Chapter 3


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Chapter 3

  1. 1. Chapter 3 Money Management Strategy: Financial Statements and Budgeting 3-1 Personal Finance 7e Kapoor Dlabay Hughes
  2. 2. Planning for Successful Money Management <ul><li>Daily spending and saving decisions are at the center of financial planning. </li></ul><ul><li>Decisions must be coordinated with your needs, goals, and personal situations. </li></ul><ul><li>Money management means the day-to-day financial activities necessary 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 means savings can’t be used for other purposes. </li></ul><ul><li>Comparison shopping can save money but takes your 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>Credit records. </li></ul></ul><ul><ul><li>Consumer purchase and auto 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 and items that would be hard to replace. </li></ul><ul><ul><li>Birth, marriage and death certificates. </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><ul><ul><li>Copy of will. </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 information 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><ul><ul><li>Insolvent means liabilities far exceed assets. </li></ul></ul>3-11
  12. 12. Where Did Your Money Go? Components of a Cash Flow Statement <ul><li>Shows inflow and outflow during 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. 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>3-13
  14. 14. 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. </li></ul></ul>3-14
  15. 15. Creating and Implementing a Budget <ul><li>Steps in the budgeting process (continued). </li></ul><ul><ul><li>Budget estimated amounts that are to be spent for various 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>3-15
  16. 16. 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>3-16
  17. 17. 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 appliances, 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>3-17