Chapter 2 - Money Management Strategy

Most financial records are kept in 1 of 3 places

- home file - safety deposit box - home computer

Savings depositis

- regular periodic savings - recommend 5-10% of income

The Budgeting Process - Step 3

Budgeting Emergency Fund and Savings - Recommend 3-6 months of living expenses be established for unexpected expenses

What to keep in a safety deposit box

Keep records and items that would be hard to replace - birth, marriage, death cert. - citizenship papers - adoption/custody papers -GIC's and bank account #s - Mortgage papers and titles - insurance policy numbers - copy of will

The Budgeting Process - Step 7

Reviewing Spending and Saving Patterns - Review your financial progress - Revise goals and budget allocations

The Budgeting Process - Step 1

Setting financial goals - financial goals are plans for future activities that require you to plan your spending and investing - should be realistic, stated in specific and measurable terms, have a definite time frame, and imply type of action to be taken

Personal Balance Sheet

a financial statement that reports what an individual or family owns or owes; aka net worth statement Items of value - net worth = amounts owed

Budget

a specific plan for spending income; aka "spending plan" Main purpose is to - live within your means - spend money wisely - prioritize and attain goals - prepare for financial emergencies - develop good financial management habits

Savings ratio

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

Take-home pay

earnings after deductions and taxes for other items; aka disposable income

Cash Flow Statement

financial statement that summarizes cash receipts and payments for a given period of time total cash received during that time period + cash outflows during that time period = cash surplus or deficit If cash inflows > cash outflows, then net worth increases

Debt ratio

liabilities / net worth - Shows relationship between debt and net worth - the lower the debts ratio, the better

Current ratio

liquid assets / current liabilities - You want a high current ratio (more assets than liabilities) to have cash to pay bills

Liquidity ratio

liquid assets / monthly assets - indicated the number of months in which living expenses can be paid if an emergency arises

Opportunity Costs and Money Management

- spending money reduces the 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 - comparison shopping can save you money but uses up valuable time

Purpose of Personal Financial Statements

- summarize the value of items you own and owe - track cash inflows by source and your outflows by type - Identify strengths and weaknesses in your current financial situation - Measure progress towards your financial goals - Provide data for use in filing your income tax return

Successful budgets are (4) ...

- well planned - includes everyone affected by it - realistic - flexible - account for unexpected expenses - clearly communicated - available to all house hold members

The Budgeting Process - Step 4

Budgeting Fixed Expenses - will depend on current need and plans for the future

The Budgeting Process - Step 5

Budgeting Variable Expenses - will fluctuate by household situation, time of year, health, economic conditions, etc. - consider fluctuating cost of cell phone monthly

What to keep in home file

Items you refer to often such as: - personal and employment records - tax records - financial services records - money management records - credit records - automobile purchase records - insurance records - investment records - housing records - estate planning and retirement records

The Budgeting Process - Step 6

Recording Spending Amounts - Record actual income and expenses - Budget variance: difference between amount budgeted & actual amount received or spent - Deficit: actual spending > planned spending - Surplus: actual spending < planned spending

Insolvency

inability to pay debts when they are due because liabilities exceed value of assets - a person can have high net worth while still having financial difficulties

Discretionary income

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

Debt payments ratio

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

Personal financial records

written evidence of business transactions, property ownership, and legal matters - enable you to measure and assess your financial position and progress

What are the 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)

Keep tax records for a minimum of __ years

6

Money Management

Day-to-day financial activities necessary to manage current personal economic resources while working toward long-term financial security Coordinate spending and saving with needs, goals, and personal situation Maintain financial records

The Budgeting Process - Step 2

Estimating Income - Estimate available money for a given period of time (usually one month) - based on number of times income is received each month - only include money that you are sure you'll receive - can be difficult to do if your income is seasonal or irregular

Components of a Cash Flow Statement (3)

Step 1 - Record income Step 2 - Record cash outflows (rent, mortgage, loan payments, insurance, food, clothing, utilities) Step 3 - Determine net cash flow

Components of a Balance Sheet (Net worth statement)

Step 1: Listing items of value (assets) Step 2: Determining amount owed (liabilities) Step 3: Computing net worth (assets - liabilities)