that the investment horizon may be shortened because of an unforeseen event, for
example, the loss of your job. This may force you to sell investments that you were expecting to
hold for the long term. If you must sell at a time when the markets are down, you may lose
money.

5.2. Determining risk profile of an individual's

A risk profile is an evaluation of an individual's willingness and ability to take risks. It can also
refer to the threats to which an organization is exposed. A risk profile is important for
determining a proper investment asset allocation for a portfolio. Organizations use a risk profile
as a way to mitigate potential risks and threats.

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  A risk profile is an evaluation of an individual's willingness and ability to take risks.
 A risk profile is important for determining a proper investment asset allocation for a
portfolio.
 Organizations use a risk profile as a way to mitigate potential risks and threats.
Understanding Risk Profile

A risk profile identifies the acceptable level of risk an individual is prepared and able to accept.
A corporation's risk profile attempts to determine how a willingness to take on risk (or an
aversion to risk) will affect an overall decision-making strategy. The risk profile for an
individual should determine that person's willingness and ability to take on risk. Risk in this
sense refers to portfolio risk. Risk can be thought of as the trade-off between risk and return,
which is to say the tradeoff between earning a higher return and having a lower chance of losing
money in a portfolio.

Influences risk profile

Risk profile is something we mention a lot when looking at investments and other key financial
decisions. But what has an impact on your risk profile?

Investing naturally comes with some level of risk and values will rise and fall over time.
However, the amount of volatility experienced varies hugely. Typically, the greater the level of
risk and volatility you take on, the higher the potential returns, but there is a greater chance that
values will fall. For some, the potential returns of a higher risk profile will outweigh the
drawbacks, whilst others will prefer the relative stability of lower risk investments, even if
potential returns are reduced.

It’s important to keep in mind that all investments involve some risk. But you also need to look
at the long-term picture where volatility is considered. Over the years, stock markets have
experienced significant dips, which can be a cause for concern for investors. However,
historically, markets have recovered to deliver returns over the long term.

There are five key factors to consider when weighing up the risk profile:

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 1. Goals

The first area to think about is what you’re investing for. Having a clear goal in mind, allows
you to build an investment portfolio that suits you. Investing for is likely to have a significant
impact on how you feel about risk. Let’s say you’re investing to pay for a child’s education,
security may be a priority for you and investments with a relatively low risk may be more
attractive because of this.

2. Investment time frame

This one links directly to what the goals are; when do you plan to access your initial investment
and the returns it’s hopefully generated. As a general rule of thumb, you shouldn’t invest if your
time frame is less than five years. This gives you an opportunity to ride out dips in the market
and recover from potential downturns. In turn, if the time frame is longer in a better position to
take on more risk when you take a long-term view. Investing for retirement is a good example
of when a long time frame may mean a higher risk profile is appropriate. When first start saving
for retirement, it’s likely to be a milestone that’s decades away. As a result, short-term volatility
should have little impact when you focus on the end goal.

3. Other assets

Financial decisions shouldn’t be made in isolation. They should look at your overall financial
plan and the other assets you have. This will influence your risk profile too. For example, if
hold a significant amount in cash and other low-risk assets, you may decide to take a higher risk
with new investments. It’s important to keep in mind here that not all your investments should
be the same in terms of risk. Diversifying and holding a range of investment assets, with various
risk profiles, can help smooth out market volatility and limit potential losses.

4. Capacity for loss

No one wants to think about losing money when they invest. However, it’s an important
consideration to make. If your investments were to perform poorly and decrease in value, how
would this impact your lifestyle. Shouldn’t invest capital that you can’t afford to lose. However,
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 there’s more to it than that. If your investments were to fall, would it devastate your future
plans. Or would it simply mean that some small adjustments would need to be made to ensure
your lifestyle was sustainable over the long term.

5. Overall attitude to risk

Whilst the above four factors are influential, your overall feelings about risk are too. You
should feel comfortable with all the financial decisions you make, including the level of risk
taken when investing. It’s natural to worry about potential losses when investing and if you
think you’re being too conservative, taking some time to understand how investment markets
operate over the long term can help. On the flip side, an aggressive approach to investing isn’t
always appropriate even if you’re comfortable with it. Working with a financial adviser can
help you reconcile your feelings on investment risk with your financial position.

