Chapter 3 Money Management Strategy: Financial Statements and Budgeting McGraw-Hill/Irwin Copyright   © 2007 by The McGraw...
Planning for Successful  Money Management <ul><li>Daily spending and saving decisions are  the heart of financial planning...
Opportunity Cost and Money Management <ul><li>Spending money on current living expenses reduces the amount you can save an...
Major Money Management Activities Creating and implementing a plan for spending,  and saving  (budgeting). Creating person...
Benefits of an Organized System of Financial Records <ul><li>Handling daily business affairs, including payment of bills o...
What to Keep in Your Home File <ul><li>Items you refer to often. </li></ul><ul><ul><li>Personal and employment records. </...
What to Keep in a Safe Deposit Box <ul><li>Safe deposit box is for records that would be hard to replace . </li></ul><ul><...
Records on Personal Computer <ul><li>Home computer . </li></ul><ul><ul><li>Current and past budgets. </li></ul></ul><ul><u...
How Long to Keep Records <ul><li>Birth certificates, wills, and Social Security information should be kept indefinitely. <...
Purpose of Personal Financial Statements <ul><li>Report your current financial position in relation to the value of the it...
Components of a Balance Sheet (net worth statement) <ul><li>Assets - what you own. </li></ul><ul><ul><li>Liquid assets. </...
Where Did Your Money Go? Components of a Cash Flow Statement <ul><li>Shows inflow, outflow for a given time period. </li><...
Ratios for Evaluating Financial Progress <ul><li>Debt ratio = total liabilities/net worth; compares debt to net worth; low...
Purposes of a Budget  <ul><li>In contrast to cash flow, which was a record of how you spent money in a past time period, a...
Creating and Implementing a Budget <ul><li>Assessing your current situation. </li></ul><ul><ul><li>Measure your current fi...
Creating and Implementing a Budget <ul><li>Steps in the budgeting process (continued). </li></ul><ul><ul><li>Estimate amou...
Characteristics of Successful Budgeting <ul><li>Well planned. </li></ul><ul><li>Realistic. </li></ul><ul><li>Flexible. </l...
Selecting a Budgeting System <ul><li>1)  Mental budget – it is all in your head </li></ul><ul><li>2)  Physical budget-use ...
Saving to Achieve Financial Goals <ul><li>Common reasoning for saving include… </li></ul><ul><ul><li>To set aside money fo...
Savings Techniques-If I don’t see it, I won’t spend it <ul><li>Payroll deductions into saving accounts </li></ul><ul><li>A...
Money Management & Achieving Financial Goals <ul><li>Balance Sheet reports current financial position </li></ul><ul><li>Ca...
Assignments <ul><li>Prepare a balance sheet for yourself </li></ul><ul><li>Prepare a cash flow statement for last month </...
Online Research <ul><li>Do an online search to see if you can find the savings rate in the United States. </li></ul><ul><l...
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  1. 1. Chapter 3 Money Management Strategy: Financial Statements and Budgeting McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
  2. 2. Planning for Successful Money Management <ul><li>Daily spending and saving decisions are the heart of financial planning. </li></ul><ul><li>Decisions must be coordinated with needs, goals, and personal situations. </li></ul><ul><li>Money management is the day-to-day financial activities needed to manage personal economic resources, while working toward long-term financial security. </li></ul>3-2
  3. 3. Opportunity Cost and Money Management <ul><li>Spending money on current living expenses reduces the amount you can save and invest. </li></ul><ul><li>Saving and investing for the future reduces the amount you can spend now. </li></ul><ul><li>Buying on credit ties up future income. </li></ul><ul><li>Using savings for purchases results in lost interest and depletes savings. </li></ul><ul><li>Comparison shopping can save money but takes valuable time. </li></ul>3-3
  4. 4. Major Money Management Activities Creating and implementing a plan for spending, and saving (budgeting). Creating personal financial statements (balance sheets and cash flow statements of income and outflow). 3-4 Storing and maintaining personal financial records and documents.
