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 Objective 1 Identify the Main Components of Wise Money Management 2-2 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 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 of past 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 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 other collectibles – Copy of will 2-5 How Long to Keep Records Records Retention Period Birth certificates, wills and social security information Indefinitely Personal property and investments As long as you own them Documents re: purchase and sale of real estate Indefinitely Copies of tax returns and supporting data 7 years minimum 10 years better 2-6 Objective 2 Create a Personal Balance Sheet and Cash Flow Statement Benefits of Personal Financial Statements 1. Report current financial position in relation to value of items owned and amounts owed 2. Measure progress toward financial goals 3. Maintain information on financial activities 4. Provide information for preparing tax forms or applying for credit 2-7 Balance Sheet A financial statement that reports what an individual or family owns and owes as of a specific date: • Also called: – Net worth statement – Statement of financial position Items of Value (what you own) - Amounts owed (what you owe) = Net Worth (your wealth) 2-8 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 Sample Balance Sheet How can net worth be increased? What is insolvency? 2-10 The Cash Flow Statement Inflows 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 The Cash Flow Statement Inflows 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 or Deficit) – Use this statement as a basis for creating a spending, saving, and investment plan 2-12 Sample Cash Flow Statement 2-13 Evaluating Financial Progress Ratios RATIO Calculation Interpretation Debt Ratio Liabilities divided by net worth Low debt is best Liquid assets divided High is desirable by current liabilties Number of months Liquid assets divided expenses canbe paid in Liquidity Ratio by monthly expenses an emergency; high is desirable Monthly credit How much of earnings Debt-payments payments divided by goes to sevice debt; less Ratio take-home pay than 20% recommended Monthly savings Savings Ratio divided by gross 5-10% recommended income Curent Ratio 2-14 Objective 3 Develop 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 The 7 Steps in Budgeting Process 1. Set financial goals 2. Estimate income from all sources 3. Budget an emergency fund and savings 4. Budget fixed expenses (include 1/12 occasional expenses) 5. Budget variable expenses 6. Record spending amounts 7. Review spending and saving patterns Review financial progress Revise goals and budget allocations 2-16 2-17 Typical Budget Allocations 2-18 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 Objective 4 Connect Money Management Activities with Savings for Personal Financial Goals 1. Your Balance Sheet (Net Worth): • Snapshot of where you are now 2. Your Cash Flow Statement: • What you received and spent over a specific period 3. Your Budget (Spending Plan): • Planning spending and saving to achieve financial goals 2-20 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 Selecting a Saving Technique to “Pay Yourself First” 1. Write a check each payday and deposit in a savings account 2. Use payroll deduction to deposit a certain amount in savings (direct deposit) 3. Save coins or spend less on certain items Convert financial goals into specific savings amounts using time value of money calculations 2-22 Using Savings to Achieve Financial Goals 2-23 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?