Presentation is loading. Please wait.

Presentation is loading. Please wait.

Money Management Strategy

Similar presentations

Presentation on theme: "Money Management Strategy"— Presentation transcript:

1 Money Management Strategy
Chapter 3

2 Section 3.1 Objectives Discuss the relationship between opportunity costs and money management Explain the benefits of keeping financial records and documents Describe a system to maintain personal financial documents

3 Money Management and Trade-Offs
Plan to get most of your money Keep track of where your money goes Consider your values, goals, and state of your bank account to make better spending decisions

4 Benefits of Organizing Your Financial Documents
Find what you need in a hurry Plan and measure your financial progress Handle routine money matters, such as paying bills on time Determine how much money you will have now and in the future Make effective decisions about how to save money

5 Where to Keep Your Financial Documents
Home Files Safe-Deposit Boxes Home Computers

6 Home Files Types of files
Employment records Money management records Checkbook Checks Tax records Receipts Insurance records Do not keep hard to replace documents here because no protection against fire, water, or theft

7 Safe-Deposit Boxes Types of files $100 or less per year
Birth certificates Mortgage papers Copy of will CDs Car titles Account and policy numbers $100 or less per year Bank loss from fire or disasters is rare Insurance protection Could also use a fire-proof box

8 Home Computers Budgets Summary of banking transactions Tax records

9 Section 3.2 Objectives Describe a personal balance sheet and cash flow statement Develop a personal balance sheet and cash flow statement

10 Personal Financial Statements
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 use when you file your tax return or apply for credit

11 Personal Balance Sheet
Step One: Determine Your Assets Step Two: Determine Your Liabilities Step Three: Calculate Your Net Worth Step Four: Evaluate Your Financial Situation

12 Step One: Determine Your Assets
Assets – Any items of value that you own Liquid Assets – items quickly converted to cash Real Estate – land and any structures, should list market value on balance sheet Personal Possessions – Car and other things not real estate Should list current value, not purchase value Investment Assets – retirement accounts, stocks, bonds

13 Step Two: Determine Your Liabilities
Liabilities – debts you owe for longer than a month – so utility bills would not be a liability Current Liabilities – debts that are paid within a year such as medical bills, cash loans, taxes Long-term Liabilities – debts that do not have to be fully paid within a year such as car loans, student loans, mortgage loans

14 Step Three: Calculate Your Net Worth
Assets-Liabilities = Net Worth Amount of Net Worth is not what you can spend, just an indication of your general financial situation May still have trouble paying bills May be insolvent – liabilities greater than assets


16 Step Four: Evaluate Your Financial Situation
Update every few weeks to track changes over time Increase net worth by: Increasing savings Increasing your investments Reducing your expenses Reducing debt

17 Cash Flow Statement Two parts – cash inflow/cash outflow
Step One: Records Your Income Step Two: Record Your Expenses Variable – Food, clothes, electricity, medical costs, recreation

18 Step One: Records Your Income
All income within a given month Discretionary Income – amount of money left after paying for essentials

19 Step Two: Record Your Expenses
Can be either fixed or variable Fixed – Cable TV, rent, bus fare Variable – Food, clothes, electricity, medical costs, recreation

20 Step Three: Determine Your Net Cash Flow
Surplus – Extra money Deficient – More money spent than earned

21 Cash Flow Statement for Month Ending July 31, 2012
Income (Cash Inflow) Take home pay Allowance Savings account interest Total Income $450 100 12 $562 Expenses (Cash Outflow) Fixed Expenses (cable tv, rent, commuter expenses) Variable Expenses (recreation, clothing, take-out food) Total Expenses $ 80 320 $400 Net Cash Flow $162

22 Evaluating Your Financial Progress
Ratio Calculation Example Meaning Debt Ratio Liabilities divided by net worth $25,000/$50,000 = 0.5 Compare your liabilities to your net worth. A low debt ratio is desirable Liquidity Ratio Liquid assets divided by monthly expenses $10,000/$4,000 = 2.5 Indicates number of months you would be able to pay your living expenses in case of an emergency. The higher the better. Debt-payments Ratio Monthly credit payments divided by take-home pay $540/$3,600 = 15% Indicates how much of a person’s earnings goes to pay debts (excluding mortgage). Most experts recommend a ration of less than 20% Savings Ratio Amount saved each month divided by gross monthly income $600/$5,000 = 12% Most financial experts recommend a saving ratio of at least 10%

23 Section 3.3 Objectives Identify the steps of creating a personal budget Discuss the advantage of increasing your savings

24 Budgeting for Financial Goals
Step One: Set Your Financial Goals Step Two: Estimate Your Income Step Three: Budget for Unexpected Expenses Step Four: Budget for Fixed Expenses Step Five: Budget for Variable Expenses Step Six: Record What You Spend Step Seven: Review Spending and Saving Patterns

25 Step 1: Set Your Financial Goals
Take into consideration: Career Lifestyle Values Hopes for the future Be specific Use time frame (short, intermediate, long-term)

26 Step 2: Estimate Your Income
Include all sources; paycheck, investments Estimate income best you can if it varies from week to week

27 Step 3: Budget for Unexpected Expenses
Have emergency fund 3 to 6 months worth of living expenses

28 Step 4: Budget for Fixed Expenses
Mortgage Car payments Student loans Insurance

29 Step 5: Budget for Variable Expenses
Medical costs Heating and cooling Other basic utilities

30 Step 6: Record What You Spend
Keep track of actual expenses and money paid out Budget variance – difference between what was budgeted and what was spent – could be deficit or surplus

31 Step 7: Review Spending and Saving Patterns
Review financial progress Revise goals if needed If deficits, ask where you can cut Use your financial goals to help decide what to cut

32 Budget Sucessfully A good budget is: Carefully planned Practical
Flexible Written and easily accessible

33 Ways to Increase Your Savings
Pay yourself first Payroll savings Spending less to save

Download ppt "Money Management Strategy"

Similar presentations

Ads by Google