2-2-11

McGraw-Hill/IrwinFocus on Personal Finance, 2e

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Money Management Skills

2-2-33 Money Management Skills

1. Identify the main components of wise money management

2. Create a personal balance sheet and cash flow statement

3. Develop and implement a personal budget4. Connect money management activities with

saving for personal financial goals

Chapter Objectives

2-2-44 Objective 1: Identify the main components of wise money management

Daily spending and saving decisions are at the center of financial planning.

Decisions must be coordinated with your needs, goals, and personal situations.

Money management means the day-to-day financial activities necessary to manage personal economic resources, while working toward long-term financial security.

2-2-55 Components of Money Management

Creatingand

implementinga plan forspending, and saving (budgeting).

Creatingpersonalfinancial

statements(balance

sheets andcash flow

statements of income

and outflow).

Storingand

maintainingpersonalfinancialrecords

anddocuments.

2-2-66 A System for Personal Financial Records

Organized system of financial records provides a basis for:

Handling daily business affairs, including payment of bills on time.

Planning and measuring financial progress. Completing required tax reports. Making effective investment decisions. Determining available resources for current and

future buying.

2-2-77 What to Keep in Your Home File Items you refer to often.

– Personal and employment records.– Money management records. – Tax records.– Financial services records.– Credit records.– Consumer purchase and auto records.– Housing records. – Insurance records.– Investment records.– Estate planning and retirement records.

2-2-88 What to Keep in a Safe Deposit Box

Safe deposit box is for records and items that would be hard to replace.– Birth, marriage and death certificates.– Citizenship and military papers.– Adoption and custody papers.– Serial numbers and photos of valuables.– CDs and credit and banking account numbers.– Mortgage papers and titles.– List of insurance policy numbers.– Stock and bond certificates.– Coins and other collectibles.– Copy of will.

2-2-99 Records on Personal Computer Home computer.

– Current and past budgets.– Summary of checks written and other banking

transactions.– Past income tax returns prepared with tax

preparation software.– Account summaries and performance

results of investments.– Computerized versions of wills,

estate plans, and other documents.

2-2-1010 How Long to Keep Records

Birth certificates, wills, and Social Security information should be kept indefinitely.

Keep records on personal property and investments as long as you own them.

Keep documents related to the purchase and sale of real estate indefinitely.

Copies of tax returns and supporting data should be kept six years.

2-2-1111Objective 2: Create a personal balance sheet and cash flow statements

Benefits of these statements1. Report your current financial position in

relation to the value of the items you own and the amounts you owe.

2. Measure your progress toward your financial goals.

3. Maintain information on your financial activities.

4. Provide information you can use when preparing tax forms or applying for credit.

2-2-1212 Balance Sheet: The starting point

Balance Sheet

A financial statement that reports what an individual or a family owns and owes; also called a net worth statement or statement of financial position

2-2-1313 Components of a Balance Sheet

Step 1 – List items of value– Liquid assets.– Real estate.– Personal possessions.– Investment assets.

Step 2 –Determine what you owe– Current liabilities (< 1 year). – Long term liabilities.

Step 3-Compute your net worth.– Assets minus liabilities=Net Worth– Insolvent means liabilities far exceed available assets.

2-2-1414 Components of a Balance Sheet contd..

Ways to Increase Net Worth Increase your savings Increase the value of your investments

and other possessions Reduce amount owed

2-2-1515 Components of a Cash Flow Statement:Inflows and Outflows Cash flow statement is also called a personal

income and expenditure statement

Step 1-Record Income• Net income from employment (Net Pay)• Savings and investment income.• Other sources.

Step 2-Record cash outflows.• Fixed and variable expenses

Step 3-Determine Net Cash Flow

Use this statement as a basis for creating a spending, saving and investment plan.

2-2-1616 Objective 3: Develop and implement a Personal Budget Budget: is a plan for spending in the future,

such as for the next month. A budget helps you…– Live within your income.– Spend your money wisely.– Reach your financial goals.– Prepare for financial emergencies.– Develop wise financial management habits.

2-2-1717 7 Steps in the Budgeting Process

1 Set financial goals.

2 Estimate income from all sources.

3 Budget an Emergency Fund and Savings.

4 Budget Fixed Expense.

2-2-1818 7 Steps in the Budgeting Process

5 Budget Variable Expenses.

6 Record Spending Amounts

7 Review Spending and Saving Patterns Review your financial progress Revise your goals and budget allocations Characteristics of successful budgets are

1) Well planned2) Realistic3) Flexible4) Clearly communicated

(continued)

2-2-1919 Objective 4: Connect money management activities with savings for personal financial goals

Financial Statements and Budget allow you to achieve your financial goals with

1. Balance Sheet: telling you where you are now

2. Cash Flow Statement: telling you what you received and spent over the past month

3. Budget: How to plan, spend and save to achieve financial goals

2-2-2020 Objective 4: Connect money management activities with savings for personal financial goals contd….

Changes in Net Worth result from cash inflows and outflows.– Outflows>Inflows

• Draw from savings or borrow• Lower assets or higher liabilities

– Inflows>Outflows• Put money into savings or pay off debts• Higher net worth

2-2-2121 Selecting a Saving Technique

1. Write a check each payday and deposit in a savings account

2. Use payroll deduction to deposit a certain amount in savings

3. Save coins or spend less on certain items

2-2-2222 Calculating Savings Amount

To achieve financial objectives1. Convert savings objectives into specific amounts

2. Use your savings and investments plans to grow your money

3. Use time value of money to calculate progress toward financial goals