Money Management Skills Chapter 2

A Successful Money Mangement Plan Money management Day-to-day financial activities necessary to manage current personal economic resources while working toward long-term financial security Components of Money Management Storing and maintaining personal financial records and documents Creating personal financial statements Balance sheet and cash flow statements of income and outflows Creating and implementing a plan for spending and saving budgeting

A System for Personal Financial Records An organized system of financial records provides the basis for: Handling daily business activities such as bill paying Planning and measuring financial progress Completing required tax reports Making effective investment decisions Determining available resources fro current and future spending Most financial records are kept in one of three places: Home file Safe deposit box Home computer

A System for Personal Financial Records Home file Personal and employment records Money management records Tax records Financial services records Credit records Consumer purchase and automobile records Housing records Insurance records Investment records Estate planning and retirement records

A System for Personal Financial Records Safe Deposit Box Birth certificate, marriage certificate, adoption records, custody papers, citizenship papers Certificates of deposits, list of checking and savings account numbers Serial number of expensive items Photographs of valuable belongings Mortgage papers, title deed Automobile title Stock and bond certificates Rare coins, stamps, gems Copy of will

A System for Personal Financial Records Personal Computer Current and past budgets Summary of written checks and other banking transactions Past income tax returns Account summaries and performance results of investments Computerized version of will, estate plan,

Personal Financial Statements These reports provide information about your current financial position and present a summary of your income and spending Include: Balance sheet Cash flow statement Purposes: Report your current financial position Measure your progress toward financial goals Maintain information about your financial activities Provide data for preparing tax forms or applying for credit

Your Personal Balance Sheet Balance sheet (also called a net worth statement or statement of financial worth) Reports what you own and what you owe What you own – what you owe = net worth Involves three steps: Listing items of value Determining amounts owed Computing net worth

Steps to Creating a Balance Sheet Listing items of value (assets) Cash and other tangible property with monetary value Liquid assets—cash and items that can easily be converted to cash Real estate—home, condo, vacation property, land Personal possessions—autos and other personal belongings Investment assets--funds set aside for long- term financial needs

Steps to Creating a Balance Sheet 2. Determining amounts owed (liabilities) Current liabilities—debts you must pay within a short time (usually less than a year) Medical bills Tax payments Insurance premiums Long-term liabilities—debts you do not have to pay in full until more than a year from now Auto loans Educational loans mortgages

Steps to Creating a Balance Sheet Computing net worth Difference between your total assets and total liabilities ASSETS – LIABILITIES = NET WORTH Business balance sheets are expressed as: ASSETS = LIABILITIES + NET WORTH A person can have a high net worth and still have trouble paying debts when they are due Net worth is not money available to use, but an indication of your financial position on a given date

Increasing Cash Flow How can an individual or family increase net worth? Increase savings Reduce spending Increase value of investments and other possessions Reducing amount owed

Your Cash Flow Statement Actual inflow and outflow of cash during a given time period Income from employment will represent your most important cash inflow Items such as rent, food, and loans represent cash outflow Cash flow statement Also called personal income and expenditure statement Summary of cash receipts and payments for a given period of time Provides data on your income and spending patterns

Steps to Create a Cash Flow Statement Record Income Inflows of cash for an individual or household Main source is usually your paycheck Other sources: Commissions Self-employment income Interest/dividends Gifts Grants scholarships Disposable Income—money earned after taxes (also called net or take-home pay) Discretionary Income—money left after all expenses are paid

Steps to Create a Cash Flow Statement Record Cash Outflows Fixed expenses—payments that do not vary month-to- month Rent/mortgage Installment loan payments Variable expenses—payments that change from month- to-month Food Clothing Utilities Recreation Medical expenses Gifts donations

Steps to Create a Cash Flow Statement Determine Net Cash Flow Difference between income and outflows Surplus—positive difference Can be used for: Investment Saving Paying off debt Deficit—negative difference Must be made up by: Using savings borrowing

A Plan for Effective Budgeting Budget or Spending Plan Purpose: to help you live within your income spend money wisely reach your financial goals prepare for financial emergencies develop wise financial management habits Steps: Set financial goals Estimate income Budget an emergency fund and savings Budget fixed expenses Budget variable expenses Record spending amounts Review spending and savings patterns