  5. 5. Benefits of an Organized System of Financial Records <ul><li>Handling daily business affairs, including payment of bills on time. </li></ul><ul><li>Planning and measuring financial progress. </li></ul><ul><li>Completing required tax reports. </li></ul><ul><li>Making effective investment decisions. </li></ul><ul><li>Determining available resources for current and future buying. </li></ul>3-5
  6. 6. What to Keep in Your Home File <ul><li>Items you refer to often. </li></ul><ul><ul><li>Personal and employment records. </li></ul></ul><ul><ul><li>Money management records. </li></ul></ul><ul><ul><li>Tax records. </li></ul></ul><ul><ul><li>Financial services records. </li></ul></ul><ul><ul><li>Consumer purchase, auto and credit records. </li></ul></ul><ul><ul><li>Housing records. </li></ul></ul><ul><ul><li>Insurance records. </li></ul></ul><ul><ul><li>Investment records. </li></ul></ul><ul><ul><li>Estate planning and retirement records. </li></ul></ul>3-6
  7. 7. What to Keep in a Safe Deposit Box <ul><li>Safe deposit box is for records that would be hard to replace . </li></ul><ul><ul><li>Birth, marriage and death certificates, copy of will </li></ul></ul><ul><ul><li>Citizenship and military papers. </li></ul></ul><ul><ul><li>Adoption and custody papers. </li></ul></ul><ul><ul><li>Serial numbers and photos of valuables. </li></ul></ul><ul><ul><li>CDs and credit and banking account numbers. </li></ul></ul><ul><ul><li>Mortgage papers and titles. </li></ul></ul><ul><ul><li>List of insurance policy numbers. </li></ul></ul><ul><ul><li>Stock and bond certificates. </li></ul></ul><ul><ul><li>Coins and other collectibles. </li></ul></ul>3-7
  8. 8. Records on Personal Computer <ul><li>Home computer . </li></ul><ul><ul><li>Current and past budgets. </li></ul></ul><ul><ul><li>Summary of checks written and other banking transactions. </li></ul></ul><ul><ul><li>Past income tax returns prepared with tax preparation software. </li></ul></ul><ul><ul><li>Account summaries and performance results of investments. </li></ul></ul><ul><ul><li>Computerized versions of wills, estate plans, and other documents. </li></ul></ul>3-8
  9. 9. How Long to Keep Records <ul><li>Birth certificates, wills, and Social Security information should be kept indefinitely. </li></ul><ul><li>Keep records on personal property and investments as long as you own them. </li></ul><ul><li>Keep documents related to the purchase and sale of real estate indefinitely. </li></ul><ul><li>Copies of tax returns and supporting data should be kept six years. </li></ul>3-9
  10. 10. Purpose of Personal Financial Statements <ul><li>Report your current financial position in relation to the value of the items you own and the amounts you owe. </li></ul><ul><li>Measure your progress toward your financial goals. </li></ul><ul><li>Maintain information on your financial activities. </li></ul><ul><li>Provide data you can use when preparing tax forms or applying for credit. </li></ul>3-10
  11. 11. Components of a Balance Sheet (net worth statement) <ul><li>Assets - what you own. </li></ul><ul><ul><li>Liquid assets. </li></ul></ul><ul><ul><li>Real estate. </li></ul></ul><ul><ul><li>Personal possessions. </li></ul></ul><ul><ul><li>Investment assets. </li></ul></ul><ul><li>Liabilities - what you owe </li></ul><ul><ul><li>Current liabilities (< 1 year). </li></ul></ul><ul><ul><li>Long term liabilities. </li></ul></ul><ul><li>Compute your net worth. </li></ul><ul><ul><li>Assets minus liabilities. </li></ul></ul>3-11
  12. 12. Where Did Your Money Go? Components of a Cash Flow Statement <ul><li>Shows inflow, outflow for a given time period. </li></ul><ul><ul><li>Record inflow. </li></ul></ul><ul><ul><ul><li>Net income from employment. </li></ul></ul></ul><ul><ul><ul><li>Savings and investment income. </li></ul></ul></ul><ul><ul><ul><li>Other sources. </li></ul></ul></ul><ul><ul><li>Record cash outflows. </li></ul></ul><ul><ul><ul><li>Fixed and variable expenses. </li></ul></ul></ul><ul><ul><ul><li>Net cash flow can be a surplus or a deficit. </li></ul></ul></ul><ul><li>Use this statement as a basis for creating a spending, saving and investment plan . </li></ul>3-12
  13. 13. Ratios for Evaluating Financial Progress <ul><li>Debt ratio = total liabilities/net worth; compares debt to net worth; lower debt ratio is best </li></ul><ul><li>Current ratio – liquid assets/current liabilities; shows how well short term assets cover short term debt; higher ratio is good </li></ul><ul><li>Liquidity ratio = liquid assets/monthly expenses; shows # of months that living expenses can be paid; higher ratio is good </li></ul><ul><li>Debt payments ratio = monthly credit payments/take-home pay; try to keep ratio below 20% </li></ul><ul><li>Savings ratio = monthly savings/gross income; Americans tend to be poor savers; shoot for at least 10% </li></ul>3-13
