1. Money Management Strategy: Financial Statements and Budgeting
Chapter 3
Money Management Strategy: Financial Statements and Budgeting

2. Chapter 3 Learning Objectives
Recognize relationships among financial documents and money management activities
Design a system for maintaining personal financial records
Develop a personal balance sheet and cash flow statement
Create and implement a budget
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
Storing and maintaining personal financial records and documents
Creating personal financial statements (balance sheets and cash flow statements of income and outflow)
Creating and implementing a plan for
spending, and saving (budgeting)

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 performance results 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 (< 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

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

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 (con’t)
Budget Variable Expenses—the amounts that are to be spent for household and living expenses
Record Spending Amounts—the 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

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 (

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

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?