5.3. Discussing the impact of inflation

Inflation affects all aspects of the economy, from consumer spending, business investment and
employment rates to government programs, tax policies, and interest rates. Understanding inflation
is crucial to investing because inflation can reduce the value of investment returns. Inflation

Inflation is a sustained rise in overall price levels. Moderate inflation is associated with economic
growth, while high inflation can signal an overheated economy. As an economy grows, businesses
and consumers spend more money on goods and services. In the growth stage of an economic cycle,
demand typically outstrips the supply of goods, and producers can raise their prices. As a result, the
rate of inflation increases. If economic growth accelerates very rapidly, demand grows even faster
and producers raise prices continually. An upward price spiral, sometimes called “runaway inflation”
or “hyperinflation,” can result. In general, when economic growth begins to slow, demand eases and
the supply of goods increases relative to demand. At this point, the rate of inflation usually drops.
Such a period of falling inflation is known as disinflation.

Inflation is the rate of change in prices. Rising inflation means you have to pay more for the same
goods and services. This can help you in the form of income inflation or asset inflation, such as in
housing or stocks, if you own the assets before prices rise, but if your income doesn’t keep pace
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 with inflation, the buying power declines. Over time, inflation increases your cost of living. If the
inflation rate is high enough, it hurts the economy.

Inflation is defined as sustained increase in the general price level in the economy over a period of time. It
has overwhelmingly more negative effects for decision making in the economy and reduces purchasing
power. However, one positive effect is that it prevents deflation. The effect depends on the type of
inflation. For example, walking inflation is 3% to 10% per year. Creeping inflation is milder than
walking inflation while running inflation implies a more aggressive rise in prices that could be a
precut .Rising prices may be an indication of an economy growing very fast. People buy more than
they need to avoid tomorrow's higher prices fuels demand for goods and services. Suppliers can't
keep up. More importantly, neither can wages. As a result, everyday goods and services are priced
out of most people's reach.

 Inflation raises prices, lowering your purchasing power.

 Inflation also lowers the values of pensions, savings, and treasury notes.
 Assets such as real estate and collectibles usually keep up with inflation.
 Variable interest rates on loans increase during inflation.
Inflation occurs when there is a sustained increase in the general price level. Traditionally high inflation
rates are considered to be damaging to an economy. High inflation creates uncertainty and can wipe
away the value of savings. Some economists even argue we should target a higher inflation rate during
periods of economic stagnation

Self-check 5

Part I: short Answer writing

Directions: Answer all the questions listed below.

1. Explain types of investment risk

2. Explain the risk and return

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Unit six . Develop your own savings plan
This learning guide is developed to provide you the necessary information regarding the
following content coverage and topics:
 Identifying and quantifying personal savings goals
 Developing personal budget
 Investigating financial product options
This guide will also assist you to attain the learning outcomes stated in the cover page.
Specifically, upon completion of this learning guide, you will be able to:

 Identify personal savings goals

 Develop a personal budget to contribute towards savings goals

 Investigate and select the range of financial product options available to maximize
earnings on savings

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6.1. Identifying and quantifying personal savings goals
Understanding a Savings Plan

A savings plan is a method for amassing money in order to reach specific financial goals. It
enumerates the goals in question and the steps needed to reach them. Such goals you want to
save and invest for:-

 Emergency savings
 Vacation plans
 Wedding arrangements
 Buying a home
 Home repairs or improvements
 Purchasing a vehicle
 College planning
 Retirement savings
Make your own list and then think about which goals are the most important to you. List your
most important goals first The types of financial goals you include in a savings plan depend on
your individual financial situation.
Types of financial goals
Two factors commonly influence your financial aspirations for the future. The first is the time
frame in which you would like to achieve your goals. The second is the type of financial need
that drives your goals.
Timing of goals What would you like to do tomorrow? Believe it or not, that question involves
goal setting, which may be viewed in three time frames.
 Short-term goals, such as saving for a vacation or paying off small debts, will be
achieved within the next year.
 Intermediate goals have a time frame from one to five years.
 Long-term goals involve financial plans that are more than five years off, such as
retirement, money for children’s college education, or the purchase of a home.

