CHAPTER THREE: MONEY MANAGEMENT & STRATEGY UNIT ONE PLANNING PERSONAL FINANCES “I didn't end up...

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CHAPTER THREE: CHAPTER THREE: MONEY MANAGEMENT & MONEY MANAGEMENT & STRATEGY STRATEGY UNIT ONE UNIT ONE PLANNING PERSONAL FINANCES PLANNING 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

Transcript of CHAPTER THREE: MONEY MANAGEMENT & STRATEGY UNIT ONE PLANNING PERSONAL FINANCES “I didn't end up...

Page 1: CHAPTER THREE: MONEY MANAGEMENT & STRATEGY UNIT ONE PLANNING PERSONAL FINANCES “I didn't end up going bankrupt... I made some great investments and I held.

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

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CHAPTER THREE: CHAPTER THREE: MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY

LESSON ONE – DETERMINING NET WORTHLESSON ONE – DETERMINING NET WORTH

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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?

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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

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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

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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

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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

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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

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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

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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

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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

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CHAPTER THREE: CHAPTER THREE: MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY

LESSON TWO – CASH FLOW STATEMENTSLESSON TWO – CASH FLOW STATEMENTS

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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

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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

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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

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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

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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)

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CHAPTER THREE: CHAPTER THREE: MONEY MANAGEMENT & STRATEGYMONEY MANAGEMENT & STRATEGY

LESSON THREE – FINANCIAL CALCULATIONSLESSON THREE – FINANCIAL CALCULATIONS

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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%)

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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)