1. Personal Finance Garman/Forgue Twelfth Edition
Chapter 3: Financial Statements, Tools, and Budgets
PPT slide program prepared by Amy Forgue and Ray Forgue.
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2. Introduction
Financial success requires paying attention to the details of your personal finances and keeping track of your financial progress.
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4. Your Next Five Years
In the next five years, you can start achieving financial success by doing the following related to financial statements, tools, and budgets:
1. Develop financial goals and update and revise them annually.
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5. Your Next Five Years
2. Develop a cash-flow statement and spending plan every month to ensure that you spend significantly less than you make.
3. Track your net worth and financial ratios annually to assess your financial progress.
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6. Your Next Five Years
4. Use an uncomplicated but effective personal financial record-keeping system.
5. Openly and honestly communicate about money matters with loved ones on a regular basis.
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7. 8 Steps to Creating a Personal Budget
Keep it simple
Set a time period
Build an emergency fund into your budget
Don't worry about finding the perfect record keeping method
Make sure everyone involved is on the same page
Make adjustments along the way
Try adding on instead of only cutting back
Don't set yourself up for failure

8. Learning Objective #1
Identify your financial values, goals, and strategies.
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9. Financial Values, Goals, and Strategies
Financial Planning: the process of developing and implementing a coordinated series of financial plans.
Managing income and wealth continuously through life to meet financial goals.
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10. Financial Values, Goals, and Strategies
Values are fundamental beliefs that define your financial success.
Financial goals follow from values and are specific objectives to be attained through financial planning and management efforts.
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11. Figure 3-1: How to Achieve Financial Goals
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12. Financial Values, Goals, and Strategies
Financial strategies are pre-established action plans that guide your financial success.
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13. Concept Check 3.1 Summarize the financial planning process.
Explain the relationships among financial values, goals, and strategies.
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14. Learning Objective #2
Use balance sheets and cash-flow statements to measure your financial health and progress.
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15. Financial Statements
Financial Statements describe an individual’s or family’s current financial condition.
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16. Balance Sheet Components of the balance sheet: Assets Liabilities
Net Worth
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17. Balance Sheet Assets: What Is owned
Monetary Assets (or liquid assets or cash equivalents)
Tangible (or use) assets
Investment (or capital) assets
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18. Balance Sheet Liabilities: What Is owed
Short-term (or current) liability
Long-term liability
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19. Assets – Liabilities = Net Worth
Balance Sheet
Net Worth: What is left
Net Worth Formula
Assets – Liabilities = Net Worth
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20. Strategies to Increase Your Net Worth
Increase Assets
Decrease Liabilities
or both!
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21. Figure 3-2: Net Worth By Age
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22. Balance Sheet for a Couple with Two Children

23. Balance Sheet for a Couple with Two Children

24. Cash-Flow Statement
The Cash-Flow Statement tracks where your money came from and went.
Income
Expenses
Surplus (or Net Gain or Net Income) or Deficit (or Net Loss)
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25. Cash-Flow Statement Expenses
Fixed Expenses stay much the same from month to month.
Variable Expenses change from month to month.
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26. Cash Flow Statement for a Couple with Two Children
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27. Cash Flow Statement for a Couple with Two Children

