Chapter 2 Money Management Strategy: Financial Statements and Budgeting - PowerPoint PPT Presentation

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Chapter 2 Money Management Strategy: Financial Statements and Budgeting

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Money Management Strategy: Financial Statements and Budgeting Kapoor Dlabay Hughes Ahmad Prepared by Cyndi Hornby, Fanshawe College – PowerPoint PPT presentation

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Title: Chapter 2 Money Management Strategy: Financial Statements and Budgeting


1
Chapter 2Money ManagementStrategy Financial
Statements and Budgeting
Kapoor Dlabay Hughes Ahmad Prepared
by Cyndi Hornby, Fanshawe College
2-1
? 2004 McGraw-Hill Ryerson Ltd.
2
Learning Objectives Chapter 2
  1. Recognize relationships among financial documents
    and money management activities.
  2. Create a system for maintaining personal
    financial records.
  3. Develop a personal balance sheet and cash flow
    statement.
  4. Create and implement a budget.
  5. Calculate savings needed to achieve financial
    goals.

2-2
3
Learning Objective 1
  • Recognize relationships among financial documents
    and money management activities.

2-3
4
Opportunity Cost 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 -savings cant be used for other
    purposes.
  • Every decision made means you give up something
    else.
  • Comparison shopping can save money but takes your
    valuable time.

2-4
5
Major Money Management Activities
Createpersonalfinancialstatementsof
incomeandoutflow(balancesheet andcash flow).
Create
Storeandmaintainpersonalfinancialrecordsand
documents.
and
implement
a plan for spending (budgeting)
and
saving.
2-5
6
Learning Objective 2
  • Create a system for maintaining personal
    financial records.

2-6
7
Why Keep Financial Records?
  • Handling daily business affairs, including paying
    of bills on time
  • Planning and measuring financial progress
  • Completing required tax forms
  • Making effective investing decisions
  • Determining available resources for current and
    future buying

2-7
8
What to Keep in Your Home File
  • Items you refer to often.
  • Personal and employment records.
  • Tax records.
  • Financial services records.
  • Money management records.
  • Credit records.
  • Consumer purchase records.
  • Insurance records.
  • Investment records.
  • Housing and car records.
  • Estate planning and retirement records.

2-8
9
What to Keep in a Safe Deposit Box
  • Safe deposit box is for records and items that
    would be hard to replace.
  • Birth, marriage and death certificates.
  • Citizenship and military papers.
  • Adoption and custody papers.
  • Serial numbers and photos of valuables.
  • GICs and bank account numbers.
  • Mortgage papers and titles.
  • List of insurance policy numbers.
  • Stock and bond certificates.
  • Coins and collectibles.
  • Copy of will.

2-9
10
Other Places to Keep Records
  • Automobile.
  • Vehicle registration.
  • Lawyer.
  • Original of your will and living will.
  • Doctor and hospital.
  • Copy of your living will.
  • Home computer.
  • Current and past budgets.
  • Chequing account records.
  • Wills, estate plans, investments.
  • Past income tax returns.

2-10
11
Learning Objective 3
  • Develop a personal balance sheet and cash flow
    statement.

2-11
12
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 information you can use when preparing
    tax forms or applying for credit.

2-12
13
Balance Sheet
  • A financial statement that reports what an
    individual or family owns or owes also called a
    net worth statement
  • -

Items of value (what you own)
Amounts Owed (what you owe)
Net Worth (your wealth)
2-13
14
Components of a Balance Sheet(Net Worth
Statement)
  • Assets - what you own.
  • Liquid assets.
  • Real estate.
  • Personal possessions.
  • Investment assets.
  • Liabilities - what you owe
  • Current liabilities.
  • Long term liabilities.
  • Net Worth.
  • Assets minus liabilities.
  • Insolvent means liabilities far exceed assets.

2-14
15
Cash Flow Statement
  • A financial statement that summarizes cash
    receipts and payments for a given period of time

Total cash received during that time period
Cash outflows during the time period
Cash surplus or deficit
2-15
16
Components of a Cash Flow Statement
  • Shows inflow and outflow during a given time
    period.
  • Record income.
  • Income from employment.
  • Savings and investment income.
  • Other sources.
  • Record cash outflows.
  • Fixed and variable expenses.
  • Net cash flow can be a surplus or a deficit.
  • Used as a basis for creating a spending, saving
    and investment plan.

2-16
17
Learning Objective 4
  • Create and implement a budget.

2-17
18
Creating and Implementing a Budget
  • Budget A specific plan for spending income
  • Purpose
  • Live within your budget
  • Spend your money wisely
  • Reach your financial goals
  • Prepare for financial emergencies
  • Develop wise financial management habits

2-18
19
The Budgeting Process
  • Step 1 Setting Financial Goals
  • plans for future activities that require you to
    plan your spending and investing
  • Should be realistic stated in specific,
    measurable terms have a definite time frame
    imply type of action to be taken

2-19
20
The Budgeting Process (cont)
  • Step 2 Estimating Income
  • Estimate available money for given period of time
    usually one month
  • Based on number of times income received each
    month, spending should be planned accordingly
  • Difficult if your earnings vary by season or
    income is irregular

2-20
21
The Budgeting Process (cont)
  • Step 3 Budgeting Emergency Fund and Savings
  • Recommend 3-6 months of living expenses be
    established
  • Step 4 Budgeting Fixed Expenses
  • Will depend on your current needs and plans for
    the future
  • Step 5 Budgeting Variable Expenses
  • Will fluctuate by household situation, time of
    year, health, economic conditions, etc.

2-21
22
The Budgeting Process (cont)
  • Step 6 Recording Spending Amounts
  • Record actual income and expenses
  • Budget Variance difference between amount
    budgeted the actual amount received or spent
  • Deficit actual spending exceeds planned
    spending
  • Surplus actual spending less than planned
    spending

2-22
23
The Budgeting Process (cont)
  • Step 7 Reviewing Spending and Saving Patterns
  • Review your financial progress
  • Revise your goals and budget allocations

2-23
24
Successful Budgets Are...
  • Well planned.
  • Realistic.
  • Flexible.
  • Clearly communicated.

2-24
25
Learning Objective 5
  • Calculate savings needed to achieve financial
    goals.

2-25
26
Saving to Achieve Financial Goals
  • Common reasoning for saving include
  • To set aside money for irregular and unexpected
    expenses.
  • To pay for the replacement of expensive items,
    such as appliances, cars or a down payment on a
    house.
  • Save to buy special items or pay for a vacation.
  • Put aside money to long-term expenses such as
    retirement or children's education.
  • To earn income from the interest on savings for
    use in paying living expenses.

2-26
27
Selecting a Saving Technique
  • Should make regular periodic savings deposits
  • Can be a percentage of income (5-10) or specific
    dollar amount
  • Write a cheque each payday and deposit into a
    special savings account at another financial
    institution
  • Payroll deduction
  • Direct deposit
  • Saving coins at end of each day

2-27
28
Suggestions for Dual-Income Households
  • Pooled Income incomes combined and bills paid
    from pool
  • Sharing the Bills each responsible for
    predetermined bills
  • 50/50 each contribute equally to pool
  • Proportionate Contribution each contribute
    percentage of his/her income

2-28
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