Unit 2- Money Management Skills

7 steps in the budgeting process

(1) Set Financial Goals (2) Estimate Income from all sources (3) Budget an Emergency Fund and Savings (4) Budget Fixed Expenses (5) Budget Variable Expenses (6) Record Spending Amounts (7) Review Spending and Savings Patterns.

Cash flow statement vs budget

- Cash flow statement reports the actual spending of a household - A budget documents the projected income and spending

Examples of personal financial record keeping/

- Invoices - Credit card statements - Insurance policies - Tax forms

PRACTICE QUIZ IN BOOK: What are the main purposes of personal financial statements?

- Report your current financial position - Measure progress towards financial goals - Maintain information on financial activities - Provide data for preparing tax forms or applying for credit

Components of Money management

- personal financial records and documents - financial statements --> balance sheets and cash flow statements of income and outflows - spending plans (budget)

PRACTICE QUIZ IN BOOK: For the following items, identify each as an asset (A), liability (L), cash inflow (CI), or cash outflow (CO): 1) Monthly rent 2) Interest on a savings account 3) Retirement account 4) Electric bill 5) Automobile loan 6) Collection of rare coins 7) Mortgage amount 8) Market value of automobile

1) CO 2) CI 3) A 4) CO 5) L 6) A 7) L 8) A

PRACTICE QUIZ IN BOOK: What are 3 major money management activities?

1) Storing and maintaining personal financial records and documents 2) Creating personal financial statements (balance sheets and cash flow of income and outputs) 3) Plan for spending and saving (budgeting)

PRACTICE QUIZ IN BOOK: For each of the following household expenses, indicate if the item is a FIXED or a VARIABLE expense. 1) Food away from home 2)Rent 3) Health insurance premium 4) Cable television 5) Electricity 6) Auto repairs

1) Variable 2) Fixed 3) Fixed 4) Fixed 5) Variable 6) Variable

Copy of tax returns and supporting data should be kept for how long?

7 years minimum, 10 years better

PRACTICE QUIZ IN BOOK: What are the main purposes of a budget?

A budget will help you live within your income, spend your money wisely, reach your financial goals, prepare for financial emergencies, and develop wise financial management habits. *A budget is necessary for successful financial planning

Balance Sheet

A financial statement that reports what an individual or a family owns and owes; also called a net worth statement or statement of financial position.

PRACTICE QUIZ IN BOOK: What does a personal balance sheet (net worth statement) tell you about your financial situation?

A personal balance sheet will determine your CURRENT financial position * It does not tell you how much you are worth

Safe deposit box

A private storage area at a financial institution with maximum security for valuables.

Budget

A specific plan for spending income; also called a spending plan.

Liabilities

Amounts owed to others- debts

PRACTICE QUIZ IN BOOK: What are the benefits of an organized system of financial records and documents?

An organized system of financial records provides a basis for (1) handling daily business activities, such as bill paying (2) planning and measuring financial progress (3) completing required tax reports (4) making effective investment decisions (5) determining available resources for current and future spending.

Personal property and investments should be kept for how long?

As long as you own them

Liquid assets

Cash and items of value that can easily be converted to cash

Assets

Cash and other property with a monetary value.

Importance of spending and saving decisions?

Central to financial planning --> must be coordinated with needs, goals, and personal situations

PRACTICE QUIZ IN BOOK: For each of the following records, check the column to indicate the length of time the item should be kept. "Short time period" refers to less than five years.

Credit card statements- short term Mortgage documents- long term Receipts for furniture, clothing- short term Retirement account information- long term?? Will- Long term

Current vs long term liabilities

Current liabilities: Pay within a short time (usually < 1 year) Ex) medical bills, tax payments, cash loans, etc Long term liabilities: Debts you do not have to pay in full until more than a year from now EX) Auto loans, educational loans, and mortgages.

Money management

Day-to-day financial activities necessary to manage current personal economic resources while working toward longterm financial security.

Take-home pay

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

What records do you keep in your home file vs. safety deposit box vs. personal computer

Home file: Items you refers to often Ex) Housing/insurance/investing records, tax records, employment records, credit records, etc Safe deposit box: Records and Items that would be hard to replace EX) Birth/marriage/death certificate, citizenship papers, adoption papers, mortgage deed, copy of will, rare coins or other collectibles, etc Personal computer: scanned copies of documents, current and past budgets, computerized versions of wills/estate plans, and other documents

Insolvency

Inability to pay ones debts when due - liabilities (debts) far exceed assets

Documents of purchase and sale of real estate should be kept for how long?

Indefinitely

Birth certificates, wills, and social security information should be kept for how long?

Indefinitely because these items are hard to replace

Ways to increase Net Worth

Individuals and families can increase their net worth by: (1) increasing their savings (2) reducing spending (3) increasing the value of investments and other possessions (4) reducing amounts owed. **Remember, your net worth is not money available to use but an indication of your financial position on a given date

Income

Inflows of cash to an individual or a household

Discretionary income

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

Net worth equation --> Your Wealth

Net worth is what you're worth!! Net worth= Assests- liabilities (debts)

Steps/Components to creating a personal balance sheet

STEP 1: List items of value - Liquid assets - Real estate - Personal possessions - Investment assets STEP 2: Determine amounts owed - current and long term liabilities - current debts - credit card balances - amounts due on loans and mortgages STEP 3: Compute Net Worth--> Determines current financial position **Good example on pg. 50

Components/Steps to creating of a Cash Flow Statement

STEP 1: Record Income - Net income from employment - Saving and investment income - Other sources STEP 2: Record Cash outflows - Fixed expenses - Variable expenses STEP 3: Determine Net Cash flow - Use this statement as a basis for creating a spending, saving, and investment plan

Cash flow statement

Summary of cash receipts and payments for a given period Total cash- Cash outflows= Cash surplus or deficit

Cash flow

The actual inflow and outflow of cash during a given time period.

deficit

The amount by which actual spending exceeds planned spending.

surplus

The amount by which actual spending is less than planned spending.

Balance sheet vs. cash flow statement vs. budget

balance sheet- where you are now cash flow statement- what you received and spent over a specific period budget- Planning spending and saving to achieve financial goals

budget variance

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