Chapter 2: Money management strategy: Financial

What to keep in a SAFE DEPOSIT BOX

things hard to replace - birth, marriage and death certificates - citizen and military papers - adoption and custody papers - serial numbers and photos of valuables - GIC's and bank account numbers - mortgage papers and titles - list of insurance policy numbers - stock and bond certificates - coins and collectibles - copy of will

Step 2 (cash flow statement) record cash outflows

- FIXED expenses do not vary from month to month (rent, mortgage, loan payments, insurance) - VARIABLE expenses are flexible payments (food, clothing, and utilities)

What to keep in your HOME file

- Items you often refer to (personal and employment records, tax records, financial services records, money management records, credit records) - Consumer purchase and automobile records - insurance records - investment records - housing records - estate planning and retirement records

Personal balance sheet (net worth statement)

- a financial statement that reports what an individual or family owns or owes Items of values - Net worth = amounts owed (what you own) - (your wealth) = (what u owe)

Other places to keep records

- automobile (vehicle registration) - lawyer (original will and living will) - doctor and hospital (copy of living will) - home computer (current & past budget, checking account records, wills/estate plans/ investments, past income tax returns)

Money management explains

- daily financial spending and saving decisions are at the centre of financial planning - coordinate these decisions with your needs, goals, and personal situation - maintaining financial records and planning your spending are essential to success

Money management

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

Compiling your latest cash flow statement will....

- highlight sources of income - reveal whether you are overspending - help assess your spending and saving patterns

Analyzing current financial situation

- identify if investments are tax efficient (provide highest after tax return) - identify assets that may be that may be lost, stolen, or damaged/ destroyed (may require insurance coverage) - summarize the types and extent of your indebtedness (borrowed to finance depreciating or appreciating assets) (many credit cards may inflate your best ratio)

Ways to increase your net worth

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

How long to keep different records for?

- many records are kept permanently (birth certificates, wills) - property / investment records are kept for as long as you own the asset - keep tax records min 6 years

Your balance sheet

- measure progress toward financial goals (save and invest on a regular basis) - identify how your asses are distributed among diff categories - calculate current asset allocation (between cash, fixed income, and equity investments)

An organized system of financial records provides a basis for....

- needling daily business affairs, including paying of bills on time - planning and measuring financial progress - completing required tax reports - making effective investing decisions - determining available resources for current and future buying

Step 3 (cash flow statement) determine net cash flow

- net cash flow can be a surplus or a deficit - used as a basis for creating a spending, saving and investment plan

Why could a person with high net worth still have financial difficulties?

- no liquid cash available to pay current expenses - INSOLVENCY is the inability to pay debts when they are due because liabilities far exceed the value of assets

What is a safe deposit box

- private storage area at a financial institution with maximum security for valuables 2 keys , one here , one with you

Opportunity costs & money management

- spending money reduces amount you can save and invest - saving and investing reduces the amount you can spend now - buying on credit ties up future income - using savings for purchases results in lost interest earnings - savings can't be used for other purposes - comparison shopping can save you money BUT uses up valuable time

Purposes of personal financial statements

- summarize the value of the items you one and the amounts you owe - track cash inflows by source and your outflows by type - identify strength and weaknesses in your current financial situation - measure progress towards your financial goals - provide data for use in filing income tax return or applying for credit

Step 1 (net worth statement) listing items of value

Assets - cash and other property with a monetary value - Liquid assets: cash and items of value easily converted to cash - Real estate: home, condo, vacation property, or other land owned - Personal possessions: automobiles, and other personal possessions - Investment assets: funds set aside for long term financial needs

Step 3 Budgeting process

Budgeting emergency fund and savings - recommend 3-6 months of living expenses be established for unexpected expenses and future security

Step 4 (Budget)

Budgeting fixed expenses - will depend on your current needs and plans for the future

Step 5 (budget)

Budgeting variable expenses - will fluctuate by household situation, time of the year, health, economic conditions etc - consider fluctuating cost of cell phone monthly

Step 2 in budgeting process

Estimating income - available money for a given period of time (usually 1/month) - based on number of times income received each month, spending should be planned accordingly - hard if earnings vary season by season / irregular income

Step 1 (cash flow statement) Record income

Income from employment; wages, salaries, and commission or self employment income - savings and investment income - gifts, grants, scholarships, and educational loans - government payments (CPP, welfare, and EI) - amounts received from pensions and retirement programs - alimony and child support payments

Step 2 (net worth statement) Determining amount owed

Liabilities - amounts owed to others (does NOT include items not yet due) - Current liabilities: debts to be paid within a short time, usually less than one year - Long term liabilities: do not have to pay in full until more than one year from now

What is net worth an indication of?

NOT the money available for use BUT IS an indication of your financial position on a given date

Step 3 (net worth statement) computing net worth

Net worth - the difference between total assets and total liabilities also assets = liabilities + net worth

CASH FLOW STATEMENT

a financial statement that summarizes cash receipts and payments for a given period of time Total cash received during that time period + cash outflows during the time period = cash surplus or deficit

Current ratio

a high current ratio is desirable to have cash available to pay bills liquid assets / current liabilities

Budget (definition) & purposes

a specific plan for spending income - live within your budget - spend your money wisely - prioritize and attain your financial goals - prepare for financial emergencies - develop wise financial management habits

3 factors to create / implement a budget

career, family, values

Take home pay

earnings after deductions for taxes and other items also called disposable income

savings ratio

financial experts recommend monthly savings of at least 10% amount saved each month / gross income

Debt payment ratios

indicates how much or a persons' earnings goes for debt payments (excluding mortgage) monthly payments / take-home pay

Liquidity ratio

indicates the number of months in which living expenses can be paid if an emergency arises liquid assets / month expenses

Discretionary income

money left over after paying for housing, food and other expenses

Debt ratio

show relationship between debt and net worth liabilities / net worth

3 steps to creating net worth statement

1) listing items of value 2) determining amount owed 3) computing net worth

2 documents that you can create

1) personal balance sheet 2) cash flow statement

3 major money management activities

1) store and maintain personal financial records and documents 2) create personal financial statements (balance sheets and cash flow statements or income and outflow) 3) create and implement a plan for spending and saving (budgeting)

Step 6 (budget)

Recording spending amounts (record actual income and expenses) - budget variance: difference between amount budgeted and the actual amount received or spent - deficit: actual spending exceeds planned spending - surplus: actual spending less than planned spending

Step 1 in budgeting process

Setting financial goals - plans for future that require spending and investing SHOULD BE - realistic, stated in specific/ measurable terms - have definite time frame - imply type of action to be taken

3 steps to a cash flow statement

Step 1 - record income Step 2 - record cash outflows Step 3- determine net cash flow