BA 1200 Chapter 2

Personal Possessions

A major portion of assets for most people. IE, cars and other personal belongings. These are usually difficult to convert to cash.

Safe Deposit Box

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

Budget Variance

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

Steps in Creating a Cash Flow Statement

1. For a set time period (such as a month), record your income from various sources, such as wages, salary, interest and payments from the government. 2. Develop categories and record cash payments for the time period covered by the cash flow statement. 3. Subtract the total outflows from the total inflows. A positive number represents the amount available for saving and investing. A negative number (deficit) represents the amount that must be taken out of savings or borrowed.

An organized system of financial records provides a basis for:

1. Handling daily business activities (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.

The Main Purposes of a Budget Are:

1. Help you live your life within your income. 2. Spend your Money wisely. 3. Reach for financial goals. 4. Prepare for financial emergencies. 5. Develop wise financial management habits.

Individuals and Households commonly use these types of Budgeting Systems:

1. Mental Budget 2. Physical Budget 3. Written Budget 4. Digital Budget

Personal Financial Statements require 2 Documents. Those documents are:

1. Personal Balance Sheet 2. Cash Flow Statement

3 Steps to Financial Literacy

1. Plan a system to monitor your cash inflows and outflows 2. Identify your fixed expenses. Control and reduce your variable spending. 3. Spend according to your plan to avoid negative cash flow and away from debt problems.

The Main Purposes of Personal Financial Statements are:

1. Report your current financial position 2. Measure your progress towards financial goals 3. Maintain information about your financial activities 4. Provide data for preparing tax forms or applying for credit

Plan for Effective Budgeting

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

Developing a Monthly Budget

1. Set Financial Goals 2. Estimate expected income from all sources; this amount is to be allocated among various outflow categories. 3. Budget amount for an emergency fund, periodic expenses, and financial goals. 4. Budget set amounts that you are obligated to pay. 5. Budget estimated amounts to be spent for various household and living expenses. 6. Record actual amount for inflows and outflows. Compare actual amounts with budgeted amounts to determine variances. 7. Evaluate whether revisions are needed in your spending and savings plan.

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)

How long you should keep tax records

7 years. (audits go back 3 years)

Cash Flow Statement

A financial statement that summarizes cash receipts and payments for a given period. This is also called Personal Income and Expenditure Statement. This report provides data on your income and spending patterns, which is helpful when preparing a budget.

Budget

A specific plan for spending income; AKA a Spending Plan. This is necessary for successful financial planning.

Savings Ratio

Amount saved each month divided by gross income (recommended monthly savings is 5 - 10%)

Liabilities

Amounts owed to others but do not include items not yet due, such as next month's rent.

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. IE, auto loans, educational loans, mortgages.

Current Liabilities

Debts that must be paid within a short time, usually less than a year. IE, Medical bills, tax payments, insurance premiums, cash loans and charge accounts.

Inflows

Deposits to accounts

Take Home Pay (NET PAY)

Earnings after deductions for taxes and other items; also called disposable income.

Cash Outflows

Expenses, or items for which you must spend money. IE, rent is a cash outflow

Investment Assets

Funds set aside for long term financial needs. These amounts usually fluctuate in value.

Balance Sheet AKA Net Worth Statement and Statement of Financial Position

Reports What you Own and What you Owe

Real Estate

Homes or other land that a person owns

Income

Inflows of cash to an individual or a household. This can be pay from a job, child support, dividends, interest, pension, alimony, etc.

Debt Ratio

Liabilities divided by net worth

Current Ratio

Liquid Assets divided by current liabilities

Liquid Ratio

Liquid assets divided by monthly expenses

Outflows

Money going out - Checks written, withdrawals and debit card payments.

Examples of Liquid Assets

Money in Savings and Checking accounts

Deficit

The amount by which actual spending exceeds planned spending.

Surplus

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

Discretionary Income

Money left over after paying for housing, food and other necessities. Studies report that discretionary income is less than 5% for people under 25 and more than 40% for older people.

Emergency Fund

Money set aside for unexpected expenses or for living costs in case of job loss.

Debt-Payments Ratio

Monthly credit card payments divided by take-home pay

Variable Expenses

Payments that change from month to month. IE, food, clothing, utilities.

Fixed Expenses

Payments that do not vary from month to month, like rent, installment payments, mortgage.

Why improved cash flow is important for your financial situation

Positive monthly cash flow will allow you to set aside funds for future financial security and avoid financial difficulties.

SWOT

Strengths, Weaknesses, Opportunities, Threats. This is a planning tool used by companies

Personal Financial Statements

Tells you the starting point of your financial journey.

Cash Flow

The actual inflow and outflow of cash during a given time period. IE, paycheck or interest earned are cash inflows

Net Worth

The difference between total assets and total liabilities.

Insolvency

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

Net Worth

The value of the items you own minus the amounts you owe is your Net Worth

The Process for Preparing a Cash Flow Statement

Total cash received during the time period (-) Cash outflows during the time period = Cash surplus or deficit.

Successful budgets are commonly viewed as being:

Well-planned, Realistic, Flexible, Clearly Communicated.