Post on 25-Dec-2015
Money Management Strategy
Chapter 3
Section 3.1 Objectives Discuss the relationship between
opportunity costs and money management Explain the benefits of keeping financial
records and documents Describe a system to maintain personal
financial documents
Money Management and Trade-Offs Plan to get most of your money Keep track of where your money goes Consider your values, goals, and state of
your bank account to make better spending decisions
Benefits of Organizing Your Financial Documents Find what you need in a hurry Plan and measure your financial progress Handle routine money matters, such as
paying bills on time Determine how much money you will have
now and in the future Make effective decisions about how to save
money
Where to Keep Your Financial Documents Home Files Safe-Deposit Boxes Home Computers
Home Files Types of files
Employment records Money management records Checkbook Checks Tax records Receipts Insurance records
Do not keep hard to replace documents here because no protection against fire, water, or theft
Safe-Deposit Boxes Types of files
Birth certificates Mortgage papers Copy of will CDs Car titles Account and policy numbers
$100 or less per year Bank loss from fire or disasters is rare Insurance protection Could also use a fire-proof box
Home Computers Budgets Summary of banking transactions Tax records Resume
Section 3.2 Objectives Describe a personal balance sheet and
cash flow statement Develop a personal balance sheet and
cash flow statement
Personal Financial Statements Help you:
Determine what you own and what you owe Measure your progress toward your financial
goals Track your financial activities Organize information that you can use when you
file your tax return or apply for credit
Personal Balance Sheet Step One: Determine Your Assets Step Two: Determine Your Liabilities Step Three: Calculate Your Net Worth Step Four: Evaluate Your Financial
Situation
Step One: Determine Your Assets Assets – Any items of value that you own
Liquid Assets – items quickly converted to cash Real Estate – land and any structures, should list
market value on balance sheet Personal Possessions – Car and other things not
real estate Should list current value, not purchase value
Investment Assets – retirement accounts, stocks, bonds
Step Two: Determine Your Liabilities
Liabilities – debts you owe for longer than a month – so utility bills would not be a liability
Current Liabilities – debts that are paid within a year such as medical bills, cash loans, taxes
Long-term Liabilities – debts that do not have to be fully paid within a year such as car loans, student loans, mortgage loans
Step Three: Calculate Your Net Worth
Assets-Liabilities = Net Worth Amount of Net Worth is not what you can
spend, just an indication of your general financial situation
May still have trouble paying bills May be insolvent – liabilities greater than
assets
Step Four: Evaluate Your Financial Situation
Update every few weeks to track changes over time
Increase net worth by: Increasing savings Increasing your investments Reducing your expenses Reducing debt
Cash Flow Statement Two parts – cash inflow/cash outflow Step One: Records Your Income Step Two: Record Your Expenses Variable – Food, clothes, electricity,
medical costs, recreation
Step One: Records Your Income All income within a given month Discretionary Income – amount of money
left after paying for essentials
Step Two: Record Your Expenses Can be either fixed or variable Fixed – Cable TV, rent, bus fare Variable – Food, clothes, electricity,
medical costs, recreation
Step Three: Determine Your Net Cash Flow
Surplus – Extra money Deficient – More money spent than earned
Cash Flow StatementCash Flow Statement for Month Ending July 31, 2012
Income (Cash Inflow)
• Take home pay• Allowance• Savings account interest
• Total Income
$450 100 12$562
Expenses (Cash Outflow)•Fixed Expenses (cable tv, rent, commuter expenses)•Variable Expenses (recreation, clothing, take-out food)
• Total Expenses
$ 80
320
$400
Net Cash Flow $162
Evaluating Your Financial ProgressRatio Calculation Example Meaning
Debt Ratio Liabilities divided by net worth
$25,000/$50,000 = 0.5
Compare your liabilities to your net worth. A low debt ratio is desirable
Liquidity Ratio
Liquid assets divided by monthly expenses
$10,000/$4,000 = 2.5
Indicates number of months you would be able to pay your living expenses in case of an emergency. The higher the better.
Debt-payments Ratio
Monthly credit payments divided by take-home pay
$540/$3,600 = 15%
Indicates how much of a person’s earnings goes to pay debts (excluding mortgage). Most experts recommend a ration of less than 20%
Savings Ratio
Amount saved each month divided by gross monthly income
$600/$5,000 = 12%
Most financial experts recommend a saving ratio of at least 10%
Section 3.3 Objectives Identify the steps of creating a personal
budget Discuss the advantage of increasing your
savings
Budgeting for Financial Goals Step One: Set Your Financial Goals Step Two: Estimate Your Income Step Three: Budget for Unexpected Expenses Step Four: Budget for Fixed Expenses Step Five: Budget for Variable Expenses Step Six: Record What You Spend Step Seven: Review Spending and Saving
Patterns
Step 1: Set Your Financial Goals Take into consideration:
Career Lifestyle Values Hopes for the future
Be specific Use time frame (short, intermediate, long-
term)
Step 2: Estimate Your Income
Include all sources; paycheck, investments Estimate income best you can if it varies
from week to week
Step 3: Budget for Unexpected Expenses
Have emergency fund 3 to 6 months worth of living expenses
Step 4: Budget for Fixed Expenses Mortgage Car payments Student loans Insurance
Step 5: Budget for Variable Expenses
Medical costs Heating and cooling Other basic utilities
Step 6: Record What You Spend
Keep track of actual expenses and money paid out
Budget variance – difference between what was budgeted and what was spent – could be deficit or surplus
Step 7: Review Spending and Saving Patterns
Review financial progress Revise goals if needed
If deficits, ask where you can cut Use your financial goals to help decide what to
cut
Budget Sucessfully A good budget is:
Carefully planned Practical Flexible Written and easily accessible
Ways to Increase Your Savings Pay yourself first Payroll savings Spending less to save