1. Organizing Financial Records Chapter 3
Money Management
Organizing Financial Records
Chapter 3

2. Why Money Management? Make informed decisions Understand trade-offs
Prepare for the unexpected

3. Opportunity Costs & Money Management
Defining Money Management: Planning how to get the most from your money through keeping track of where your money goes so you can make it go further.
An example of this would be whether you should spend your paycheck on clothes, or putting it in a savings account so it may earn interest. This would be considered an example of a trade-off
Opportunity Costs & Money Management

4. Benefits of Organizing Your Financial Documents
First step in effective money management is to organize your personal financial documents
Personal financial documents include a variety of materials, such as bank statements and paycheck stubs. A receipt of a shirt you purchased would also be a document. These tell you how much money you have. Car titles, birth certificates, and tax documents may not effect your day-to-day spending, but should also be considered. Together, these present a clear picture of your finances.

5. Where to Keep Your Financial Documents
Home Files – File cabinet, labeled folders, or even a cardboard box.
Whatever method you choose, they should be simple so that you have quick access to your documents.
Safe-deposit box – A small , secure storage compartment you can rent at a bank for a small, yearly fee. (Birth certificates, car titles, stock certificates, and valuable collectibles).
Safe deposit boxes are usually kept in a locked, fireproof room that is only accessible while the bank is open and in most cases they are insured.

6. Where to Keep Your Financial Documents, cont.
Home Computers – This is where you can keep your personal budget, personal financial statements, and keep track of bills that you pay online or are drafted automatically.

7. Personal Financial Statements
For a complete look at your financial situation, you should create a personal financial statement – a document that provides information about an individual’s current financial position and presents a summary of income and spending.
Personal financial statements can help you:
Determine what you own and what you owe
Measure your progress toward your financial goals
Track your financial activities
Organize information that you can you use when you file tax returns or apply for credit (Mortgage, business loans, etc.)

8. Personal Financial Statements (4 Steps) Step 1: Determine Your Assets
Assets – Items of value that an individual or company owns, including cash, property, personal possessions, and investments.
Wealth – An abundance of valuable material possessions or resources (liquid assets, real estate, personal possessions, and investments assets). There are 3 categories of wealth:
Liquid assets – Cash and items that can be quickly converted to cash.
Real Estate – Land and any structures that are on it, such as a house or any other building that a person or family owns. Market value for real estate is the price at which the property would sell.
Personal Possessions – Cars and any other valuable belongings that are not real estate (TV’s, electric guitar, skis, fine jewelry). Keep in mind that some possessions may lose value (TV’s, furniture) over time and some may gain value (baseball card collection, vintage records, or jewelry).

9. Step 2: Determine Your Liabilites
Liabilites – Debts that you owe.
Current liabilities are short-term debts that have to be paid within one year (medical bills, cash loans, and taxes are examples of this).
Long-term liabilities are debts that do not have to be paid for at least a year (car loans, student loans, and mortgages are a few examples).
Step 2: Determine Your Liabilites

10. Step 3: Calculate Your Net Worth
To determine your net worth, subtract your liabilities from your assets. The difference is your net worth.
It is important to understand the meaning of net worth. Just because your net worth is $100,000, that does not mean you have $100,000 to spend. Some of that wealth may be tied up in stocks, real estate, and personal possessions (difficult to convert to liquid assets).
Insolvency – A financial state that occurs when liabilities are greater than assets.

11. Step 4: Evaluate Your Financial Situation
By using a balance sheet to track your financial progress, you will be able to keep track of your progress. Make sure to update your balance sheet at least once a year, preferably every few months. If your net worth is increasing, keep up the good work! If it is decreasing, you may want to increase saving or investments, or reduce your expenses and/or your debts.

12. Cash Flow Statement: Income vs. Expenses
Money that goes in and out of your wallet and bank accounts is called cash flow. It is divided into two parts: cash inflow (money you receive or your income) and cash outflow (all the money you spend). To create a cash flow statement, follow these steps:
Record your income.
Record your expenses.
Determine your net cash flow.

13. Step 1: Record Your Income
Take-home pay, or net pay, is the amount of income left after taxes and other deductions are taken out of your gross pay.
Discretionary income – the money left over after you have paid for your essentials, such as food, clothing, shelter, transportation, and medication. You can spend this amount at your discretion, or according to your wants. The higher your discretionary income, the better off you are.

14. Step 2: Record Your Expenses
Expenses can be fixed or variable. Fixed expenses are those that are more or less the same each month. Variable expenses may change from month to month. List examples of each….
Mortgage? Cable bill? Groceries? New shoes? Car loan?
Step 2: Record Your Expenses

15. Step 3: Determine Your Net Cash Flow
Income – Expenses = Net Cash Flow
Surplus – Extra money that can be spent or saved, depending on your financial goals and values.
Deficit – More money spent than earned.
**A current and accurate cash flow statement can provide the foundation for preparing and implementing your spending, savings, and investment plans!!!

16. Section 3: Budgeting for Financial Goals (7 Steps)
Step 1: Set Your Financial Goals
These are things you want to accomplish with your money. This depends on your lifestyle, values, and your hopes for the future.
Step 2: Estimate Your Income
If you know your work schedule for the following month and are paid hourly, this will be easy. Or, if you are a salaried employee. Do not try to predict bonuses or gifts.
Step 3: Budget for Unexpected Expenses
Emergency Fund (3-6 months worth of living expenses). Important in case of a job loss or unexpected medical emergency. Vacation fund could be a separate account that you are planning for.

17. Budgeting for Financial Goals, cont.
Step 4: Budget for Fixed Expenses
Mortgage, Auto loan, Student loans, Insurance
Step 5: Budget for Variable Expenses
This can be a little more difficult to predict. When in doubt, guess high. These can be heating/cooling bills can vary depending on the season.
Step 6: Record What You Spend
You may spend more than you expected in certain categories, and less in others. This can create a budget variance – or the difference between the budgeted amount and actual amount that you spend.

18. Budgeting for Financial Goals, cont.
Step 7: Review Spending and Saving Patterns.
Budgeting is a continual process and it may require monthly revisions based on the nature of your expenses. If you fall behind on bills, or if you are left with a lot of extra money at the end of the month, you may need to revise your budget. If you always have deficits, you may need to see where you can cut expenses. Review spending patterns carefully and see where shortfalls occur.

19. How to Budget Successfully
A good budget is carefully planned.
Estimates should not be wild guesses, and spending categories must cover all expenses.
A good budget is practical.
If your first full-time job pays $1,500/month, don’t go buy a brand new car.
A good budget is flexible.
Marriage, children, retirement, unexpected shifts in income.
A good budget must be written and easily accessible.
Use a notebook, folder, or computer to store your budget. Do not try to remember it in your head.

20. Ways to Increase Your Savings
1. Pay Yourself First
Make it automatic. Set up recurring transfers from your regular checking to a savings account.
2. Payroll Savings
Have your employer direct deposit your money to multiple accounts.
3. Spending Less to Save
Start small. Go to the matinee movie ($3.50) as opposed to the evening show ($8.00). Put the extra $4.50 in a savings account.
“The journey of a thousand miles begins with a single step.”