Develop Your Financial Goals

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Once you have evaluated your current financial situation, you are ready to move forward in the
financial planning process. The second step is developing your financial goals. Setting goals
will give you a direction for your plan and a destination toward which you want to head. When
creating financial goals, you want to consider obvious objectives such as monthly savings or
retirement investments. As you develop your financial goals, recall the first tip from Chapter
One which discussed setting your goals. Your goals should be SMART, that is specific,
measurable, attainable, realistic, and time-based. You should also develop short-term,
intermediate, and long-term goals. Developing each of these types of goals allow you to achieve
successes early in the plan while also keeping your eye toward the future. Short-term or
intermediate goals may also serve as stepping stones to reach long-term goals.
If you want to save birr 24000 within six months to start min business in the seventh month, you
set goal.
Look the following set specific, measurable, Attainable, realistic, and timely financial goals

Saving goal specific measurable, Attainable realistic, Timely

24000 2000 Monthly Started Six Monthly and in
2000 mini months seventh month
business

6.2. Developing personal budget

Use the following guidelines for personal Budget

Housing & Utilities 30% Monthly budget
Food & Household 20% Total monthly income 10000
Clothing & Personal 10% Housing & Utilities 30% 3000
Transportation 10% Food & Household 20% 2000
Saving & Investing 10% Clothing & Personal 10% 1000
Miscellaneous 20% Transportation 10% 1000
Saving & Investing 20% 2000
% Miscellaneous 10% 1000

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6.3. Investigating financial product options

Financial products are investments and securities that are created to provide buyers and sellers
with a long term or short term financial gain. Financial products enable risks to be spread, and
liquidity to circulate around an economy.

Financial "products" or "instruments" are contracts that can be negotiated on capital markets.
There are several ways to classify such products. The approach taken in this website is to focus
on the technical characteristics of such instruments. However, we also present an alternative
classification based on market segment which more closely reflects economic realities.

Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell
an underlying asset at an agreed-upon price and date. Call options and put options form the basis
for a wide range of option strategies designed for hedging, income, or speculation.

Securities

Securities cover all direct financing instruments of companies, banks, states or public entities. A
security represents a share of a medium or short-term (Medium term note, commercial paper)
claim or long term claim (bonds), or a share in the capital of a company (equities or shares). For
the issuer of the security, it is a financing instrument and for the buyer an investment instrument.
Securities are negotiable instruments, in other words they can change hand after they have been
issued on what is called the secondary market, provided of course that a counter party exists for
the exchange. In this section we deal with related subjects such as securitization and corporate
actions.

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Self-check 6

Part I: short Answer writing

Directions: Answer all the questions listed below.

3. Explain financial product options

4. Discuss the purpose of saving
5. Discuss financial products (instrument)

Operation sheet 6.1: saving plan and setting goal

 Operation title: Preparing six months your own saving budget

 Purpose: To evaluate personal budget preparation.
 Instruction: Using the following information prepare your own budget
a. Quantifying personal savings goals
b. Show the steps of personal budget
c. Identify fixed expenses and variable expenses
d. Use budget spreadsheet

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Unit Seven: Implement your own savings plan
This learning guide is developed to provide you the necessary information regarding the
following content coverage and topics:
 Identifying requirements to open an account
 opening relevant savings accounts or other investigated financial products
 Adjusting savings goal
This guide will also assist you to attain the learning outcomes stated in the cover page.
Specifically, upon completion of this learning guide, you will be able to:

 Understand requirements to open an account and provide evidence of personal identity

 Investigate relevant financial products, savings accounts and implement savings plan a
short period of time

 Adjust unattainable goal and realize savings goal

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7.1. Identifying requirements to open an account

Bank
Opening an account is a fairly simple process, but you need to make sure you bring the right
documentation with you. Checking accounts are deposit accounts that allow you to store your
cash, make withdrawals and transfers, write checks, and pay your bills.

Your bank or financial institution will also provide you with a debit card so you can do your
banking at automated teller machines (ATM). If you want to do routine financial transactions,
you can choose from a variety of checking account options. Once you choose a bank and fill out
some paperwork, you can leave with a functioning account. But the process can get a little more
complicated because you usually have to provide documentation to prove your identity. It can
get frustrating and delay your ability to use the account if you don’t provide the right paperwork.

 Checking accounts generally come with very few

eligibility requirements.
 When you open your account, make sure you have a
government-issued ID to prove your identity.
 You’ll also need your Social Security number or
individual taxpayer identification number, along with something that has your address on
it, such as a utility.

Ethiopian national/foreigners of Ethiopian origin residing abroad can open the account in
person & by post in his/her home.

 Application forms properly filled and signed by the applicant and specimen signature.

 For Ethiopians or foreign nationals of Ethiopian origin individuals, valid passport and/or
identification card.

