Chapter 5

Money Management Strategy

Section 3.1

Standard and Poor’s pg. 58 Organizing your Personal Financial Records

Introductory Paragraph

Opportunity Costs and Money Management Common trade-offs see. Pg. 59 bullet list Other ways to save money: Price shop,

what trade-offs do you make by price shopping?

Whats your Financial ID? Pg. 60 When spending money think of the

following: Your values, Your Goals, and the State of your bank account

Benefits of Organizing Financial Documents 1st step to effective money management is

to organize your personal financial documents

Possible financial documents: Bank statements, paycheck stubs, sales receipts

Not as commonly thought of: Car titles, birth certificates, tax forms

Benefits of organizing your documents Ease of finding needed materials Plan and measure your financial progress Handle routine money matters, such as

depositing paychecks in the bank and paying bills on time

Determine how much $ you have available to spend now and in the future

Make effective decisions about how to save money

Where to keep your documents

Home Files: Folder system, file cabinet, shoebox, should be simple and allow quick access to documents. If keeping important documents in the home consider a

safe or lock box

Safe-Deposit Boxes: Small secure stage compartment that you can rent in a bank, usually under $100 to rent– Usually kept in fire proof room, two keys to unlock,

wise idea to keep copies at home as well

Continued

Home Computers: Can buy special software programs to track expenses/checks

Good to use for tracking a checking account Allows you to easily compare month to

month expenses What measures should you consider if using

home computer? See figure 3.1 pg. 64

Section 3-2

Personal Financial Statements

The Personal Balance Sheet: What are you worth now? For a complete look at your financial

situation you should create a personal balance sheet and a cash flow statement. Known as personal financial statements

Personal Financial Statements: Documents that provide information about your current financial position and present a summary of your income and spending

Personal Financial Statements can 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

To evaluate your financial situation Create a balance sheet Balance sheet (net worth statement):

Financial statement that lists the items of value that you own, the debts that you, and your net worth

Net Worth: The difference between the amount that you own and the debts that you owe.

Steps to Create a Balance Sheet Step 1) Determine your Assets: Any items of value that you

own (cash, personal property, personal possessions, investments)

To determine your assets you need to consider 4 categories of wealth

1. Liquid Assets: Cash and items that can be quickly converted to cash

2. Real Estate: Land that a person or family owns, and anything on it, record the market value or price at which you could sell the property

3. Personal Possessions: Anything valuable that is not real estate, record current market value (golf club example)

4. Investment Assets: Retirement accounts, stocks, bonds. Long term financial needs

Step 2) Determine Your Liabilities Liabilities: Debts that you owe Ex: Borrow money from parents to buy a

computer. Effects both assets and liabilities Current Liabilities: Short-term liabilities,

have to be paid within 1 year. Long-Term Liabilities: Debts that don’t

have to be fully repaid for at least a year (car loans, student loans, mortgages)

Liabilities include only those things you owe for longer then a month

Step 3) Calculate Your Net Worth Assets – Liabilities = Net Worth Net worth doesn’t necessarily mean you

have that much to spend People often have money problems when

they have too many assets that aren’t liquid See Figure 3.2 pg. 69 Insolvency: Condition that occurs if your

liabilities are greater than your assets

Step 4) Evaluate your Financial Situation Update balance sheet or make a new one

every month or chart your changes overtime Increase net worth by increasing your

savings, increasing value of your investments, reducing expenses, or reducing your debts

See Careers in Finance pg. 70

The Cash Flow Statement: Income Versus Expenses Cash Flow: The money that actually goes into and

out of your wallet and bank accounts Cash Inflow: Money you receive or your income Cash Outflow: All the money you spend Cash Flow statement is a summary of your cash

flow during a particular period, usually a month or year

Shows your spending patterns

Steps to Creating a Cash Flow Statement Step 1) Record your Income Record all your income for a month, and record as cash

inflow Record exact amount, amount after taxes Take-home pay: Net pay, amount of income left after

taxes and other deductions are taken out of your gross pay

Add interest into statement Discretionary income: The money left over after you

have paid for essentials. The higher your discretionary income the better

What is tax money going towards?

Step 2) Record your Expenses Two basic types: Fixed and Variable Fixed Expenses: Those that are more or less

the same each month Variable Expenses: Those that may change

from month to month Total of Fixed and Variable expenses is

your cash outflow

Step 3) Determine Your Net Cash Flow Income – Expenses= Net Cash Flow Surplus: Positive net cash flow Deficit: Spend more than you earn or

receive What is best way to improve your cash

flow?

Analyzing your Financial Position from your Personal Financial Statements As net cash flow changes so does net worth To make up for deficit you can borrow or

draw from savings, either way net worth declines

If extra money at end of month net worth increases, can save money or pay off debts

Section 3-3

Characteristics of a Successful Budget

Carefully Planned: No guesses, cover all expenses

Practical: Be Realistic Flexible: Unexpected expenses, shifts in

income as well. Needs to be easy to revise Needs to be written and easily accessible Pg. 135

Ways to Increase your Savings

Key to establishing your financial future Methods: Set aside fixed amount each time you pay your

bills Percentage of monthly income Payroll savings deduction Money saved each day, put in jar/extra change Pay credit card off each month