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Chapter 3

Money Management Strategy: Financial Statements and Budgeting

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Personal Finance 6eKapoor Dlabay Hughes

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Opportunity Cost andMoney Management Spending money on current living expenses

reduces the amount you can save and invest. Saving and investing for the future reduces the

amount you can spend now. Buying on credit ties up future income. Using savings for purchases results in lost interest

and means savings can’t be used for other purposes.

Comparison shopping can save money but takes your valuable time.

3-2

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Major Money Management Activities

Createand

implementa plan forspending

(budgeting)and

saving.

Createpersonalfinancial

statementsof income

andoutflow(balance

sheet andcash flow).

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Storeand

maintainpersonalfinancialrecords

anddocuments.

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Why Keep Financial Records?

To help making spending decisions. To plan future spending. To pay bills on time. To see changes in net worth. To make good investment decisions. To prepare your income tax forms.

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

Personal and employment records. Tax records. Financial services records. Money management records. Credit records. Consumer purchase records. Insurance records. Investment records. Housing and car records. Estate planning and retirement records. 3-5

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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 account numbers. Mortgage papers and titles. List of insurance policy numbers. Stock and bond certificates. Coins and collectibles. Copy of will.

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Other Places to Keep Records Automobile.

Vehicle registration. Lawyer.

Original of your will and living will. Doctor and hospital.

Copy of your living will. Home computer.

Current and past budgets. Checking account records. Wills, estate plans, investments. Past income tax returns.

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Purpose of PersonalFinancial Statements

Report your current financial position in relation to the value of the items you own and the amounts you owe.

Measure your progress toward your financial goals.

Maintain information on your financial activities. Provide information you can use when

preparing tax forms or applying for credit.

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Components of a Balance Sheet(net worth statement) Assets - what you own.

Liquid assets. Real estate. Personal possessions. Investment assets.

Liabilities - what you owe Current liabilities. Long term liabilities.

Net Worth. Assets minus liabilities. Insolvent means liabilities far exceed assets. 3-9

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Components of aCash Flow Statement Shows inflow and outflow during a given time

period. Record income.

Income from employment.Savings and investment income.Other sources.

Record cash outflows.Fixed and variable expenses.Net cash flow can be a surplus or a deficit.

Used as a basis for creating a spending, saving and investment plan. 3-10

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Creating and Implementing a Budget Assessing your current situation.

Measure your current financial position. Determine your needs, values and life

situation. Planning your financial direction.

Setting financial goals. Creating budget allocations.

Budget amount for an emergency fund, periodic expenses and financial goals.

Budget set amounts that you are obligated to pay. Budget estimated amounts that are to be spent for

various household and living expenses. 3-11

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Creating and Implementing a Budget Implementing your budget.

Monitoring spending, saving and investment patterns.

Selecting a budget system. Budgeting systems include...

Mental budget, physical budget, written budget, and computerized budget.

Evaluating your budgeting program. Reviewing your financial progress . Revising (as needed) your financial goals and

your budget allocations.

(continued)

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Successful Budgets Are...

Well planned. Realistic. Flexible. Clearly communicated.

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Saving to Achieve Financial Goals

Common reasoning for saving include… To set aside money for irregular and

unexpected expenses. To pay for the replacement of expensive items,

such as appliances, cars or a down payment on a house.

Save to buy special items or pay for a vacation. Put aside money to long-term expenses such

as retirement or children's education. To earn income from the interest on savings for

use in paying living expenses. 3-14