Chapter 3

The Cash Flow Statement: Step 2

Record Cash Outflows: - Fixed expenses - variable expenses

Personal Computer, Tablet, Phone

Records on your personal computer: - Scanned copies of documents - Spreadsheet summaries of budgets and investment records - Digital versions of income tax returns, wills, and estate plan - Apps for banking activities, financial record keeping, and investment transactions

How long should records be kept

- Keep birth certificates, wills, and Social Security data permanently - Keep records on property and investments as long as you own them - Keep documents related to the purchase and sale of real estate indefinitely - Keep copies of tax returns and supporting data for seven years

Successful Money Management

- Daily spending and saving decisions are the main element of financial planning - Decisions must be coordinated with needs, goals, and personal situations

Variable Expenses

- Flexible payments that change from month to month - Ex. Food, clothing, utilities

Purposes of a budget

- Live within your income - Spend your money wisely - Reach your financial goals - Prepare for financial emergencies - Develop wise financial management habits

Fixed Expenses

- Payments that do not vary from month to month - Ex. Rent or mortgage payments, installment loan payments, cable and Internet service fees

Main Purposes of Financial Statements

- Report your current financial position in relation to the value of the items you own and the amounts you owe - Measure your progress toward financial goals - Maintain information on your financial activities - Provide data you can use when preparing tax forms or applying for credit

Opportunity Cost and Money Management

- Spending for current living expenses reduces the amount you can save and invest - Saving and investing for the future reduces the amount you can spend now - Buying on credit ties up future income - Using savings for purchases results in lost interest earnings and depletes savings - Comparison shopping can save money but takes valuable time

Identifying Saving Goals

- To create an emergency fund for irregular and unexpected expenses - To pay for the replacement of expensive items - To buy expensive items like sports equipment or to pay for a vacation - To provide for long-term expenses such as retirement or the education of children - To earn income from the interest on savings for use in paying living expenses

A Personal Financial Records System

- An organized system of financial records - Home file, safe deposit box, computer, cloud storage

The Cash Flow Statement

- Cash Flow is the actual inflow and outflow of cash for a given time period - Also called a Personal Income and Expenditure Statement

Characteristics of Successful Budgeting

- A budget will work only if you follow it - Experts advise that a successful budget should be: Well planned, realistic, flexible, clearly communicated

Selecting a Saving Technique

- Write a check each payday as a percentage of income and deposit into savings - Use an automatic payment or a smartphone app to electronically transfer an amount into savings - Use payroll deduction to deduct from your salary and deposit into savings - Save coins in a container or spend less on certain items

Ways to increase Net Worth

- increasing your savings - reducing spending - increasing the value of investments and other possessions - reducing the amounts you owe

Components of Money Management

1. Storing and maintaining personal financial records and documents 2. Creating personal financial statements (balance sheets and cash flow statements of income and outflows) 3. Creating and implementing a plan for spending and saving (budgeting)

Net Worth

An indication of your current financial position on a given date Items of value (what you own) - Amounts owed (what you owe) = Net worth (your wealth)

Assets

Cash and other property with a monetary value

Personal Balance Sheet Step 3

Compute Net Worth- net worth (assets-liabilities), insolvency (the inability to pay debts when they are due

Written Budget

Detailed plan for spending in a spreadsheet or notebook

Personal Balance Sheet Step 2

Determine Amounts Owed - Liabilities - what you owe- current liabilities (less than 1 year), long-term liabilities

The Cash Flow Statement: Step 3

Determine Net Cash Flow - The difference between income and outflows can either be positive (surplus) or negative (deficit) - Cash flow statement provides the foundation for preparing and implementing a spending, saving, and investment plan

Take-home pay

Earnings after deductions for taxes and other items; also called net pay/disposable income

Mental Budget

Exists only in your head

Safe Deposit Box or Fireproof Home Safe

Items in the safe deposit box: Records that would be difficult to replace, Birth, marriage and death certificates, Citizenship and military papers, Adoption and custody papers, Serial numbers and photos of valuables, CDs and credit and banking account numbers, Mortgage papers and titles, List of insurance policies, Annual stock investment statements, Rare coins and stamps, Copy of will

Home Files, Home Computer or Online

Items in your home file: - Personal and employment records, Money management records, Tax records, Financial services records, Credit records, Consumer purchase and automobile records, Housing records, Insurance records, Investment records, Estate planning and retirement records

Personal Balance Sheet Step 1

List Items of Value - Assets- what you own- liquid assets, real estate, personal possessions, investment assets

Discretionary income

Money left over after paying for housing, food, and other necessities

The Cash Flow Statement: Step 1

Step 1: Record Income - Wages, salaries, and commissions - Self-employment business income - Savings and investment income - Gifts, grants, and scholarships - Government payments, such as SS, public assistance, and unemployment benefits - Amounts received from pension and retirement programs - Alimony and child support payments

The Budgeting Process

Step 1: Set Financial Goals Step 2: Estimate Income Step 3: Budget An Emergency Fund and Savings Step 4: Budget Fixed Expenses Step 5: Budget Variable Expenses Step 6: Record Spending Amounts Step 7: Review Spending and Saving Patterns Review Your Financial Progress Revise Your Goals and Budget Allocations

Money Management

The day-to-day financial activities necessary to manage current personal economic resources while working toward long-term financial security

Process for preparing a cash flow statement

Total cash received during the time period - Cash outflows during the time period = Cash surplus or deficit

Computerized Budgeting System

Use Excel or software such as Quicken

Online Budget

Use bank or financial institution website

Budgeting App

Use cell phone or tablet

Physical Budget

Use envelopes for your expenses such as food, rent, etc

Deficit

the amount by which actual spending exceeds planned spending

Surplus

the amount by which actual spending is less than planned spending

Budget Variance

the difference between the amount budgeted and the actual amount received or spent