2 Money Management Skills

1. 2 Money Management Skills • Money management = Day-to-day financial activities necessary to manage current personal economic resources, while working toward long-term financial security • Daily spending and saving decisions = central to financial planning • Must be coordinated with needs, goals, and personal situation 2-1

2. Objective 1Identify the Main Components ofWise Money Management 2-2

3. An Organized Personal Financial Records System Provides a basis for: • Handling daily business affairs, such as bill paying • Planning and measuring financial progress • Completing required tax reports • Making effective investment decisions • Determining available resources for current and future buying 2-3

4. Records in Your Home File/Computer Items you refer to often: • Personal and employment records (resume, benefit info) • Money management records (budget, balance sheet) • Tax records (W-2 forms, receipts, copies ofpast returns) • Financial services records (checkbook, bank statements) • Credit records (statements, list of account numbers) • Consumer purchase & auto records (warranties, receipts) • Housing records (lease, property tax, home improvements) • Insurance records (policies, claim reports) • Investment records (CD certificate #s, brokerage statements) • Estate planning & retirement records (will, pension, IRA) 2-4

5. What to Keep in a Safe Deposit Box • Records and items that would be hard to replace: • Birth, marriage and death certificates • List of checking, savings and financial institution account numbers • 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 othercollectibles • Copy of will 2-5

6. How Long to Keep Records 2-6

7. Objective 2Create a Personal Balance Sheet and Cash Flow Statement Benefits of Personal Financial Statements • Report current financial position in relation to value of items owned and amounts owed • Measure progress toward financial goals • Maintain information on financial activities • Provide information for preparing tax forms or applying for credit 2-7

8. Items of Value (what you own) Amounts owed (what you owe) Net Worth (your wealth) - = Balance Sheet A financial statement that reports what an individual or family owns and owes as of a specific date: • Also called: • Net worthstatement • Statement of financial position 2-8

9. Components of a Balance Sheet • Step 1 – List items of value • Liquid assets (e.g., checking & savings) • Real estate (e.g., house, condo, land) • Personal possessions (e.g., car, computer) • Investment assets (e.g., mutual funds, IRAs) • Step 2 – Determine amounts owed • Current liabilities (debts repaid in < 1 year) • Long term liabilities (e.g., mortgage) • Step 3 - Compute your net worth 2-9

10. Sample Balance Sheet 2-10 How can net worth be increased? What is insolvency?

11. The Cash Flow StatementInflows and Outflows • Cash flow statement = personal income and expenditure statement • Summary of cash receipts and payments for a given period Total cash received during the time period Cash outlays during the time period Cash surplus or deficit - = 2-11

12. The Cash Flow StatementInflows and Outflows 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 Cash Flow (Surplus orDeficit) • Use this statement as a basis for creating a spending, saving, and investment plan 2-12

13. Sample Cash Flow Statement 2-13

14. Evaluating Financial ProgressRatios 2-14

15. Objective 3Develop and Implement a Personal Budget • Budget = Spending Plan • Helps you: • Live within your income • Spend money wisely • Reach financial goals • Prepare for financial emergencies • Develop wise financial management habits 2-15

16. The 7 Steps in Budgeting Process • Set financial goals • Estimate income from all sources • Budget an emergency fund and savings • Budget fixed expenses (include 1/12 occasional expenses) • Budget variable expenses • Record spending amounts • Review spending and saving patterns • Review financial progress • Revise goals and budget allocations 2-16

17. 2-17

18. Typical Budget Allocations 2-18

19. Budgeting Systems • Mental budget • Appropriate if financial resources and responsibilities are limited • Physical Budget • Envelopes, folders or containers • Written Budget • On notebook paper • Computerized Budget • Spreadsheet or specialized software Pros and Cons of each system? Who might use them? 2-19

20. Objective 4Connect Money Management Activities with Savings for Personal Financial Goals • Your Balance Sheet (Net Worth): • Snapshot of where you are now • Your Cash Flow Statement: • What you received and spent over a specific period • Your Budget (Spending Plan): • Planning spending and saving to achieve financial goals 2-20

21. Changes in Net Worth Changes in Net Worth result from cash inflows and outflows. • Outflows > Inflows • Draw from savings or borrow • Problem/Result: Lower assets or higher liabilities • Inflows > Outflows • Put money into savings or pay off debts • Result: Higher net worth 2-21

22. Selecting a Saving Technique to “Pay Yourself First” • Write a check each payday and deposit in a savings account • Use payroll deduction to deposit a certain amount in savings (direct deposit) • Save coins or spend less on certain items Convert financial goals into specific savings amounts using time value of money calculations 2-22

23. Using Savings to Achieve Financial Goals 2-23

24. Wrap Up • Chapter Quiz • Concept Check 2-1- How Long Should Items Be Kept? • Credit card statements, mortgage documents, receipts, retirement account info, will • Concept Check 2-2- Identify items in financial statements • Concept Check 2-3- Identify types of expenses • Concept Check 2-4- Which financial statement?