Grab a scratch sheet (from the front table) and jot down your thoughts on the following question. “I’ve got a great job and no bills. I still live at home. Why do I need an emergency fund?”

Personal Financial Statements 3.2 Chapter 3 Personal Financial Statements 3.2

Lesson Objectives Develop a personal balance sheet and cash flow statement. Analyze your personal financial situation.

Personal Financial Statements Documents that provide information about your current financial position and present a summary of your income and spending. Balance Sheet Cash Flow Statement

Personal Balance Sheet: What are you worth now? Balance Sheet – financial statement that lists the items of value that you own, the debts that you owe, and your net worth.

Step 1: Determine your assets Assets – items of value that you own, including cash, property, personal possessions, and investments.

Assets Liquid Assets Checking account balance 1,450.00 Savings account balance 550.00 Total liquid assets 2,000.00 Real Estate Market value of house 105,000.00 Personal Possessions Market value of car 4,250.00 Furniture and appliances 2,500.00 Electronic equipment 2,000.00 Collectibles 750.00 Total personal possessions 9,500.00 Investment Assets Retirement accounts 15,000.00 Stock investments 3,300.00 Total investment assets 18,300.00 Total Assets 134,800.00

Step 2: Determine your Liabilities Liabilities – debts that you owe.

Liabilities Current Liabilities Medical bills 1,250.00 Credit card balances 2,300.00 Total current liabilities 3,550.00 Long-term Liabilities Mortgage 92,500.00 Student loan 3,500.00 Car loan 2,500.00 Total long-term liabilities 98,500.00 Total Liabilities 102,050.00

Step 3: Calculate your net worth Net Worth – difference between the amount that you own and the debts that you owe. Assets – Liabilities = Net Worth Insolvency – condition that occurs if your liabilities are greater than your assets.

Assets Liabilities Liquid Assets 2,000.00 Real Estate 105,000.00 Personal Possessions 9,500.00 Investment Assets 18,300.00 Total Assets 134,800.00 Liabilities Current Liabilities 3,550.00 Long-term Liabilities 98,500.00 Total Liabilities 102,050.00 Net Worth 32,750.00

Step 4: Evaluate your financial situation Track your financial progress Increasing? Decreasing? Holding Steady?

Cash flow statement: Income versus expenses Cash Flow – money that actually goes into and out of your wallet and bank accounts. Divided into 2 parts: Cash Inflow Income Money you receive Cash Outflow Money you spend

Step 1: Record your income Take-Home Pay – (aka: net pay) amount of income left after taxes and other deductions are taken out of your gross pay. Discretionary Income – money left over after you have paid for the essentials – food, clothing, shelter, transportation, and medication.

Income (Cash Inflow Take-home pay 450.00 Allowance 100.00 Savings account interest 12.00 Total Income 562.00

Step 2: Record your expenses Fixed Expenses – the same each month. Variable Expenses – change from month to month

Expenses (Cash Outflow) Income (Cash Inflow Take-home pay 450.00 Allowance 100.00 Savings account interest 12.00 Total Income 562.00 Expenses (Cash Outflow) Fixed expenses (TV, bus pass, etc) 80.00 Variable expenses (clothes, take-out, etc) 320.00 Total Expenses 400.00

Step 3: Determine your net cash flow Surplus – extra money that can be spent or saved Deficit – occurs if you spend more than you earn or receive

Net Cash Flow 162.00 Income (Cash Inflow Expenses (Cash Outflow) Take-home pay 450.00 Allowance 100.00 Savings account interest 12.00 Total Income 562.00 Expenses (Cash Outflow) Fixed expenses (TV, bus pass, etc) 80.00 Variable expenses (clothes, take-out, etc) 320.00 Total Expenses 400.00 Net Cash Flow 162.00

Analyze your financial position Using your financial statements Debt Ratio Liquidity Ratio Debt-Payments Ratio Savings Ratio

Low debt ratio is desirable. Debt to Equity Ratio Low debt ratio is desirable. (.5 is reasonable) Liabilities = Net Worth 25,000.00 = .5 50,000.00

Liquidity Ratio The higher, the better. Liquid Assets = Monthly Expenses 10,000.00 = 2.5 4,000.00

Most financial experts recommend less than 20%. Debt-payments ratio Most financial experts recommend less than 20%. Monthly Credit Payments = Take-Home Pay 540.00 = .15 3,600.00

Most financial experts recommend at least 10% Savings Ratio Most financial experts recommend at least 10% Amount Saved = Gross Monthly Income 600.00 = .12 5,000.00