Financial Management Tools: Net Worth, Income Statement & Budgeting

1. Unit 3: Net Worth, Income & Expense Statement, and Budgeting

2. Three Tools to Manage Your Money and Financial Progress Work together to help you objectively evaluate your past, present, and future financial decisions Statement of Financial Position Or Net Worth Income & Expense Statement Budget What is my future money management plan? What is my financial position today? How have I managed my money in the past? Reach net worth level desired

3. Who is Wealthier? Income - $30,000,000 Income - $77,000,000 Net Worth - $180 Mill Net Worth - $60 Mill Let’s learn more to answer this question!

5. Indicates the monetary value of all possessions that a person or household owns, minus the total amounts owed to others Is an objective measure of financial wealth. Calculated as Assets – Liabilities.

6. Net Worth vs. Income Determined by how a person manages their income, expense, and savings Money received such as wages earned from working for pay A person may have high income and a low net worth or vice versa, but they are usually correlated.

7. Who is wealthier? For now, Tom Brady is but that could change.

8. Statement of Financial Position or Balance Sheet Shows Net Worth Statement of Financial Position - A financial statement that describes an individual or family’s financial condition on a specified date by showing assets, liabilities, and net worth Shows a person’s net worth Or their total financial assets less their financial liabilities arriving at net worth

9. Net Worth in Action • Assets • Less Liabilities • = Net Worth

10. What is an asset? Monetary Assets: Cash, Checking, Savings Stocks Asset - Anything a person owns with monetary value Tangible Assets: Home, Autos, Jewelry

11. What are liabilities? Loans (mortgage, automobile, student) Liabilities – A debt or obligation owed to others Balance on a credit card

12. Liabilities vs. Expenses Money owed to others Money spent Total amount owed Bills paid on a regular basis Monthly payment to repay that automobile loan - $180/month Automobile loan - $5,490 owed

13. How Do You Increase Net Worth? Assets Manage your money by having income > expenses Liabilities

14. Let’s take a look at 2 families. Which family has more wealth, A or B ? Family A Family B

15. Family A owns a 3 bedroom house valued at $200,000 with no outstanding mortgage loan. They have a checking account ($5K), an emergency savings account ($35K), a college savings account ($25K) and a retirement savings plan (100K). They also have two credit cards with a total balance of $5K and no other liabilities.  Family B owns a 5 bedroom house valued at $600,000 with a $500K mortgage loan.Their total cash and savings is $15K. They also own a valuable piece of art and expensive jewelry with a combined value of $50K. The family has a retirement savings account ($15K) and total other liabilities of $35K.

16. Questions for Discussion: Net Worth • Does it make you wealthier to buy items that cost a large amount? Why or why not? • How do most people purchase expensive goods such as a house or car? • What does it mean to have debt? • What are the best ways to grow your net worth? • How important do you think owning stocks and your own home are to building your wealth?

17. Summary Assets – Liabilities = Net Worth Net worth is the objective measure of wealth To obtain financial security, increase net worth by ensuring income is greater than expenses (save 10% of each paycheck) To increase net worth you will have to increase assets and/or decrease liabilities

18. Income and Expense Statement

19. The Income and Expense Statement Income and Expense Statement - lists and summarizes income and expense transactions that have taken place over a specific period of time, usually a month or year

20. 3 Sections of The Income and Expense Statement Income Expenses Net gain (surplus) or net loss (shortage)

21. What is Income?

22. Income Categories Earned income – any money earned from labor Unearned income – income received from sources other than employment (interest, dividends) Income from Government Programs – welfare, disability, unemployment, social security

23. What are Expenses?

24. Expense Categories • Savings & Investing • Taxes • Insurance • Housing • Transportation • Food • Health care • Entertainment • Other

25. Expense Characteristics: Variable vs. Fixed • Variable Expenses are those that change each time period (food, entertainment, gas, clothing, etc.) • Fixed Expenses are expenses that remain the same each time period (rent, loan payment, etc.)

26. Net Gain (Surplus) or Net Loss (Shortage) Net gain Net loss

27. Find a tracking method that works for you Keep receipts Add up daily Smartphone APP Record in writing Use depository institution account statements Use Money management software (Quicken, Mint) A written system is more effective than a mental/memory system!

28. Use that money for extra savings or other expenses Increase income and/or decrease expenses Statement of Financial Position Income & Expense Statement Budget & Spending Plan A spending plan or budget will help you plan your spending What is my future money management plan? What is my financial position today? How have I managed my money in the past?

