Chapter 3: Money management strategy: financial statements and budgeting

Objective 1

Recognize relationships among financial documents and money management activities -Daily spending and saving decisions are the heart of financial planning -Decisions must be coordinated with needs, goals, and personal situations

Step 3: Computing Net worth

-Assets-Liabilities=Networth -Asstes=Net Worth+Liabilities -Insolvency---inability to pay debts when they are due

Step 1: Listing items of value

-Assets: what you own -Liquid Assets: Real Estate Personal possessions Investment assets

Systems for Personal Financial Records

-Items in your home life -items in the safe deposit box -Records on personal computer -How long should records be kept?

Step 2: Determining the Amounts owed

-Liabilities: what you owe -Current Liabilities (<1 year) -Long term liabilities

Selecting Budgeting System

-Mental -Physical -Written -Computerized -Online -Budget App

Personal Financial Statements

-Purpose of financial statements -balance sheet

How long should records be kept?

-birth certificates, wills, and social security information should be kept indefinitely -keep records on personal property and investments as long as you own them -keep documents related to the purchase and sale of real estate indefinitely -copies of tax returns and the supporting data should be kept six years

Records on your personal computer

-current and past budgets -summary of checks written and other banking transactions -past income tax returns prepared with tax preparation software -Account summaries and performance results of investments -Computerized versions of wills, estate plans, and other documents

Step 3: Determine Net Cash Flows

-different between income and outflows can either be positive or negative -cash flow statement provides the foundation for preparing and implementing a spending, saving, and investment plan

Step 2: Record Cash Outflows

-fixed expenses -variable expenses

Ways to increase net worth

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

Net worth

-indication of the financial positions at any given date

Selecting Savings Technique

-payroll deductions into savings accounts -automatic payments from checking into savings accounts or mutual funds -saving regularly in 401 (k) plans -also save coins, make periodic deposits -write a check each payday as a % of income and deposit into savings

Items in your home life

-personal and employment records -money management records -tax records -financial services records -consumer purchase, auto and credit records -housing records -insurance records -investments records -estate planning and retirement records

Purpose of Personal 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 your financial goal -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 money on 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 and depletes savings -Comparison shopping can save money but take valuable time

Step 1: Record Income

-wages, salaries, and commissions -self-employment business income -savings and investment income -gifts, grants, scholarships and educational loans -government payments, such as social security, public assistance, and unemployment benefits -Amounts received from pension and retirement programs -Alimony and child support payments

Characteristics of Successful Budgeting

-well-planned -realistic -flexible -clearly communicated

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)

Personal Financial Statements

Cash Flow Statement (Personal income and expenditure statement)--cash flow is actual inflow, outflow, for a given time period Total Cash received during the time period - cash outflows during the time period= cash surplus or deficit

Objective 4

Create and implement a budget -budget is a spending plan -Main purposes of a budget are to help you: Live within your income Spend money wisely Reach financial goal Prepare for financial emergencies Develop wise financial management habits

Money Management

Day-to-day financial activities needed to manage personal economic resources, while working toward long-term financial security

Objective 2

Design a system for maintaining personal financial records Benefits of Organized System of Financial Record: -handling daily business affairs, including payment of bills on time -planning and measuring financial progress -completing required tax reports -making effective investment decisions -determining available resources for current and future buying

Objective 3

Develop a personal balance sheet and cash flow statement

Objective 5

Relate money management and savings activities to achieve financial goals Reasons for saving include: -setting aside money for irregular and unexpected expenses -paying for the replacement of expensive items, such as cars or a down payment on a house -Buying special items like recreational equipment or to pay for a vacation -providing for long-term expenses such as retirement or the education of children -earning income from the interest on savings for use in paying living expenses

Cash Flow Statement

Step 1: Record Income Step 2: Record Cash outflows Step 3: Determine net cash flows

Balance sheet

Where are You Now? -also called Net Worth Statement or Statement of Financial Planning -Includes 3 Steps -Step 1: Listing Items of Value -Step 2: determining the amounts owed -Step 3: computing net worth Ways to increase net worth

Mental budget

it's all in your head

Online budget

mint.com

Physical Budget

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

Computerized Budgets

use software such as quicken

Written Budget

use spreadsheets

Budget app

using your phone to track expenses