  14. 14. Purposes of a Budget <ul><li>In contrast to cash flow, which was a record of how you spent money in a past time period, a budget is a plan for spending in the future, such as for the next month. A budget helps you… </li></ul><ul><ul><li>Live within your income. </li></ul></ul><ul><ul><li>Spend your money wisely. </li></ul></ul><ul><ul><li>Reach your financial goals. </li></ul></ul><ul><ul><li>Prepare for financial emergencies. </li></ul></ul><ul><ul><li>Develop wise financial management habits. </li></ul></ul>3-14
  15. 15. Creating and Implementing a Budget <ul><li>Assessing your current situation. </li></ul><ul><ul><li>Measure your current financial position. </li></ul></ul><ul><ul><li>Determine your needs, values and life situation . </li></ul></ul><ul><li>Steps in the budgeting process. </li></ul><ul><ul><li>Set financial goals. </li></ul></ul><ul><ul><li>Estimate income from all sources. </li></ul></ul><ul><ul><li>Budget amount for an emergency fund, periodic expenses and financial goals. </li></ul></ul><ul><ul><li>Budget set amounts that you are obligated to pay. These are your fixed expenses . BE SURE TO BUDGET FOR SAVINGS. </li></ul></ul>3-15
  16. 16. Creating and Implementing a Budget <ul><li>Steps in the budgeting process (continued). </li></ul><ul><ul><li>Estimate amounts that are to be spent for household and living expenses. These are your variable expenses. </li></ul></ul><ul><ul><li>Record actual amounts for inflows and outflows, comparing actual amounts with budgeted amounts to determine variances. </li></ul></ul><ul><ul><ul><li>Deficits and surpluses. </li></ul></ul></ul><ul><ul><li>Review your spending and savings patterns and evaluate whether revisions are needed in your savings and spending plans. </li></ul></ul>3-16
  17. 17. Characteristics of Successful Budgeting <ul><li>Well planned. </li></ul><ul><li>Realistic. </li></ul><ul><li>Flexible. </li></ul><ul><li>Clearly communicated. </li></ul>3-17
  18. 18. Selecting a Budgeting System <ul><li>1) Mental budget – it is all in your head </li></ul><ul><li>2) Physical budget-use envelopes for </li></ul><ul><li>your expenses such as food, rent. </li></ul><ul><li>3) Written budget – use spreadsheets </li></ul><ul><li>4) Computerized budget – use software such as Quicken ( www.quicken.com ) </li></ul>3-18
  19. 19. Saving to Achieve Financial Goals <ul><li>Common reasoning for saving include… </li></ul><ul><ul><li>To set aside money for irregular and unexpected expenses. </li></ul></ul><ul><ul><li>To pay for the replacement of expensive items, such as cars or a down payment on a house. </li></ul></ul><ul><ul><li>To buy special items like recreational equipment or to pay for a vacation. </li></ul></ul><ul><ul><li>To provide for long-term expenses such as retirement or the education of children. </li></ul></ul><ul><ul><li>To earn income from the interest on savings for use in paying living expenses. </li></ul></ul>3-19
  20. 20. Savings Techniques-If I don’t see it, I won’t spend it <ul><li>Payroll deductions into saving accounts </li></ul><ul><li>Automatic payments from checking into </li></ul><ul><li>savings accounts or mutual funds </li></ul><ul><li>Saving regularly in 401(k) plans </li></ul><ul><li>Also save coins, make periodic deposits </li></ul><ul><li>Write a check each payday as a % of </li></ul><ul><li>income and deposit into savings </li></ul>3-20
  21. 21. Money Management & Achieving Financial Goals <ul><li>Balance Sheet reports current financial position </li></ul><ul><li>Cash Flow Statement shows cash you have received and spent in the past </li></ul><ul><li>Budget helps you to spend and save to achieve financial goals </li></ul>3-21
  22. 22. Assignments <ul><li>Prepare a balance sheet for yourself </li></ul><ul><li>Prepare a cash flow statement for last month </li></ul><ul><li>Prepare a monthly budget </li></ul><ul><li>Monitor the budget and show variances </li></ul>3-22
  23. 23. Online Research <ul><li>Do an online search to see if you can find the savings rate in the United States. </li></ul><ul><li>How does your savings ratio compare to the average? </li></ul>3-23

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