Therefore documents required to open current account: -

 Trade license

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  Tin (tax identification number)

 Memorandum of association

 Minute of meeting of board of director

 Held to discuss opening account

 Initial amount of deposit

 Resident ID and Passport (for Ethiopian national living abroad)

7.2. Open relevant savings accounts or other investigated financial products

Banks

A bank is also a place where you can deposit your money to keep it safe. Banks are interested in
earning a profit from customers so you may find that the fees with a bank are higher. Banks
typically have multiple branches across a large region. Checking accounts is a service that gives
customers a way to pay bills by check, and to deposit money. Checking accounts don’t often pay
interest, or if they do, it is less than you can earn on a savings account.

Savings account is an interest-bearing deposit account held at a bank or other financial

institution. Though these accounts typically pay a modest interest rate, their safety and reliability
make them a great option for parking cash you want available for short-term needs. Because
savings accounts pay interest while keep your funds easily accessible, they’re a good option for
emergency or short-term cash. In exchange for the ease and liquidity that savings accounts offer,
you’ll earn a lower rate than that paid by more restrictive savings instruments and investments.

Savings accounts have some limitations on how often you can withdraw funds, but generally
offer exceptional flexibility that’s ideal for building an emergency fund, saving for a short-term
goal like buying a car or going on vacation, or simply sweeping surplus cash you don’t need in
your checking account so it can earn more interest.

How Savings Accounts Work

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Savings and other deposit accounts are important sources of funds that financial institutions use
for loans. For that reason, you can find savings accounts at virtually every bank or credit union,
whether they are traditional brick and mortar institutions or operate exclusively online. In
addition, you can find savings accounts at some investment and brokerage firms.

Savings account interest rates vary. With the exception of promotions promising a fixed rate
until a certain date, banks and credit unions might change their rates at any time. Typically, the
more competitive the rate, the more likely it is to fluctuate. Changes in the federal funds rate can
trigger institutions to adjust their deposit rates. Some institutions offer high-yield savings
accounts, which may be worth investigating.

Savings Account

Some savings accounts require a minimum balance in order to avoid monthly fees or earn the
highest published rate, while others have no balance requirement. Know the rules of your
particular account to ensure you avoid diluting your earnings with fees. Money can be
transferred in or out of your savings account online, at a branch or ATM, by electronic transfer,
or direct deposit. Transfers can usually be arranged by phone, as well.

Some banks limit withdrawals to six per month, after the Federal Reserve set that limit only to
withdraw it in April, 2020. Exceed six withdrawals, and a bank might impose a fee, close your
account, or convert it to a checking account. The amount that can be withdrawn is limited only to
how much is in the account.

Savings Account Advantages

Savings accounts offer you a place to put your money that is separate from your everyday
banking needs, allowing you to stash money for a rainy day or earmark funds to achieve a big
savings goal. What’s more, the bank’s security measures, along with federal protection against
bank failures provided by the Federal Deposit Insurance Corporation (FDIC), will keep your
money safer than it would be under your mattress or in your sock drawer.

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Beyond keeping your funds safe, savings accounts also earn interest, so it pays to keep any
unneeded funds in a savings account instead of accumulating cash in your checking account,
where it will likely earn little or nothing. At the same time, your access to funds in a savings
account will remain extremely liquid, unlike certificates of deposit, which impose a hefty penalty
if you withdraw your funds too soon. Holding a savings account at the same institution as your
primary checking account can offer several convenience and efficiency benefits. Since transfers
between accounts at the same institution are usually instantaneous, deposits or withdrawals to
your savings account from your checking account will take effect right away. This makes it easy
to transfer excess cash from your checking account and have it immediately earn interest or
transfer money the other way if you need to cover a large checking transaction.

Many institutions allow you to open more than one savings account, which can be handy if you
want to keep track of your savings progress on multiple goals. For instance, you could have one
savings account to save for a big trip while a separate one holds surplus cash from your checking
account.

Savings Account Disadvantages

The trade-off for a savings account’s easy access and reliable safety is that it won’t pay as much
as other savings instruments. For instance, you can earn a higher return with certificates of
deposit or Treasury bills, or by investing in stocks and bonds if your time horizon is long
enough. As a result, savings accounts present an opportunity cost if used for long-term savings.
Also, while the liquidity of a savings account is one of its key benefits, it can also be a downside,
as the ready availability of funds may tempt you to spend what you’ve saved. In contrast, it is
much more difficult to cash in a bond, withdraw funds from a retirement account, or sell a stock
than it is to take money out of your savings account, especially if that account is linked to your
checking account.

