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Money Management Strategy: Financial Statements and Budgeting

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Money Management Strategy: Financial Statements and Budgeting Online Research Do an online search to see if you can find the savings rate in the United States How ... – PowerPoint PPT presentation

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Title: Money Management Strategy: Financial Statements and Budgeting


1
  • Chapter 3
  • Money Management Strategy Financial Statements
    and Budgeting

2
Chapter 3Learning Objectives
  1. Recognize relationships among financial documents
    and money management activities
  2. Design a system for maintaining personal
    financial records
  3. Develop a personal balance sheet and cash flow
    statement
  4. Create and implement a budget
  5. Relate money management and savings activities to
    achieve financial goals

3
Planning for Successful Money Management
  • Objective 1 Recognize relationships among
    financial documents and money management
    activities
  • Daily spending and saving decisions are the
    heart of financial planning
  • Decisions must be coordinated with needs, goals,
    and personal situations
  • Money management is the day-to-day financial
    activities needed to manage personal economic
    resources, while working toward long-term
    financial security

4
Planning for Successful Money Management
(continued)
  • OPPORTUNITY COST AND MONEY-MANAGEMENT
  • Spending money on current living expenses reduces
    the amount you can save and invest
  • Saving and investing for the future reduces the
    amount you can spend now
  • Buying on credit ties up future income
  • Using savings for purchases results in lost
    interest and depletes savings
  • Comparison shopping can save money but takes
    valuable time

5
COMPONENTS OF MONEY MANAGEMENT
Creating and implementing a plan for spending,
and saving (budgeting)
Creatingpersonalfinancialstatements(balancesh
eets andcash flowstatements of income and
outflow)
Storingandmaintainingpersonalfinancialrecords
anddocuments
6
A System for Personal Financial Records
  • Objective 2 Design a system for maintaining
    personal financial records
  • Benefits of an Organized System of Financial
    Records
  • Handling daily business affairs, including
    payment of bills on time
  • Planning and measuring financial progress
  • Completing required tax reports
  • Making effective investment decisions
  • Determining available resources for current and
    future buying

7
A System for Personal Financial Records
(continued)
  • ITEMS IN YOUR HOME FILE
  • Personal and employment records
  • Money management records
  • Tax records
  • Financial services records
  • Consumer purchase, auto and credit records
  • Housing records
  • Insurance records
  • Investment records
  • Estate planning and retirement records

8
A System for Personal Financial Records
(continued)
  • ITEMS IN THE SAFE DEPOSIT BOX
  • Records that would be hard to replace
  • Birth, marriage and death certificates, copy of
    will
  • Citizenship and military papers
  • Adoption and custody papers
  • Serial numbers and photos of valuables
  • CDs and credit and banking account numbers
  • Mortgage papers and titles
  • List of insurance policy numbers
  • Stock and bond certificates
  • Coins and other collectibles

9
A System for Personal Financial Records
(continued)
  • RECORDS ON YOUR PERSONAL COMPUTER
  • Current and past budgets
  • Summary of checks written and other banking
    transactions
  • Past income tax returns prepared with tax
    preparation software
  • Account summaries and performanceresults of
    investments
  • Computerized versions of wills, estate plans,
    and other documents

10
A System for Personal Financial Records
(continued)
  • HOW LONG SHOULD RECORDS BE KEPT?
  • Birth certificates, wills, and Social Security
    information should be kept indefinitely
  • Keep records on personal property and investments
    as long as you own them
  • Keep documents related to the purchase and sale
    of real estate indefinitely
  • Copies of tax returns and supporting data should
    be kept six years

11
Personal Financial Statements Measure Financial
Progress
  • Objective 3 Develop a personal balance sheet and
    cash flow statement
  • Purpose of Personal Financial Statements
  • Report your current financial position in
    relation to the value of the items you own and
    the amounts you owe
  • Measure your progress toward your financial goals
  • Maintain information on your financial activities
  • Provide data you can use when preparing tax forms
    or applying for credit

12
Personal Financial Statements Measure Financial
Progress (continued)
  • BALANCE SHEET WHERE ARE YOU NOW?
  • Also called the Net Worth Statement or Statement
    of Financial Planning
  • Preparation of Balance Sheet requires using the
    following Steps
  • STEP 1 LISTING ITEMS OF VALUE
  • Assets - what you own
  • Liquid assets
  • Real estate
  • Personal possessions
  • Investment assets

13
Personal Financial Statements Measure Financial
Progress (continued)
  • STEP 2 DETERMINING THE AMOUNTS OWED
  • Liabilities - what you owe
  • Current liabilities (lt 1 year)
  • Long term liabilities
  • STEP 3 COMPUTING NET WORTH
  • Assets Liabilities Net Worth
  • Assets Net Worth Liabilities
  • Insolvency is the inability to pay debts when
    they are due

