Money Management Strategy

1
Money Management Strategy
Chapter 3
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Organizing PersonalFinancial Records

• What Youll Learn
• How to recognize the relationship between
  financial documents and money management
  strategies
• How to create a system to maintain your personal
  financial documents

• Why Its Important
• Organizing your personal financial records can
  help you make informed decisions about your
  spending.

3
Money Management

• Money management is planning how to get the most
  from your money
• Good money management can help you keep track of
  where your money goes so that you can make it go
  farther
• Money management includes
• Organizing your personal financial records
• Preparing personal financial statements
• Creating a budget

4
Personal Financial Documents
Personal financial documents include your bank
statements, paycheck stubs, car titles, birth
certificates, social security cards, tax forms,
cell phone contracts, and any other documents
that record information about how you spend your
money.
Organized documents help you

• Plan and measure your financial progress
• Handle routine money matters
• Determine how much money you have to spend later
  and in the future
• Make effective decisions about how to save money

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Where to Keep Documents

• Home Files
• Use for documents that are fairly easy to replace
• Advantages
• Easy to set up
• Easy to use and access
• Inexpensive
• Disadvantages
• Vulnerable to damage

6
Where to Keep Documents

• Safe-Deposit Boxes
• Use for documents that are hard to replace
• Advantages
• Safe from damage
• Separate from other documents
• Access is limited
• Contents usually insured
• Disadvantages
• Harder to access
• Costs money (about 100 year)

7
Where to Keep Documents

• Computer Files
• Use for documents that are easy to keep
  electronically or that are useful in planning
• Advantages
• Automatic calculation of amounts
• Usually has tool to help in tracking and planning
  
• Disadvantages
• Data can be lost

8
Check Your Understanding

• Complete Worksheet Packet page 4
• Known these terms
• money management
• safe-deposit box

9
Personal Financial Statements

• What Youll Learn
• How to develop a personal balance sheet and cash
  flow statement
• How to analyze your personal financial situation

• Why Its Important
• Personal financial statements can give you an
  idea of where youre headed financially and where
  you are now in relation to your financial goals.

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Personal Financial Documents

• Provide information about your current financial
  position and present a summary of your income and
  spending
• Help you to
• determine what you own and what you owe
• measure your progress toward your financial goals
• track your financial activities
• organize information that you can use when you
  file your return or apply for credit

11
Balance Sheet

• Financial statement that lists the items of value
  that you own, the debts you owe, and your net
  worth
• Net worth, then, is the difference between the
  amount that you own and the debts that you owe
• Also known as net worth statement

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Creating the Balance Sheet

• Determine Your Assets
• Determine Your Liabilities
• Calculate Your Net Worth
• Evaluate Your Financial Situation

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Assets

• Assets are any items of value that you own
• Categories
• Liquid Assets cash and items that can be
  quickly converted to cash
• Real Estate land that a person or family owns
  and anything that is on the land
• Personal Possessions valuable belongings that
  are not real estate
• Investment Assets retirement accounts and
  securities (investments) such as stocks, bonds,
  and mutual funds

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Liabilities

• Liabilities are debts that you owe
• Liabilities include only those items that you
  will owe for longer than a month
• Categories
• Current liabilities short-term debts that have
  to be paid within one year
• Long-Term liabilities debts that dont have to
  be fully paid for at least one year

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Net Worth

• The formula to calculate net worth is
• ASSETS LIABILITIES NET WORTH

Example What is Janines net worth if her
assets are worth 3,000 and her liabilities total
700? Formula Assets Liabilities Net
Worth Solution 3,000 - 700 2,300
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More on Net Worth

• What Net Worth Means
• Net worth is an indication of your general
  financial situation.
• A negative net worth means you are insolvent or
  you have more debt than items of value.
• A positive net worth is generally good, but it
  doesnt mean you will always have an easy time
  paying your bills especially if you have few
  liquid assets

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Evaluate Your Financial Situation

• Use the balance sheet to track your financial
  progress
• Update your balance sheet every month noting the
  change in net worth
• Increasing keep doing what youre doing
• Decreasing changes are in order
• Staying the Same you may want to make some
  changes

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Check Your Understanding

• Complete Worksheet Packet page 9
• Known these terms

• personal financial statements
• balance sheet
• net worth
• assets
• liquid assets
• real estate
• personal possessions

• investment assets
• market value
• liabilities
• current liability
• long-term liability
• insolvency

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Cash Flow Statement

• The cash flow statement tracks the amount of
  money that actually goes into and out of your
  wallet
• Also known as an income statement

