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Money Management Strategy

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

1 Money Management Strategy
Chapter 3 Money Management Strategy

2 Organizing Personal Financial Records
What You’ll Learn How to recognize the relationship between financial documents and money management strategies How to create a system to maintain your personal financial documents Why It’s Important Organizing your personal financial records can help you make informed decisions about your spending.

3 Money Management Money management is planning how to get the most from your money Good money management can help you keep track of where your money goes so that you can make it go farther Money management includes… Organizing your personal financial records Preparing personal financial statements Creating a budget

4 Personal Financial Documents
Personal financial documents include your bank statements, paycheck stubs, car titles, birth certificates, social security cards, tax forms, cell phone contracts, and any other documents that record information about how you spend your money. Organized documents help you: Plan and measure your financial progress Handle routine money matters Determine how much money you have to spend later and in the future Make effective decisions about how to save money

5 Where to Keep Documents
Home Files Use for documents that are fairly easy to replace Advantages Easy to set up Easy to use and access Inexpensive Disadvantages Vulnerable to damage

6 Where to Keep Documents
Safe-Deposit Boxes Use for documents that are hard to replace Advantages Safe from damage Separate from other documents Access is limited Contents usually insured Disadvantages Harder to access Costs money (about $100 year)

7 Where to Keep Documents
Computer Files Use for documents that are easy to keep electronically or that are useful in planning Advantages Automatic calculation of amounts Usually has tool to help in tracking and planning Disadvantages Data can be lost

8 Check Your Understanding
Complete Worksheet Packet page 4 Known these terms money management safe-deposit box

9 Personal Financial Statements
What You’ll Learn How to develop a personal balance sheet and cash flow statement How to analyze your personal financial situation Why It’s Important Personal financial statements can give you an idea of where you’re headed financially and where you are now in relation to your financial goals.

10 Personal Financial Documents
Provide information about your current financial position and present a summary of your income and spending Help you to… 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 return or apply for credit

11 Balance Sheet Financial statement that lists the items of value that you own, the debts you owe, and your net worth Net worth, then, is the difference between the amount that you own and the debts that you owe Also known as net worth statement

12 Creating the Balance Sheet
Determine Your Assets Determine Your Liabilities Calculate Your Net Worth Evaluate Your Financial Situation

13 Assets Assets are any items of value that you own Categories
Liquid Assets – cash and items that can be quickly converted to cash Real Estate – land that a person or family owns and anything that is on the land Personal Possessions – valuable belongings that are not real estate Investment Assets – retirement accounts and securities (investments) such as stocks, bonds, and mutual funds

14 Liabilities Liabilities are debts that you owe
Liabilities include only those items that you will owe for longer than a month Categories Current liabilities – short-term debts that have to be paid within one year Long-Term liabilities – debts that don’t have to be fully paid for at least one year

The formula to calculate net worth is: ASSETS – LIABILITIES = NET WORTH Example: What is Janine’s net worth if her assets are worth $3,000 and her liabilities total $700? Formula: Assets – Liabilities = Net Worth Solution: $3,000 - $700 = $2,300

16 More on Net Worth What Net Worth Means
Net worth is an indication of your general financial situation. A negative net worth means you are insolvent or you have more debt than items of value. A positive net worth is generally good, but it doesn’t mean you will always have an easy time paying your bills especially if you have few liquid assets

17 Evaluate Your Financial Situation
Use the balance sheet to track your financial progress Update your balance sheet every month noting the change in net worth Increasing – keep doing what you’re doing Decreasing – changes are in order Staying the Same – you may want to make some changes

18 Check Your Understanding
Complete Worksheet Packet page 9 Known these terms personal financial statements balance sheet net worth assets liquid assets real estate personal possessions investment assets market value liabilities current liability long-term liability insolvency

19 Cash Flow Statement The cash flow statement tracks the amount of money that actually goes into and out of your wallet Also known as an income statement