14

15
Personal Financial Statements Measure Financial
Progress (continued)
  • Net Worth is an indication of the financial
    position at any given date
  • Ways to increase Net Worth
  • Increasing your savings
  • Reducing spending
  • Increasing the value of investments and other
    possessions
  • Reducing the amounts you owe

16
Financial Ratio
  • Debt ratio liabilities / net worth
  • 25,000 / 50,000 0.5
  • High or low is better?
  • Current ratio liquid asset / current
    liabilities
  • 4,000 / 2,000 2
  • What does it mean?
  • High ratio means you have enough cash to pay bill

17
Financial Ratio
  • Liquidity ratio liquid assets / monthly
    expenses
  • 10,000 / 4,000 2.5
  • What does it mean? Low or high is better?
  • Debt-payments ratio monthly credit payment /
    take-home pay
  • 540 / 3,600 0.15
  • What does it mean?

18
Financial Ratio
  • Savings ratio amount saved each month / gross
    income
  • 648 / 5,400 0.12
  • What is the a proper ratio?

19
Personal Financial Statements Measure Financial
Progress (continued)
  • THE CASH FLOW STATEMENT
  • Cash Flow is the actual inflow, outflow for a
    given time period
  • The Cash Flow statement is also called personal
    income and expenditure statement

20
Personal Financial Statements Measure Financial
Progress (continued)
  • THE CASH FLOW STATEMENT
  • The process of preparing cash flows statement
    follows these steps
  • STEP 1 RECORD INCOME
  • Wages, salaries, and commissions
  • Self-employment business income
  • Savings and investment income
  • Gifts, grants, scholarships and educational loans
  • Government payments, such as Social Security,
    public assistance, and unemployment benefits
  • Amounts received from pension and retirement
    programs
  • Alimony and child support payments

21
Personal Financial Statements Measure Financial
Progress (continued)
  • STEP 2 RECORD CASH OUTFLOWS
  • Fixed Expenses
  • Variable expenses
  • STEP 3 DETERMINE NET CASH FLOWS
  • The difference between income and outflows can
    either be positive or negative
  • Cash flow statement provides the foundation for
    preparing and implementing a spending, saving,
    and investment plan

22

23
Budgeting for Skilled Money Management
  • Objective 4 Create and implement a budget
  • A budget is a spending plan
  • The main purposes of a budget are to help you
  • Live within your income
  • Spend your money wisely
  • Reach your financial goals
  • Prepare for financial emergencies
  • Develop wise financial management habits

24
Budgeting for Skilled Money Management (continued)
  • STARTING THE BUDGETING PROCESS
  • Steps in the budgeting process
  • Set financial goals
  • Estimate income from all sources
  • Budget amount for an emergency fund, periodic
    expenses and financial goals
  • Budget Fixed Expenses that you are obligated to
    pay

25
Budgeting for Skilled Money Management (continued)
  • Steps in the budgeting process (cont)
  • Budget Variable Expensesthe amounts that are to
    be spent for household and living expenses
  • Record Spending Amountsthe actual amounts for
    inflows and outflows, comparing actual amounts
    with budgeted amounts to determine variances
  • Review Spending and Saving Patterns
  • Evaluate whether revisions are needed in your
    savings and spending plans

26

27
Budgeting for Skilled Money Management (continued)
  • CHARACTERISTICS OF SUCCESSFUL BUDGETING
  • Well-planned
  • Realistic
  • Flexible
  • Clearly communicated

28
Selecting a Budgeting System
  • Mental budget it is all in your head
  • Physical budget-use envelopes for your expenses
    such as food, rent, etc.
  • Written budget use spreadsheets
  • Computerized budget use software such as
    Quicken (www.quicken.com)

29
Money Management and Achieving Financial Goals
  • Objective 5 Relate money management and savings
    activities to achieve financial goals
  • IDENTIFYING SAVING GOALS
  • To set aside money for irregular and unexpected
    expenses
  • To pay for the replacement of expensive items,
    such as cars or a down payment on a house
  • To buy special items like recreational equipment
    or to pay for a vacation
  • To provide for long-term expenses such as
    retirement or the education of children
  • To earn income from the interest on savings for
    use in paying living expenses

30
Money Management and Achieving Financial Goals
(continued)
  • SELECTING A SAVINGS TECHNIQUE
  • Payroll deductions into savings accounts
  • Automatic payments from checking into savings
    accounts or mutual funds
  • Saving regularly in 401(k) plans
  • Also save coins, make periodic deposits
  • Write a check each payday as a of income and
    deposit into savings

31

32
Money Management and Achieving Financial Goals
(continued)
  • Balance Sheet reports current financial position
  • Cash Flow Statement shows cash you have received
    and spent in the past
  • Budgets help you to spend and save to achieve
    financial goals

33
Assignments
  • Prepare a balance sheet for yourself
  • Prepare a cash flow statement for last month
  • Prepare a monthly budget
  • Monitor the budget and show variances

34
Online Research
  • Do an online search to see if you can find the
    savings rate in the United States
  • How does your savings ratio compare to the
    average?
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