CHAPTER THREE: CHAPTER THREE: MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
UNIT ONEUNIT ONEPLANNING PERSONAL FINANCESPLANNING PERSONAL FINANCES
“I didn't end up going bankrupt... I made some great investments and I held on to my money, which also enables me to have the freedom to do what I want now. But it's not about finances. No matter what, it's about keeping it real.”
-Vanilla Ice
CHAPTER THREE: CHAPTER THREE: MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
LESSON ONE – DETERMINING NET WORTHLESSON ONE – DETERMINING NET WORTH
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY• Every time you make a decision, you choose one thing and reject
another. What is that called?
• What is Money Management?
• When decisions regarding Money Management, you must always consider the financial trade-offs
• Trade-offs can be difficult to resolve because they may be benefits for each side
• How you can be sure you are making the right Money Management decision?
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY• Consider the factors that influence your decision making (i.e.
goals, values, wants, needs, etc.)
• Always set a financial objective (or goal) when you are ready to become financially independent
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
ORGANIZING FINANCIAL DOCUMENTS
• The first step of effective money management is to organize your personal financial documents
• There are several types of personal financial documents:
• Bank Statements
• Paycheck Stubs
• Ownership Titles (cars, boats, etc.)
• Tax Forms
• Monthly Budgets
• Cash Flow Spreadsheets
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
ORGANIZING FINANCIAL DOCUMENTS
• Organizing your personal financial documents will allow you to:• Plan and measure your financial progress
• Handle routine money matters (paying bills on time)
• Wealth forecasting
• Make effective decisions about how to save money
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
PERSONAL FINANCIAL STATEMENTS
• Personal Balance Sheet• also known as a “Net Worth Statement”
• Net worth is the difference between the amount that you own and the debts that you owe
• There are four steps to creating a personal balance sheet
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
PERSONAL BALANCE SHEETS
• STEP ONE: Determine Your Assets
• Assets are any items of value that an individual or company owns, including cash, property, personal possessions, and investments
• To determine assets, you must consider the four categories of wealth:
• Liquid Assets – cash, checking accounts, savings accounts, etc.
• Real Estate – land, houses, buildings (at market value)
• Personal Possessions – cars, furniture/appliances, electronics, etc.
• Investments - stocks, bonds, pensions, retirement accounts
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
PERSONAL BALANCE SHEETS
• STEP TWO: Determine Your Liabilities
• Liabilities are debts that you owe • There are two types of liabilities:
• Current Liabilities – medical bills, credit card bills, taxes
• Long Term Liabilities – mortgages, student loans, car loans
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
PERSONAL BALANCE SHEETS
• STEP THREE: Calculate Your Net Worth
• To calculate your net worth, you simply subtract your liabilities from your assets (A – L = Net Worth)
• Even if you have a high net worth, you may still have difficulty paying your bills (especially when your assets are not liquid)
• If you cannot pay your debts (or if your liabilities are greater than your assets) you will be considered insolvent
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
PERSONAL BALANCE SHEETS
• STEP FOUR: Evaluate Your Financial Situation
• You can use your personal balance sheet to evaluate your situation
• You should create a new balance sheet every few months
• You can increase your net worth by increasing your savings, increasing your investments, reducing your expenses, and/or reducing your debts
CHAPTER THREE: CHAPTER THREE: MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
LESSON TWO – CASH FLOW STATEMENTSLESSON TWO – CASH FLOW STATEMENTS
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
CASH FLOW STATEMENTS
• What is Cash Flow?
• Cash inflow (money you receive / income)
• Cash outflow (money you spend)
• A Cash Flow Statement is a summary of your cash flow during a particular period, usually a month or a year
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
CASH FLOW STATEMENTS
• There are three steps to creating a Cash Flow Statement
• STEP ONE: Record Your Income (inflow)
• List all your sources of income during a given month
• Only include “take-home pay” in on your statement
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
CASH FLOW STATEMENTS
• There are three steps to creating a Cash Flow Statement
• STEP TWO: Record Your Expenses (outflow)
• Break down expenses between “fixed” and “variable”
• Identify expenses prior to categorizing them
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
CASH FLOW STATEMENTS
• There are three steps to creating a Cash Flow Statement
• STEP THREE: Determine Your Net Cash Flow
• Subtract expenses from your income (I - E)
• A positive cash flow is known as a surplus
• A negative cash flow is known as a deficit
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
YOUR FINANCIAL POSITION
• Every time your cash flow changes, so does your net worth
• Whenever you experience a deficit, your net worth declines• Increase liabilities or reduce assets
• A surplus will result in an increase of net worth
• Increase assets or reduce liabilities
• Net worth and Cash Flow can give you additional information on your financial situation (Figure 3.4)
CHAPTER THREE: CHAPTER THREE: MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY
LESSON THREE – FINANCIAL CALCULATIONSLESSON THREE – FINANCIAL CALCULATIONS
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGYYOUR FINANCIAL POSITION
• DEBT RATIO: Total Liabilities / Net Worth• The lower the better
• LIQUIDITY RATIO: Liquid Assets / Monthly Expenses• Indicates the number of months your would be able to pay your living
expenses… the higher the better
• DEBT – PAYMENTS RATIO: Mo. Credit Paymnts / Take Home Pay• Indicates how much of a person’s earning go to debts (excluding mortgage)
– should be less than 20%
• SAVINGS RATIO: Amount Saved Each Month / Gross Monthly Income (should be at least 10%)
MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGYCLASS WORKCLASS WORK
• Complete THINK CRITICALLY, USE MATH SKILLS, and SOLVE MONEY PROBLEMS on page 73 of your textbook
• QUIZ on Wednesday (Take-home)
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