Savings accounts are also a poor choice for funds you need to access frequently. Because rules
previously restricted withdrawal transactions to six times per month—whether those were
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transfers or outright withdrawals at a branch or ATM—a savings account was not always an
appropriate vehicle for these funds. The lifting of these restrictions has made the funds more
accessible

7.3. Adjusting savings goal

Setting specific savings goals will help you to begin saving money. When you are just putting
money into the bank on a regular basis, it can be easier to withdraw it for various reasons. You
can easily overspend and use some of the money you had earmarked for savings. For these
reasons, it is important to save for a specific target or goal. You may be working toward several
objectives at once, or you may be focused on one specific goal that you want to meet.

Choose a Specific Savings Goal

You need to determine what you are saving money for. Your savings goal may be for a down
payment on your home. You may be saving for a dream vacation or to pay for your next car. You
may be saving for retirement or for an emergency fund. You may be saving for all of these
reasons.

 Choose a specific savings goal- First, define your goal. Whether it’s a vacation, a college
education for your kids, a down payment on a house or retirement, decide what you’re
working toward rather than choosing a nebulous number, or a vague idea of “saving
more.” “Have the emotional conversation with yourself about your money and what you
hope it accomplishes.”

 Set a savings deadline- Next, set a timeline for accomplishing your goal. Some goals, like
buying a car next year, might be shorter term. Other goals, like reaching your retirement
number, might take longer and require more ongoing planning. “Setting yourself up for
success means a plan and a schedule. Figure out your monthly or weekly contributions to
reach your goals.

 Create a different account for each. Setting aside different financial accounts for each
goal, especially since it’s likely that you’re saving for more than one goal at the same
time. “Saving for multiple goals can make things tricky. Break down each savings goal

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 into an account, whether it’s for a car, house, vacation or anything else. In some cases,
you might have to prioritize some goals over others. Think critically about where your
money needs to go first and work from there.

 Track your goals- Keep track of your progress so that you can see where you stand and
celebrate your progress. As you see your success, you’re more likely to feel good about
continuing. And, of course, once you reach your goal, that feeling can encourage you to
keep working toward your other goals and setting new goals

Self-check 7

Part I: short Answer writing

Directions: Answer all the questions listed below.

1. Explain documents required to open account

2. Type accounts
3. Discuss adjusting savings goal

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 THE ONLY BUDGETING BOOK TERE STOUFFER
YOU’LL EVER NEED: How to Save Money and Manage Your Finances with a Personal Budget Plan
That Works for You

Developers’ profile
No Name Qualification Field of Organizati Mobile E-mail
(Level) Study on/ number
Institution
1 Lammi MBA In Accounting Ambo TVT 0913723393 Lammidhuguma@gmail.
Dhuguma finance & finance com
2 Ejigu MA Accounting Barayu PT 0913440478 [email protected]
Tarafe & finance m

3 Asnake MSc Accounting Adama 0912224442 Asnakeabay142@

Abay & finance RVUTc gmail.com

4 Kasa BA Accounting A.A 0912780259 [email protected]

Tarafe & finance KMCTVT

5 Tilahun BA Accounting Afar Adadle 0942817075 Telegram

Walde & finance PT

6 Mokanan MSc Accounting 0975105823 Telegram

t Mulu & finance

Page 77 of 84 Ministry of Labor and Skills Prepare and Use a Personal Version -1
Author/Copyright Budget and Savings Plan II November 2022
 Developers’ profile
No Name Qualification Field of Organizati Mobile E-mail
(Level) Study on/ number
Institution
1 Lammi MBA In Accounting Ambo TVT 0913723393 Lammidhuguma@gmail.
Dhuguma finance & finance com
2 Ejigu MA Accounting Barayu PT 0913440478 [email protected]
Tarafe & finance m

3 Asnake MSc Accounting Adama 0912224442 Asnakeabay142@

Abay & finance RVUTc gmail.com

4 Kasa BA Accounting A.A 0912780259 [email protected]

Tarafe & finance KMCTVT

5 Tilahun BA Accounting Afar Adadle 0942817075 Telegram

Walde & finance PT

6 Mokanan MSc Accounting 0975105823 Telegram

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Author/Copyright Budget and Savings Plan II November 2022
 t Mulu & finance

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