28. Figure 3-3: Personal Finance Over the Life Cycle
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29. Concept Check 3.2
Distinguish between the balance sheet and cash-flow statement.
How should assets and liabilities be valued for the balance sheet?
Distinguish between fixed and variable expenses.
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30. Learning Objective #3
Evaluate your financial strength and progress using financial ratios.
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31. Financial Ratios
Liquidity: The speed and ease with which an asset can be converted to cash.
Basic liquidity ratio
𝑚𝑜𝑛𝑒𝑡𝑎𝑟𝑦 𝑙𝑖𝑞𝑢𝑖𝑑 𝑎𝑠𝑠𝑒𝑡𝑠 𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
Do I have enough liquid assets to cover emergencies?
Number of months in which living expenses can be paid in an emergency (3-6)
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32. Financial Ratios Asset-to-debt ratio 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡𝑠
Do you have enough to assets to meet my debt obligations?
A high ratio is desirable
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33. Financial Ratios Debt service-to-income ratio
𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑏𝑡 𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑔𝑟𝑜𝑠𝑠 𝑖𝑛𝑐𝑜𝑚𝑒
Can I meet my total debt obligations? Is my debt too high?
36% or less, declining with age
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34. Financial Ratios
Disposable income—income after subtracting withholdings for taxes and insurance.
Debt payments-to-disposable income ratio
𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑛𝑜𝑛−𝑚𝑜𝑟𝑡𝑔𝑎𝑔𝑒 𝑑𝑒𝑏𝑡 𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑑𝑖𝑠𝑝𝑜𝑠𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒
Can I pay my non-mortgage debts?
14% or less is desirable
>16% may indicate a problem
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35. Financial Ratios Investment assets-to-total assets ratio
𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
Do I need to invest more?
10% for those in their 20s
11-30% for those in their 30s
≥ 31% for older adults
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36. Concept Check 3.3
Distinguish between the basic liquidity ratio and the asset-to-debt ratio.
Distinguish between the debt service-to-income ratio and the debt payments-to-disposable income ratio.
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37. Concept Check 3.3
What can changes over time in your investment assets-to-total assets ratio tell you about your progress in reaching financial goals?
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38. Learning Objective #4
Collect and organize the financial records necessary for managing your personal finances.
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39. Financial Record Keeping
Financial record keeping saves time and makes you money.
Financial Records: Documents that evidence financial transactions.
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42. Concept Check 3.4
List some advantages of keeping good financial records.
Name three financial records that might best be kept in a safe-deposit box.
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43. Learning Objective #5 Achieve your financial goals through budgeting.
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44. Budgeting
Budget: A paper or electronic document used to record both planned and actual income and expenditures over a period of time.
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45. Budgeting Rules for successful budgeting: Keep it simple.
Make it personal.
Keep it flexible.
Be positive.
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46. Figure 3-4: About Financial Statements and Budgets
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47. Budgeting – Action Before
Set financial goals.
Long-term goals
Intermediate goals
Short-term goals
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48. Figure 3-5: Goals Worksheet for Harry and Belinda Johnson
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49. Budgeting – Action Before
Make and reconcile budget estimates.
Take-home pay (or disposable income)
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51. Budgeting – Action Before
Revise budget estimates.
Earn more income.
Cut back on expenses.
Try a combination of more income and fewer expenses.
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52. Budgeting – Action Before
Plan cash flows.
Cash-Flow Calendar
Revolving Savings Fund
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53. Cash-flow Calendar for Harry and Belinda Johnson

54. Revolving Savings Fund for Harry and Belinda Johnson

55. Budgeting – Action During
Budget for shopping trips.
Record the purpose of expenditures.
Keep track of credit transactions.
Monitor unexpended balances to control overspending.
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56. Budgeting – Action During
Justify exceptions.
Use a subordinate budget.
Use the envelope system.
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57. Budgeting – Action After
Evaluate budgeting progress.
Budget Variance: Difference between amount budgeted and actual amount spent or received.
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58. Budgeting
Record Keeping: Recording sources and amounts of dollars earned and spent.
Adding up actual income and expenditures
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59. Figure 3-6: Record-Keeping Formats
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60. Money Left Over at the End of the Month?
Carry the surpluses forward.
Put into a revolving savings fund.
Build a cash reserve in a savings account.
Pay down credit card debt.
Put toward a mortgage or other loan.
Invest in a retirement account.
Spend like “mad money.”
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62. Concept Check 3.5
Identify two actions that should be performed before establishing a budget.
What are budget estimates? Offer some suggestions on how to go about making budget estimates for various types of expenses.
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63. Concept Check 3.5
Distinguish between a cash-flow calendar and a revolving savings fund, and tell why each is important.
Offer three suggestions for effective budget controls.
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64. Worst Financial Blunders in Financial Statements, Tools, and Budgets
Based on others’ financial woes, you will make mistakes in personal finance when you:
1. Fail to plan for occasional, non-monthly irregular expenditures.
2. Underestimate how much you plan to spend each month.
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65. Worst Financial Blunders in Financial Tools, Statements, and Budgets
3. Use credit card purchases to “balance” your budget.
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66. Do It Now!
You know more about personal finance after reading this chapter, so get started right now by: 1. Putting a notepad in your pocket to record every single expense of $1 or more for one month.
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67. Do It Now!
2. Preparing cash-flow statements at the end of the month. 3. Setting up a spending plan for the next month that provides for savings for at least one of your goals.
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