CHAPTER 3

MONEY MANAGEMENT STRATEGY

WHAT YOU’LL LEARN

• When you have completed this section (3.1), you’ll be able to:

• Discuss the relationship between opportunity costs & money management

• Explain the benefits of keeping financial records and documents.

• Describe a system to maintain personal financial documents.

ORGANIZING FINANCIAL RECORDS (3.1)

• Opportunity costs & money management• By considering your values, goals, & current state of your bank

account, you can make better spending decisions.

• Benefits of organizing your financial documents (paycheck stubs, bank statements, etc.)• Why it’s important to have a system?• Find documents quickly• Plan & measure financial progress• Handle routine money matters (pay bills on time)

• Where to keep your financial documents? (Figure 3.1 pg. 62)• Home files• Safe-deposit boxes• Home computers

PERSONAL FINANCIAL STATEMENTS (3.2)

• Personal financial statement - summary of your income & spending

• Net worth – difference between what you own & debts that you owe.

• Personal Balance Sheet Steps• Step 1: determine your assets– Assets– Wealth– Liquid assets– Real estate

• Market value– Personal possessions– Investment assets

STEP 2: DETERMINE YOUR LIABILITIES

• Liabilities – debts that you owe

• Current liabilities – short-term debts (ex. Medical bills)

• Long-term liabilities – take longer than a year to pay off (car or home loan)

• Step 3: calculate your net worth = assets - liabilities

• Insolvency occurs when liabilities exceed assets

STEP 4: EVALUATE YOUR FINANCIAL SITUATION

• As a rule, you can increase your net worth by…

• Increasing your savings • Increasing investments • Reducing expenses• Reducing debts

CASH FLOW STATEMENT: INCOME VERSUS EXPENSES

• Cash flow – money that actually goes into (inflow) & out of your wallet (outflow)

• Income – paycheck from job, allowance from parents, interest from bank account

• Steps for cash-flow statement• Step 1: record your income– Take-home pay– Discretionary income• Step 2: record your expenses• Step 3: determine your cash flow– Surplus– deficit

BUDGETING FOR FINANCIAL GOALS (3.3)

• Budget – plan for using money to meet wants & needs.

• Step 1: Set Your Financial Goals• Step 2: Estimate Your Income• Step 3: Budget for Unexpected Expenses• Step 4: Budget for Fixed Expenses• Step 5: Budget for Variable Expenses– Consumer price index (CPI)

• Step 6: Record What You Spend (budget variance)• Step 7: Review Spending & Saving Patterns– Reviewing financial progress– Revising goals & adjusting your Budget

HOW TO BUDGET SUCCESSFULLY

• A budget should have several important characteristics:

• Carefully planned budget

• Practical

• Flexible

• Written & easily accessible

WAYS TO INCREASE YOUR SAVINGS

• Pay yourself first

• Payroll savings

• Spending less to save