2-1 Measuring Your Financial Health and Making a Plan

2-2 Introduction Where does all your money go? Planning and budgeting requires control Evaluate your financial health Develop a plan of action

2-3 Using a Balance Sheet to Measure Your Wealth A snapshot of your financial status at a particular time. Assets you own Debt or liabilities you’ve incurred Your net worth or equity

2-4 Figure 2.2 Personal Balance Sheet

2-5 Assets: What You Own Assets are your possessions even if you owe money on them. List assets using their fair market value. All values must be current.

2-6 Assets: What You Own Monetary assets—cash or liquid asset (checking and savings accounts) Investments (including whole life insurance that builds cash value) Retirement plans (401K and pension) Tangible assets—physical assets –House, vehicles, furniture, jewelry, collectibles, etc.

2-7 Liabilities: What You Owe Liability is debt that must be repaid in the future. Current liabilities must be paid off within the next year. Long-term liabilities come due beyond a year. List only the unpaid balances.

2-8 Liabilities: What You Owe Current bills—utility bills, insurance premiums, credit card balances. Long-term liabilities—home, car, or student loans. Other loans—other installment loans, bank loans, insurance policy loans.

2-9 Net Worth: A Measure of Your Wealth Net worth = total assets - total debt If liabilities > assets, negative net worth and insolvent. If liabilities < assets, positive net worth. Good level of net worth depends on your goals and your place in the financial life cycle.

2-10 Using an Income Statement to Trace Your Money Financial motion picture—tells you where your money has come from and where it has gone over some period of time. Income and expenditure, net income statement Cash basis—based on actual cash flows Income – expenses (over given time period)

2-11 Figure 2.4 A Simplified Income Statement

2-12 Income: Where Your Money Comes From Income or cash inflows: –Wages, salary, bonuses, tips, commissions before tax or automatic investments –Other sources: family income, government payments (veterans benefits, welfare), investment income Subtract federal, state, social security taxes from earnings to calculate your take-home pay

2-13 Expenditures: Where Your Money Goes Cash transactions may not leave a paper trail. Variable or fixed expenditures. Control over expenditures

2-14 Record Keeping Without records difficult to prepare taxes. You track expenses and know how much and where you are spending. Easier for someone to step in during an emergency and understand your financial situation.

2-15 Record Keeping Steps 1.Track your financial dealings. Credit card and check expenditures are easy to track, but cash expenditures must be tracked as they occur. After tracking, record transactions in a ledger. 2.File and store your financial records so they are readily accessible.

2-16 Putting It All Together: Budgeting Evaluate your financial health by using the balance sheet and income statement: –To set financial goals –To achieve financial goals Develop a plan of action and cash budget using the income statement Monitor your progress using the balance sheet and income statement.

2-17 Developing a Cash Budget Plan for controlling cash inflows and outflows. Allocate dollar amounts for different spending categories

2-18 Preparing a Cash Budget –Estimate anticipated after-tax income or take home pay from most recent annual personal income statement. –Estimate living fixed and variable expenses. –Estimate income available for saving and investing: subtract anticipated living expenditures from anticipated take-home pay.

2-19 Implementing the Cash Budget Put it in place for a month. Compare actual expenditures in each category with budget amounts at the end of the month. Evaluate whether you change budget estimates or exert self-control? Stick your desired budget for a month with an envelope system.

2-20 Figure 2.7 Budget Tracker

2-21 Hiring a Professional Three options for working with professionals 1.Go it alone and have your plan checked by a professional. 2.Work with a professional to develop a plan. 3.Leave it all in the hands of a pro.

2-22 What Planners Do More unique financial situations need professional help. They give advice. You still need to know the basics and still bear ultimate responsibility.

2-23 Choosing a Professional Planner Check accreditations: –Personal financial specialist (PFS) –Certified financial planner (CFP) –Chartered financial consultants (ChFC) Check experience Referrals

2-24 Choosing a Professional Planner Fee-only planners Fee-and-commission planners Fee offset planners Commission based planners