2 Organizing Personal Financial Records What You’ll LearnHow to recognize the relationship between financial documents and money management strategiesHow to create a system to maintain your personal financial documentsWhy It’s ImportantOrganizing your personal financial records can help you make informed decisions about your spending.
3 Money ManagementMoney management is planning how to get the most from your moneyGood money management can help you keep track of where your money goes so that you can make it go fartherMoney management includes…Organizing your personal financial recordsPreparing personal financial statementsCreating 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 progressHandle routine money mattersDetermine how much money you have to spend later and in the futureMake effective decisions about how to save money
5 Where to Keep Documents Home FilesUse for documents that are fairly easy to replaceAdvantagesEasy to set upEasy to use and accessInexpensiveDisadvantagesVulnerable to damage
6 Where to Keep Documents Safe-Deposit BoxesUse for documents that are hard to replaceAdvantagesSafe from damageSeparate from other documentsAccess is limitedContents usually insuredDisadvantagesHarder to accessCosts money (about $100 year)
7 Where to Keep Documents Computer FilesUse for documents that are easy to keep electronically or that are useful in planningAdvantagesAutomatic calculation of amountsUsually has tool to help in tracking and planningDisadvantagesData can be lost
8 Check Your Understanding Complete Worksheet Packet page 4Known these termsmoney managementsafe-deposit box
9 Personal Financial Statements What You’ll LearnHow to develop a personal balance sheet and cash flow statementHow to analyze your personal financial situationWhy It’s ImportantPersonal 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 spendingHelp you to…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 return or apply for credit
11 Balance SheetFinancial statement that lists the items of value that you own, the debts you owe, and your net worthNet worth, then, is the difference between the amount that you own and the debts that you oweAlso known as net worth statement
12 Creating the Balance Sheet Determine Your AssetsDetermine Your LiabilitiesCalculate Your Net WorthEvaluate 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 cashReal Estate – land that a person or family owns and anything that is on the landPersonal Possessions – valuable belongings that are not real estateInvestment 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 monthCategoriesCurrent liabilities – short-term debts that have to be paid within one yearLong-Term liabilities – debts that don’t have to be fully paid for at least one year
15 ASSETS – LIABILITIES = NET WORTH The formula to calculate net worth is:ASSETS – LIABILITIES = NET WORTHExample: What is Janine’s net worth if her assets are worth $3,000 and her liabilities total $700?Formula: Assets – Liabilities = Net WorthSolution: $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 progressUpdate your balance sheet every month noting the change in net worthIncreasing – keep doing what you’re doingDecreasing – changes are in orderStaying the Same – you may want to make some changes
19 Cash Flow StatementThe cash flow statement tracks the amount of money that actually goes into and out of your walletAlso known as an income statement
20 Creating the Cash Flow Statement Determine Your Cash InflowsDetermine Your Cash OutflowsDetermine Your Net Cash Flow
21 Cash Inflows Your cash inflows represent your income Sources of income Take-home pay or net payGiftsBank account interestGains on investmentsSale of assets
22 Cash Outflows Your cash outflows represent your expenses Types of ExpensesFixed expenses – expenses that remain more or less the same every monthVariable expenses – expenses that change from month to month
23 INCOME - EXPENSES = NET CASH FLOW The formula to calculate net cash flow is:INCOME - EXPENSES = NET CASH FLOWExample: 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 FlowSolution: $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 flowSome financial experts like to look at discretionary income to evaluate the strength of a person’s incomeDiscretionary 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 TogetherWhen your cash flow changes, so does your net worthA negative cash flow will decrease your net worthA positive cash flow will increase your net worthYou 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, 10BTerms to knowpersonal spending recordcash flowcash inflowscash outflowsfixed expensevariable expenseincometake-home paydiscretionary incomesurplusdeficitpositive cash flownegative cash flowincome statement
27 Budgeting What You’ll Learn How to create a budget that is practical for youHow to achieve your financial goals by increasing your savingsWhy It’s ImportantFollowing 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 unexpectedBudget for expensesRecord what you spendReview spending and savings patterns
30 I think we’ve said and done enough on this topic! Set Financial GoalsI 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 onIf 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 amountsPay Yourself First (PYF) – try payroll deductionVariable Expensesmake your best guess based on previous monthswhen in doubt, guess high!use guidelines about expenses published by financial expertsasks friends and relatives what they spend
34 Record What You SpendKeep track of your money for the next month and record what you actually receive and spendCalculate 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 incomeSurplus – consider placing more in savings for long-term goal
36 Budgeting Tips Plan carefully Be practical Be flexible estimates should be based on some datacover all expensesBe practicalBe flexibleWrite your budget downBe able to access your budget data easily
37 Check Your Understanding Worksheet packet page 12A, 13, 12BTerms to knowtaxesfederal income taxstate income taxSocial Security taxMedicare taxFICAUnemployment taxgross paynet paypay yourself firstUnited Wayretirement planbudgetConsumer Price Indexbudget variancecost/benefit analysispay stubpayroll deductionOccupational privilege tax
38 Form W-4Tells your employer how much to withhold from your paycheck for taxes.
39 Form W-2Shows 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 WordsTerms to knowForm W-2Form W-4Allowance