© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Chapter 3 Money Management Strategy: Financial Statements and Budgeting 3-1 Personal Finance 6e Kapoor Dlabay Hughes

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill 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 means savings can’t be used for other purposes. Comparison shopping can save money but takes your valuable time. 3-2

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Major Money Management Activities Create and implement a plan for spending (budgeting) and saving. Create personal financial statements of income and outflow (balance sheet and cash flow). 3-3 Store and maintain personal financial records and documents.

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Why Keep Financial Records? To help making spending decisions. To plan future spending. To pay bills on time. To see changes in net worth. To make good investment decisions. To prepare your income tax forms. 3-4

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill 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. 3-5

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill 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.  CDs and account numbers.  Mortgage papers and titles.  List of insurance policy numbers.  Stock and bond certificates.  Coins and collectibles.  Copy of will. 3-6

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill 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.  Checking account records.  Wills, estate plans, investments.  Past income tax returns. 3-7

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill 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. 3-8

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill 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. 3-9

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill 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. 3-10

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Creating and Implementing a Budget Assessing your current situation.  Measure your current financial position.  Determine your needs, values and life situation. Planning your financial direction.  Setting financial goals.  Creating budget allocations.  Budget amount for an emergency fund, periodic expenses and financial goals.  Budget set amounts that you are obligated to pay.  Budget estimated amounts that are to be spent for various household and living expenses. 3-11

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Creating and Implementing a Budget Implementing your budget.  Monitoring spending, saving and investment patterns.  Selecting a budget system.  Budgeting systems include...  Mental budget, physical budget, written budget, and computerized budget. Evaluating your budgeting program.  Reviewing your financial progress.  Revising (as needed) your financial goals and your budget allocations. (continued) 3-12

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill Successful Budgets Are... Well planned. Realistic. Flexible. Clearly communicated. 3-13

© The McGraw-Hill Companies, Inc., All Rights Reserved. Irwin/McGraw-Hill 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. 3-14