1. Chapter 2 Money Management Skills McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Money Management Skills Chapter Objectives
Identify the main components of wise money management
Create a personal balance sheet and cash flow statement
Develop and implement a personal budget
Connect money management activities with saving for personal financial goals
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3. Objective 1 Identify the Main Components of Wise Money Management
Money management = day-to-day financial activities necessary to manage current personal economic resources, while working toward long-term financial security
Daily spending and saving decisions = central to financial planning
Must be coordinated with needs, goals, and personal situations
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4. Components of Money Management
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5. Money Management Troubles & Debt
Getting out of debt:
Evaluate your credit situation
Track your spending
Plan to make payments on time
Consider other income sources
If appropriate, seek assistance
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6. An Organized Personal Financial Records System
Provides a basis for:
Handling daily business affairs, such as bill paying
Planning and measuring financial progress
Completing required tax reports
Making effective investment decisions
Determining available resources for current and future buying
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7. Records in Your Home File
Items you refer to often
Personal and employment records
Money management records
Tax records
Financial services records
Credit records
Consumer purchase and auto records
Housing records
Insurance records
Investment records
Estate planning and retirement records
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8. What to Keep in a Safe Deposit Box
Records and items that would be hard to replace:
Birth, marriage and death certificates
List of checking, savings and financial institution account numbers
Citizenship and military papers
Adoption and custody papers
Serial numbers and photos of valuables
CDs and credit and banking account numbers
Mortgage papers and titles
List of insurance policy numbers
Stock and bond certificates
Coins and other collectibles
Copy of will
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9. Records on Your Personal Computer*
Current and past budgets
Summary of checks written and other banking transactions
Past income tax returns prepared with tax preparation software
Account summaries and investment performance results
Computerized versions of wills, estate plans, and other documents
* Keep a backup!
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10. How Long to Keep Records
Retention Period
Birth certificates, wills and social security information
Indefinitely
Personal property and investments
As long as you own them
Documents re: purchase and sale of real estate
Copies of tax returns and supporting data
7 years minimum
10 years better
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11. Objective 2 Create a Personal Balance Sheet and Cash Flow Statement
Benefits
Recap your current financial position in relation to the value of items you own and amounts you owe
Measure progress toward financial goals
Maintain information on financial activities
Provide information for preparing tax forms or applying for credit
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12. Balance Sheet
A financial statement that reports what an individual or family owns and owes as of a specific date:
Also called:
Net worth statement
Statement of financial position
Items of Value (what you own) -
Amounts owed (what you owe)
Net Worth (your wealth) =
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13. Components of a Balance Sheet
Step 1 – List items of value
Liquid assets
Real estate
Personal possessions
Investment assets
Step 2 – Determine amounts owed
Current liabilities (< 1 year)
Long term liabilities
Step 3 - Compute your net worth.
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14. Net Worth Assets - Liabilities = Net Worth
Measurement of current financial position
Net worth ≠ cash available
Insolvency:
Inability to pay debts when due
Liabilities far exceed assets
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15. Sample Balance Sheet
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16. Ways to Increase Net Worth
Increase your savings
Reduce spending
Increase the value of investments and other possessions
Reduce amounts owed
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17. Evaluating Financial Progress Ratios
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18. The Cash Flow Statement Inflows and Outflows
Cash flow statement = personal income and expenditure statement
Summary of cash receipts and payments for a given period
Total cash received during the time period
Cash outlays during the time period
Cash surplus or deficit - =
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19. The Cash Flow Statement Inflows and Outflows
Step 1 - Record Income
Net income from employment (Net Pay)
Savings and investment income
Other sources
Step 2 - Record cash outflows
Fixed and variable expenses
Step 3 - Determine Net Cash Flow
Use this statement as a basis for creating a spending, saving and investment plan
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20. Sample Cash Flow Statement
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21. Objective 3 Develop and Implement a Personal Budget
Budget = spending plan
Helps you:
Live within your income
Spend money wisely
Reach financial goals
Prepare for financial emergencies
Develop wise financial management habits
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22. The 7 Steps in Budgeting Process
Set financial goals
Estimate income from all sources
Budget an Emergency Fund and Savings
Budget Fixed Expenses
Budget Variable Expenses
Record Spending Amounts
Review Spending and Saving Patterns
Review financial progress
Revise goals and budget allocations
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24. Typical Budget Allocations
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25. Characteristics of a Successful Budget
Well planned
Realistic
Flexible
Clearly communicated
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26. Budgeting Systems Mental budget Physical Budget Written Budget
Appropriate if financial resources and responsibilities are limited
Physical Budget
Envelopes, folders or containers
Written Budget
On notebook paper
Computerized Budget
Spreadsheet or specialized software
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27. Objective 4 Connect Money Management Activities with Savings for Personal Financial Goals
Your Balance Sheet:
Snapshot of where you are now
Your Cash Flow Statement:
What you received and spent over a specific period
Your Budget:
Planning spending and saving to achieve financial goals
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28. Changes in Net Worth
Changes in Net Worth result from cash inflows and outflows.
Outflows > Inflows
Draw from savings or borrow
Problem/Result: Lower assets or higher liabilities
Inflows > Outflows
Put money into savings or pay off debts
Result: Higher net worth
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29. Selecting a Saving Technique
Write a check each payday and deposit in a savings account
Use payroll deduction to deposit a certain amount in savings (direct deposit)
Save coins or spend less on certain items
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30. Calculating Savings Amounts
Convert savings goals into specific amounts
Use savings and investments plans to grow your money
Use time value of money to calculate progress toward financial goals
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31. Using Savings to Achieve Financial Goals
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