Chapter 3

1. Chapter 3 Money Management Strategy: Financial Statements and Budgeting Personal Finance 7e Kapoor Dlabay Hughes 3-1

2. Planning for Successful Money Management • Dailyspending 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. 3-2

3. 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. 3-3

4. Major Money Management Activities Creatingpersonalfinancialstatements(balancesheets andcash flowstatements of income and outflow). Storingandmaintainingpersonalfinancialrecordsanddocuments. Creating and implementing a plan for spending, and saving (budgeting). 3-4

5. Benefits of an Organized System of Financial Records • 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. 3-5

6. 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. 3-6

7. 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. 3-7

8. 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 performanceresults of investments. • Computerized versions of wills, estate plans, and other documents. 3-8

9. 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. 3-9

10. 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. 3-10

11. 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 (< 1 year). • Long term liabilities. • Compute your net worth. • Assets minus liabilities. • Insolvent means liabilities far exceed assets. 3-11

12. Where Did Your Money Go? Components of a Cash Flow Statement • Shows inflow and outflow during a given time period. • Record inflow. • Net 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. • Use this statement as a basis for creating a spending, saving and investment plan. 3-12

13. Purposes of a Budget • 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… • Live within your income. • Spend your money wisely. • Reach your financial goals. • Prepare for financial emergencies. • Develop wise financial management habits. 3-13

14. Creating and Implementing a Budget • Assessing your current situation. • Measure your current financial position. • Determine your needs, values and life situation. • Steps in the budgeting process. • Set financial goals. • Estimate income from all sources. • Budget amount for an emergency fund, periodic expenses and financial goals. • Budget set amounts that you are obligated to pay. These are your fixed expenses. 3-14

15. Creating and Implementing a Budget • Steps in the budgeting process (continued). • Budget estimated amounts that are to be spent for various household and living expenses. These are your variable expenses. • Record actual amounts for inflows and outflows, comparing actual amounts with budgeted amounts to determine variances. • Deficits and surpluses. • Review your spending and savings patterns and evaluate whetherrevisions are needed in your savings and spending plans. 3-15

16. Characteristics of Successful Budgeting • Well planned. • Realistic. • Flexible. • Clearly communicated. 3-16

17. 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. • To buy special items like recreational equipment or to pay for a vacation. • To provide for long-term expenses such as retirement or the education of children. • To earn income from the interest on savings for use in paying living expenses. 3-17

18. The End