Personal Finance Chapter 2 Money Management Skills

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 investments decisions. 5. Determining available resources for current and future spending.

Budgeting may be viewed in seven main steps:

1. Set financial goals. 2. Estimate income. 3. Budget an Emergency fund and savings. 4. Budgeting fixed expenses 5. Budget variable expenses. 6. Record spending amounts. 7. Review spending and saving patterns.

Components of Money Management

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

The process for preparing a cash flow statement involves three steps:

1. Total cash received during the time period. 2. MINUS cash outflows during the time period 3. EQUAL cash surplus or deficit

Individuals and families can increase their net worth by:

1. increasing their savings 2. reducing spending 3. increasing the value of investments and others possessions; 4. reducing amounts owed Remember, u net worth is not money available to use, but an indication of u financial position on a given date.

cash flow statement

A financial summary for a specific period that shows the beginning balance on hand, the receipts and disbursements during the period, and the balance on hand at the end of the period.

saving ratio

Amount saved each month divided by gross income. Financial experts recommend monthly savings of 5-10 percent.

payroll deduction

Amount subtracted from a paycheck,either by government requirement (mandatory taxes,Social Security,etc.) or at the employee's request (health insurance,retirement plan,etc.).

Creating a Personal Balance Sheet

Assets: 1. Liquid Assets (checking account balance, savings, money market accounts; cash value of life insurance and total liquid assets) 2. Real Estate (current market value of home) 3. Personal possessions (auto, appliances, furniture, entertainment, computer, jewelry and total household assets). 4. Investments assets (retirement accounts, mutual funds and total investments assets) This items gives u a TOTAL ASSETS. Liabilities: Current liabilities (medical bills, charge account & credit card balances, balance due on auto loan and total current liabilities) Long-term liabilities: mortgage, home improvement loan, student loan and total long-term liabilities. Net Worth = Assets - liabilities

variable expenses

Expenses that change from month to month

Current ratio

Indicates $2 in liquidity assets for every $1 of current liabilities; a high current ratio is desirable to have cash available to pay bills.

Debt-payments ratio

Indicates how much of a person's earnings goes for debt payments (excluding a home mortgage); most financial advisors recommends a debt payment ratio of less than 20 percent.

Liquidity ratio

Indicates the number of months in which living expenses can be paid if an emergency arises; a high liquidity ratio is desirable.

Disposable income

It is also known as a personal disposable income PDI. It is the amount of money households have available for spending and saving after income taxes have been accounted for.

U prepare the balance sheet to determine your current financial position using the following process:

Items of value (what u own) - Amounts owed (what u owe) = Net worth (u wealth)

discretionary income

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

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.

safe deposit box

a small, secure storage compartment that you can rent in a bank, usually for $100 a year or less

take home pay

also called net pay, it is the amount of income left after taxes and other deductions are taken out of your gross pay; also, it is called disposable income.

Liabilities

amounts owed to others.

deficit

an excess of liabilities over assets (usually over a certain period)

investment assets

are funds set aside for long term financial needs

personal possesions

car, personal belongings

Liquid assets

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

assets

cash and other property with a monetary value.

Money management

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

Long-term liabilities

debts that are not required to be paid in full until more than a year from now.

current liabilities 1

debts that must be paid within a short time, usually less than a year.

net worth 1

difference between total assets and total liabilities.

budget

documents that projects income and spending. Specific plan for expending income, also called spending plan.

income

earnings from work or investments. Inflows of cash to an individual or a household.

steps to get out of debt

evaluate credit situation track your spending plan to make payments on time consider other income sources if appropriate, seek assistance

ways to increase net worth

increase savings reduce spending increase value of investments reduce amounts owed

A mortgage

is an amount borrowed to buy a house or other real state that will be repaid over a period of 15, 20, or 30 years.

Solvency

it is the ability to pay u bills as they come due because u assets exceed u liabilities.

debt ratio

liabilities divided by net worth. A low debt ratio is best.

current liabilities

liabilities due within a short time, usually within a year

surplus

more than is needed, desired, or required. this amount is available for saving, investing, or paying off debts.

real estate

property consisting of houses and land

A cash flow statements

provides the foundation for preparing and implementing a spending, saving, and investment plan. The cash flow statement reports the actual spending of a household. In contrast, budget, which has a similar format, documents projected income and spending.

main purpose of personal financial statements (4)

report current financial position measure your progress towards financial goals maintain info about financial activities provide data for preparing tax forms/applying for credit

fixed expenses

set costs that must be paid such as rent, insurance, and car payments

cash flow

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

net cash flow

the difference between income and outflows can be either a positive (surplus) or negative (deficit). A deficit means more money goes out than comes in during a given month.

budget variance

the difference between the budgeted amount and the actual amount that you spend

insolvency

the inability to pay debts when they are due because liabilities far exceed the value of assets.

The cash flow statement is

the inflows and outflows. Also called a personal income and expenditure statement. It is a summary of cash receipts and payments for a given period, such as a month or a year. This report provides data on u income and spending patterns, which will be helpful when preparing a budget.

net worth

total assets minus total liabilities