2 Section 3.1 Standard and Poor’s pg. 58 Organizing your Personal Financial Records Introductory Paragraph
3 Opportunity Costs and Money Management Common trade-offs see. Pg. 59 bullet listOther ways to save money: Price shop, what trade-offs do you make by price shopping?Whats your Financial ID? Pg. 60When spending money think of the following: Your values, Your Goals, and the State of your bank account
4 Benefits of Organizing Financial Documents 1st step to effective money management is to organize your personal financial documentsPossible financial documents: Bank statements, paycheck stubs, sales receiptsNot as commonly thought of: Car titles, birth certificates, tax forms
5 Benefits of organizing your documents Ease of finding needed materialsPlan and measure your financial progressHandle routine money matters, such as depositing paychecks in the bank and paying bills on timeDetermine how much $ you have available to spend now and in the futureMake effective decisions about how to save money
6 Where to keep your documents Home Files: Folder system, file cabinet, shoebox, should be simple and allow quick access to documents.If keeping important documents in the home consider a safe or lock boxSafe-Deposit Boxes: Small secure stage compartment that you can rent in a bank, usually under $100 to rentUsually kept in fire proof room, two keys to unlock, wise idea to keep copies at home as well
7 ContinuedHome Computers: Can buy special software programs to track expenses/checksGood to use for tracking a checking accountAllows you to easily compare month to month expensesWhat measures should you consider if using home computer?See figure 3.1 pg. 64
8 Personal Financial Statements Section 3-2Personal Financial Statements
9 The Personal Balance Sheet: What are you worth now? For a complete look at your financial situation you should create a personal balance sheet and a cash flow statement. Known as personal financial statementsPersonal Financial Statements: Documents that provide information about your current financial position and present a summary of your income and spending
10 Personal Financial Statements can Help You… Determine what you own and what you oweMeasure your progress toward your financial goalsTrack your financial activitiesOrganize information that you can use when you file your tax return or apply for credit
11 To evaluate your financial situation Create a balance sheetBalance sheet (net worth statement): Financial statement that lists the items of value that you own, the debts that you, and your net worthNet Worth: The difference between the amount that you own and the debts that you owe.
12 Steps to Create a Balance Sheet Step 1) Determine your Assets: Any items of value that you own (cash, personal property, personal possessions, investments)To determine your assets you need to consider 4 categories of wealthLiquid Assets: Cash and items that can be quickly converted to cashReal Estate: Land that a person or family owns, and anything on it, record the market value or price at which you could sell the propertyPersonal Possessions: Anything valuable that is not real estate, record current market value (golf club example)Investment Assets: Retirement accounts, stocks, bonds. Long term financial needs
13 Step 2) Determine Your Liabilities Liabilities: Debts that you oweEx: Borrow money from parents to buy a computer. Effects both assets and liabilitiesCurrent Liabilities: Short-term liabilities, have to be paid within 1 year.Long-Term Liabilities: Debts that don’t have to be fully repaid for at least a year (car loans, student loans, mortgages)Liabilities include only those things you owe for longer then a month
14 Step 3) Calculate Your Net Worth Assets – Liabilities = Net WorthNet worth doesn’t necessarily mean you have that much to spendPeople often have money problems when they have too many assets that aren’t liquidSee Figure 3.2 pg. 69Insolvency: Condition that occurs if your liabilities are greater than your assets
15 Step 4) Evaluate your Financial Situation Update balance sheet or make a new one every month or chart your changes overtimeIncrease net worth by increasing your savings, increasing value of your investments, reducing expenses, or reducing your debtsSee Careers in Finance pg. 70
16 The Cash Flow Statement: Income Versus Expenses Cash Flow: The money that actually goes into and out of your wallet and bank accountsCash Inflow: Money you receive or your incomeCash Outflow: All the money you spendCash Flow statement is a summary of your cash flow during a particular period, usually a month or yearShows your spending patterns
17 Steps to Creating a Cash Flow Statement Step 1) Record your IncomeRecord all your income for a month, and record as cash inflowRecord exact amount, amount after taxesTake-home pay: Net pay, amount of income left after taxes and other deductions are taken out of your gross payAdd interest into statementDiscretionary income: The money left over after you have paid for essentials. The higher your discretionary income the betterWhat is tax money going towards?
18 Step 2) Record your Expenses Two basic types: Fixed and VariableFixed Expenses: Those that are more or less the same each monthVariable Expenses: Those that may change from month to monthTotal of Fixed and Variable expenses is your cash outflow
19 Step 3) Determine Your Net Cash Flow Income – Expenses= Net Cash FlowSurplus: Positive net cash flowDeficit: Spend more than you earn or receiveWhat is best way to improve your cash flow?
20 Analyzing your Financial Position from your Personal Financial Statements As net cash flow changes so does net worthTo make up for deficit you can borrow or draw from savings, either way net worth declinesIf extra money at end of month net worth increases, can save money or pay off debts
22 Characteristics of a Successful Budget Carefully Planned: No guesses, cover all expensesPractical: Be RealisticFlexible: Unexpected expenses, shifts in income as well. Needs to be easy to reviseNeeds to be written and easily accessiblePg. 135
23 Ways to Increase your Savings Key to establishing your financial futureMethods:Set aside fixed amount each time you pay your billsPercentage of monthly incomePayroll savings deductionMoney saved each day, put in jar/extra changePay credit card off each month