20 Creating the Cash Flow Statement
Determine Your Cash Inflows Determine Your Cash Outflows Determine Your Net Cash Flow

21 Cash Inflows Your cash inflows represent your income Sources of income
Take-home pay or net pay Gifts Bank account interest Gains on investments Sale of assets

22 Cash Outflows Your cash outflows represent your expenses
Types of Expenses Fixed expenses – expenses that remain more or less the same every month Variable expenses – expenses that change from month to month

The formula to calculate net cash flow is: INCOME - EXPENSES = NET CASH FLOW Example: What is Jason’s net cash flow if his income is $1,500 and his expenses add up to $1,350? Formula: Income – Expenses = Net Cash Flow Solution: $1,500 - $1,350 = $150

24 More on Cash Flow A surplus occurs if you have a positive cash flow
A deficit occurs if you have a negative cash flow Some financial experts like to look at discretionary income to evaluate the strength of a person’s income Discretionary income is the money you have left over after paying for essentials (food, clothing, shelter, transportation, medication) Represents the money you can spend on wants

25 Putting It Together When your cash flow changes, so does your net worth A negative cash flow will decrease your net worth A positive cash flow will increase your net worth You can also use financial ratios to analyze your financial position – see worksheet packet page 7.

26 Check Your Understanding
Use your Personal Spending Record to prepare your own Cash Flow Statement. Worksheet packet pages 8, 10, 10A, 10B Terms to know personal spending record cash flow cash inflows cash outflows fixed expense variable expense income take-home pay discretionary income surplus deficit positive cash flow negative cash flow income statement

27 Budgeting What You’ll Learn
How to create a budget that is practical for you How to achieve your financial goals by increasing your savings Why It’s Important Following a practical budget can help you achieve your financial goals and develop wise financial habits.

28 What is a Budget? A budget is a plan for using your money in a way that best meets your needs and wants. Budgeting is essential to intelligent money management and includes 6 steps.

29 Steps in Budgeting Set financial goals Estimate your income
Budget for the unexpected Budget for expenses Record what you spend Review spending and savings patterns

30 I think we’ve said and done enough on this topic!
Set Financial Goals I think we’ve said and done enough on this topic!

31 Estimate Your Income Record expected income for the next month
Include only income you can count on If your income is unpredictable, estimate what you will receive in the next month and adjust it down a little

32 Budget for the Unexpected
You should build up and maintain an emergency fund. Your emergency fund should be 3-6 months worth of income. This money is used in case of unemployment, unexpected medical needs or any other financial crisis.

33 Budget for Expenses Fixed Expenses Variable Expenses
simply record the amounts Pay Yourself First (PYF) – try payroll deduction Variable Expenses make your best guess based on previous months when in doubt, guess high! use guidelines about expenses published by financial experts asks friends and relatives what they spend

34 Record What You Spend Keep track of your money for the next month and record what you actually receive and spend Calculate the budget variance – the difference between the actual amount you spent and what you budgeted

35 Review Patterns Your budget should be reviewed each month
Deficits – cut expenses/increase income Surplus – consider placing more in savings for long-term goal

36 Budgeting Tips Plan carefully Be practical Be flexible
estimates should be based on some data cover all expenses Be practical Be flexible Write your budget down Be able to access your budget data easily

37 Check Your Understanding
Worksheet packet page 12A, 13, 12B Terms to know taxes federal income tax state income tax Social Security tax Medicare tax FICA Unemployment tax gross pay net pay pay yourself first United Way retirement plan budget Consumer Price Index budget variance cost/benefit analysis pay stub payroll deduction Occupational privilege tax

38 Form W-4 Tells your employer how much to withhold from your paycheck for taxes.

39 Form W-2 Shows the income you earned from the employer and the amount withheld for taxes.

40 Check Your Understanding
Worksheet packet pages 14-16; Unit 3 Puzzle, Scrambled Words Terms to know Form W-2 Form W-4 Allowance

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