Statement of Financial Position Who is wealthier? Ian Income $30,00 Net Worth $45,000 Mitchell...
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Transcript of Statement of Financial Position Who is wealthier? Ian Income $30,00 Net Worth $45,000 Mitchell...
BUDGETING AND SAVING MONEY
Statement of Financial PositionWho is wealthier?
Ian
Income $30,00
Net Worth $45,000
•Mitchell
•Income-$85,000
•Net Worth-$28,000
Statement of financial position
Your net worth = wealth!Net worth: the objective measure of financial
wealth.Wealth: Measurement of how much a
person or household owns once all debts have been paid
Net Worth Net Worth is more about how you
MANAGE your income.Someone can have a high income, but low
net worth.Living within your means will help build your
net worth. Your net worth is actually the difference
between your assets and liabilities.
How do you determine your net worth? Statement of financial
position: that describes an individual or family’s financial condition on a specified date. Uses assets, liabilities, and net
worth.
3 components of Statement of Financial Position:1. Assets
2. Liabilities
3. Net worth
Assets
Asset: everything a person owns with monetary valueCan be cashCan also be value of personal possessions
Examples: Checking account, savings account, money in stocks, value of current home or car
○ The value of these assets must be what you can realistically sell them for TODAY, not the purchase price. Kellybluebook.com
Liabilities
Liabilities: debt or obligations owed to othersCan be bills or loans that are due
Can also be value owed on credit cards
Liabilities
What is recorded in the liabilities section of a personal financial statement?The amount you owe if you were to pay the
amount owed in full today.○ Example: You have an auto loan that you pay
$180 per month on; if you continued payments till it was paid off $6300.
○ If paid the loan off in full today $5490 Amount recorded on statement.
Net Worth The difference between your liabilities
and your assets is your Net Worth.Assets – Liabilities = Net worth
Assets Liabilities
Checking Account $540Savings Account $3250
Current Bills Due $1,250Credit Cards Owed $4500
Stocks & Bonds $10,000Home Value $92,000 Mortgage Owed $68,000
Car Value $2,300Total: $108,090 Total $73,750
Net Worth:$34,340
How to increase Net Worth Your net worth increases when your
assets increase or your liabilities decrease.
Ideal assets Ideal Liabilities
Update your personal financial statement at least once a year, Especially if there are dramatic changes to assets or liabilities
How to Increase Net Worth By properly using money management
tools!Statement of financial position (updated
yearly)Income and Expense StatementUsing a spending plan
So…Who is wealthier?
Ian
Income $30,00
Net Worth $45,000
•Mitchell
•Income-$85,000
•Net Worth-$28,000
Income and Expense Statement
Jessica is paid once a month. She puts enough money in the bank to
cover her expenses every month; but still runs out of money before all expenses are paid.
Meet Jessica…
Expense Amount
Rent/Utilities $500
Health Insurance $100
Renter’s Insurance
$10
Car Insurance $40
Gas $100
Groceries $100
Cell phone $70
Personal Care $30
Entertainment $50
Total $1000
-Jessica made a list of all her expenses
-Doesn’t expect to have more than $1000 in expenses every month; but still runs out!
-Where is her money going?
Jessica…
Jessica forgot to account for the $1.50 coffee she buys every morning and the lunch she has with friends about once a week.
$1.50 $45 $540 on Coffee! $8.00 $32 $416 on Lunch!
○ Jessica is forgetting $77 that she thinks is minimally nothing!
The costs add upItem Avg Cost Of
ItemCost/Month if purchased daily
Approximate cost per year if purchased daily
16 oz pop $1-$2 $30-$60 $365-$730
16 oz Energy Drink
$2-$3 $60-$90 $730-$1095
16 oz Starbucks coffee
$2.50-$4 $75-$120 $900-$1440
Candy Bar $1 $30 $360
Income and Expense Statement
A statement that lists and summarizes income and expense transactions that have taken place over a specific period of time, usually a month or year.
○ Can help evaluate past financial decisions to increase net worth
Income and Expense Statement
3 ComponentsIncome: Money receivedExpenses: money spentNet Gain/Net Loss: Your income minus your
expenses
Spending Plans
Think of a personal/financial goal. Based on your current spending, is it
realistic to achieve your goal? Think of how you can adjust your
spending to achieve this goal…This is the beginning of a spending plan!
Spending Plan
A document used to record both planned and actual income and expenses over a period of time.
A BUDGET!
Spending Plan
Look at your current financial position and how you have managed money in the past.
Determine what changes to make & then make changes!
Why is a spending plan so important for financial planning?
Manage $ in a positive manner Increase net worth Help set and reach goals Analyze opportunity costs and trade offs
to maximize financial well being