Chapter 03 Money Management Strategy: Financial Statements - PowerPoint Presentation

1. Chapter 03Money Management Strategy: Financial StatementsAndBudgeting

2. Chapter 3Learning ObjectivesLO3-1 Recognize relationships among financial documents and money management activities.LO3-2 Develop a personal balance sheet and cash flow statement.LO3-3 Create and implement a budget. LO3-4 Relate money management and savings activities to achieving financial goals.3-2

3. Successful Money ManagementLO3-1:Recognize relationships among financial documents and money management activities.Daily spending and saving decisions are the main element of financial planningDecisions must be coordinated with needs, goals, and personal situationsMONEY MANAGEMENT is the day-to-day financial activities necessary to manage current personal economic resources while working toward long-term financial security3-3

4. Opportunity Cost and Money ManagementSpending for current living expenses reduces the amount you can save and investSaving and investing for the future reduces the amount you can spend nowBuying on credit ties up future incomeUsing savings for purchases results in lost interest earnings and depletes savingsComparison shopping can save money but takes valuable time3-4

5. 3-5Components of Money Management

6. A Personal Financial Records SystemAn Organized System of Financial Records provides a basis for:Handling daily business affairs, such as paying billsPlanning and measuring financial progressCompleting required tax reportsMaking effective investment decisionsDetermining available resources for current and future spendingHome file, safe deposit box, computer, cloud storage3-6

7. Home Files, Home Computeror OnlineItems in Your Home FilePersonal and employment recordsMoney management recordsTax recordsFinancial services recordsCredit recordsConsumer purchase and automobile recordsHousing recordsInsurance recordsInvestment recordsEstate planning and retirement records3-7

8. Safe Deposit Box or Fireproof Home SafeItems in the safe deposit boxRecords that would be difficult to replaceBirth, marriage and death certificatesCitizenship and military papersAdoption and custody papersSerial numbers and photos of valuablesCDs and credit and banking account numbersMortgage papers and titlesList of insurance policiesAnnual stock investment statementsRare coins and stampsCopy of will3-8

9. Personal Computer, Tablet, PhoneRecords on your personal computerScanned copies of documentsSpreadsheet summaries of budgets and investment recordsDigital versions of income tax returns, wills, and estate planApps for banking activities, financial record keeping, and investment transactions3-9

10. How Long Should Records Be KeptHow long should records be kept?Keep birth certificates, wills, and Social Security data permanentlyKeep records on property and investments as long as you own themKeep documents related to the purchase and sale of real estate indefinitelyKeep copies of tax returns and supporting data for seven years3-10

11. Personal Financial StatementsLO3-2:Develop a personal balance sheet and cash flow statement. MAIN PURPOSES OF PERSONAL FINANCIAL STATEMENTSReport your current financial position in relation to the value of the items you own and the amounts you oweMeasure your progress toward financial goalsMaintain information on your financial activitiesProvide data you can use when preparing tax forms or applying for credit3-11

12. Personal Balance Sheet: Step 1PERSONAL BALANCE SHEET: WHERE ARE YOU NOW?also called the Net Worth Statement or Statement of Financial PositionPreparation requires using three stepsSTEP 1: LIST ITEMS OF VALUEAssets — what you ownLiquid assetsReal estatePersonal possessionsInvestment assets3-12

13. Personal Balance Sheet:Step 2 and 3STEP 2: DETERMINE AMOUNTS OWEDLiabilities — what you oweCurrent liabilities (less than 1 year) Long-term liabilitiesSTEP 3: COMPUTE NET WORTHNet Worth = Assets - LiabilitiesAssets = Liabilities + Net WorthInsolvency is the inability to pay debts when they are due3-13

14. Net WorthNet Worth is an indication of your current financial position on a given dateWays to increase Net WorthIncreasing your savingsReducing spendingIncreasing the value of investments and other possessionsReducing the amounts you owe3-14

15. Net Worth CalculationExample If a household has $193,000 of assets and liabilities of $88,000, then the net worth would be $105,000. Assets - Liabilities = Net Worth $193,000 - $88,000 = $105,0003-15

16. The Cash Flow StatementWHERE DID YOUR MONEY GO?Cash Flow is the actual inflow and outflow of cash for a given time periodAlso called a Personal Income and Expenditure StatementProcess for preparing a cash flow statement:3-16

17. The Cash Flow Statement:Step 1Preparation requires using three stepsSTEP 1: RECORD INCOMEWages, salaries, and commissionsSelf-employment business incomeSavings and investment incomeGifts, grants, and scholarshipsGovernment payments, such as Social Security, public assistance, and unemployment benefitsAmounts received from pension and retirement programsAlimony and child support payments3-17

18. The Cash Flow Statement:Step 2 and 3STEP 2: RECORD CASH OUTFLOWSFixed expensesVariable expensesSTEP 3: DETERMINE NET CASH FLOWThe difference between income and outflows can either be positive (surplus) or negative (deficit)Cash flow statement provides the foundation for preparing and implementing a spending, saving, and investment plan3-18

19. Budgeting forSkilled Money Management LO3-3:Create and implement a budget. A budget is a spending planThe main purposes of a budget are to help you:Live within your incomeSpend your money wiselyReach your financial goalsPrepare for financial emergenciesDevelop wise financial management habits3-19

20. Creating and Implementing a Budget3-20

21. The Budgeting ProcessStep 1: Set Financial GoalsStep 2: Estimate IncomeStep 3: Budget An Emergency Fund and SavingsStep 4: Budget Fixed ExpensesStep 5: Budget Variable ExpensesStep 6: Record Spending AmountsStep 7: Review Spending and Saving PatternsReview Your Financial ProgressRevise Your Goals and Budget Allocations3-21

22. Characteristics of Successful BudgetingA budget will work only if you follow itExperts advise that a successful budget should be:Well plannedRealisticFlexible Clearly communicated3-22

23. Types of Budgeting SystemsWhich one works for you?Mental budget: exists only in your headPhysical budget: use envelopes for your expenses such as food, rent, etc.Written budget: detailed plan for spending in a spreadsheet or notebookComputerized budgeting system: use Excel or software such as Quicken Online budget: use bank or financial institution websiteBudgeting app: use cell phone or tablet3-23

24. Money Management and Achieving Financial GoalsLO3-4:Relate money management and savings activities to achieving financial goals.IDENTIFYING SAVING GOALSTo create an emergency fund for irregular and unexpected expensesTo pay for the replacement of expensive items, such as automobiles, or a down payment on a houseTo buy expensive items like sports equipment or to pay for a vacationTo provide for long-term expenses such as retirement or the education of childrenTo earn income from the interest on savings for use in paying living expenses3-24

25. Selecting a Saving TechniqueWrite a check each payday as a percentage of income and deposit into savingsUse an automatic payment or a smartphone app to electronically transfer an amount into savingsUse Payroll deduction to deduct from your salary and deposit into savingsSave coins in a container or spend less on certain items; take a sandwich instead of buying lunch or limit impulse buying for snacks or coffee3-25

26. Calculating Savings AmountsTo achieve financial objectives, convert savings goals into specific amounts3-26