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