29. Summary: Income & Expense Statement Tells you where your money has come from and where it has gone 3 components: income, expenses, and net gain (surplus) or net loss (shortage) Use a tracking method that works best for you Customize income and expense categories

30. Best Budget Apps - 2018 • Best overall saving and budgeting apps: Mint and Acorns • Best budgeting app for hands-on users: You Need a Budget • Best simplified budgeting app: PocketGuard • Best app for paying and tracking bills: Prism

31. Say “Yes” to Comparison Shopping. Say “No” to Impulse Buying.

32. What are your spending habits? • Think about the last item you purchased • Did you look at the product carefully, or consider other options before purchasing it? • Did you buy the first thing you saw? • Based on size? • Based on color? • Based on price? • Did you compare products? • Are you an impulse shopper or a comparison shopper? Or does it depend?

33. Shopping Habits • Impulse Buying • Unplanned buying • Little consideration of the product or other options • “emotional buying” • Comparison Shopping • Planned buying • Careful consideration of the product, features, price and quality • “rational buying”

34. Comparison Shopping • Benefits of comparison shopping • Buy the same product or service for less money • Buy more goods and services with the same amount of money • Buy a better quality product for the same amount of money

35. Comparison Shopping – Step One • Step One • Decide what is needed before shopping • How will I use this product? • How long does it need to last? • What features do I really need? • Answering the above questions will help a person make the best decision in “rationale mode”

36. Comparison Shopping – Step Two • Step Two • What is the quality of the products that I am comparing? (Do most of this work before shopping) • Materials used, craftsmanship, durability • Research on the Internet (Blogs, articles, etc.) • Ask others who own the same product • Refer to unbiased testing agencies for more information • Consumer Reports • Underwriter’s Laboratories • Better Business Bureau

37. Comparison Shopping – Step Three • Step Three • What is the total cost? • Need to consider additional costs other than what is shown on the price tag • Example: Clothing that needs to be dry cleaned will cost more over a lifetime than clothing that can be washed at home • “Hidden costs” impact decisions and need to be considered carefully

38. Comparison Shopping – Step Four • Step Four: • How will the product be used? • Consider how the product will be used, how often it will be used and what price is appropriate for the use • Example: If a product is used once a year, spending more money for high quality and additional features may not be necessary • Example: If a product is used everyday, one may be willing to pay more for higher quality

39. Comparison Shopping – Step Five • Step Five: • Consider the opportunity cost and make a decision to buy the product (or not) • Opportunity cost – what your second best choice would be as to how to spend (or save) that same money

40. Comparison Shopping Steps • Step One • Decide exactly what is needed before shopping • Step Two • Determine the features and quality you are seeking. Do research before shopping. • Step Three • What is the total cost? Include non price tag items • Step Four • How will the product be used? • Step Five • Consider the opportunity cost and make a decision

41. Making Good Choices • Comparison shopping: • Helps individuals and families spend money wisely • Helps build a positive financial future • Can reduce costs without cutting back on necessary items • Allows people to save money while meeting needs

42. Comparison Shopping Activity • Look up the price of the teacher-provided items (choose one model and stick with it) at: • Walmart • Target • Amazon • Where did you find the best online deal? • Can you find other online search engines to help with Comparison Shopping?

43. Spending Plans Or Budget Advanced Level

44. Three Synergistic Money Management Tools Statement of Financial Position Income & Expense Statement Spending Plan or Budget What is my future money management plan? What is my financial position today? How have I managed my money in the past? Determine what changes to make Make changes

45. Spending Plan or Budget Development Process Develop the spending plan or budget Maintain the spending plan Step 1 - Track Current Income and Expense Step 5 - Evaluate and Make Adjustments Step 4 – Implement, track, and Control Step 2 - Personalize Your Spending Plan Step 3 - Allocate Money to Each Category

46. Personalize Your Spending Plan Step 1 - Track Current Income and Expense Step 5 - Evaluate and Make Adjustments How will you develop a spending plan? What is the time period for your spending plan? Step 2 - Personalize Your Spending Plan Step 4 - Implement and Control Step 3 - Allocate Money to Each Category Choose categories for your spending plan

47. Ways to develop a spending plan Paper and pencil Spreadsheet How would you develop a spending plan? Money management computer software Apps

48. What categories will your spending plan include? Usually concurrent with pay period or monthly (ie. every 2 weeks or monthly) Information gathered from tracking the Income and Expense Statement Do any categories need added, changed, or removed? What is the intended time period for your spending plan?

49. “Pay Yourself First” • This is putting aside 10 % or more of your gross pay every month for savings or investing. • We do this in order to: • Increase our net worth • Assure we have an adequate emergency fund • To make sure we reach our short-term and long-term financial goals

50. Spending Plan Guide: Common Estimated %s What variables may cause these percentages to be different?