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Creating the Cash Flow Statement

• Determine Your Cash Inflows
• Determine Your Cash Outflows
• Determine Your Net Cash Flow

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Cash Inflows

• Your cash inflows represent your income
• Sources of income
• Take-home pay or net pay
• Gifts
• Bank account interest
• Gains on investments
• Sale of assets

22
Cash Outflows

• Your cash outflows represent your expenses
• Types of Expenses
• Fixed expenses expenses that remain more or
  less the same every month
• Variable expenses expenses that change from
  month to month

23
Net Cash Flow

• The formula to calculate net cash flow is
• INCOME - EXPENSES NET CASH FLOW

Example What is Jasons net cash flow if his
income is 1,500 and his expenses add up to
1,350? Formula Income Expenses Net Cash
Flow Solution 1,500 - 1,350 150
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More on Cash Flow

• A surplus occurs if you have a positive cash flow
• A deficit occurs if you have a negative cash flow
• Some financial experts like to look at
  discretionary income to evaluate the strength of
  a persons income
• Discretionary income is the money you have left
  over after paying for essentials (food, clothing,
  shelter, transportation, medication)
• Represents the money you can spend on wants

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Putting It Together

• When your cash flow changes, so does your net
  worth
• A negative cash flow will decrease your net worth
• A positive cash flow will increase your net worth
• You can also use financial ratios to analyze your
  financial position see worksheet packet page 7.

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Check Your Understanding

• Use your Personal Spending Record to prepare your
  own Cash Flow Statement.
• Worksheet packet pages 8, 10, 10A, 10B
• Terms to know

• personal spending record
• cash flow
• cash inflows
• cash outflows
• fixed expense
• variable expense
• income

• take-home pay
• discretionary income
• surplus
• deficit
• positive cash flow
• negative cash flow
• income statement

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Budgeting

• What Youll Learn
• How to create a budget that is practical for you
• How to achieve your financial goals by increasing
  your savings

• Why Its Important
• Following a practical budget can help you achieve
  your financial goals and develop wise financial
  habits.

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What is a Budget?

• A budget is a plan for using your money in a way
  that best meets your needs and wants.
• Budgeting is essential to intelligent money
  management and includes 6 steps.

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Steps in Budgeting

• Set financial goals
• Estimate your income
• Budget for the unexpected
• Budget for expenses
• Record what you spend
• Review spending and savings patterns

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Set Financial Goals

• I think weve said and done enough on this topic!

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Estimate Your Income

• Record expected income for the next month
• Include only income you can count on
• If your income is unpredictable, estimate what
  you will receive in the next month and adjust it
  down a little

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Budget for the Unexpected

• You should build up and maintain an emergency
  fund.
• Your emergency fund should be 3-6 months worth of
  income.
• This money is used in case of unemployment,
  unexpected medical needs or any other financial
  crisis.

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Budget for Expenses

• Fixed Expenses
• simply record the amounts
• Pay Yourself First (PYF) try payroll deduction
• Variable Expenses
• make your best guess based on previous months
• when in doubt, guess high!
• use guidelines about expenses published by
  financial experts
• http//www.practicalmoneyskills.com
• http//www.stats.bls.gov/news.release/cesan.toc.ht
  m
• asks friends and relatives what they spend

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Record What You Spend

• Keep track of your money for the next month and
  record what you actually receive and spend
• Calculate the budget variance the difference
  between the actual amount you spent and what you
  budgeted

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Review Patterns

• Your budget should be reviewed each month
• Deficits cut expenses/increase income
• Surplus consider placing more in savings for
  long-term goal

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Budgeting Tips

• Plan carefully
• estimates should be based on some data
• cover all expenses
• Be practical
• Be flexible
• Write your budget down
• Be able to access your budget data easily

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Check Your Understanding

• Worksheet packet page 12A, 13, 12B
• Terms to know

• taxes
• federal income tax
• state income tax
• Social Security tax
• Medicare tax
• FICA
• Unemployment tax
• gross pay
• net pay
• pay yourself first

• United Way
• retirement plan
• budget
• Consumer Price Index
• budget variance
• cost/benefit analysis
• pay stub
• payroll deduction
• Occupational privilege tax

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Form W-4

• Tells your employer how much to withhold from
  your paycheck for taxes.

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Form W-2

• Shows the income you earned from the employer and
  the amount withheld for taxes.

40
Check Your Understanding

• Worksheet packet pages 14-16 Unit 3 Puzzle,
  Scrambled Words
• Terms to know
• Form W-2
• Form W-4
• Allowance