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Money Management Skills:

Financial Statements and Budgeting

Or

“We Spent How Much On What?!”

CHAPTER 2

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Money Management, Defined

Money Management – Day-to-day financial activities necessary to

manage current personal economic resources while working toward long-term financial security

“How Come We Always Have Too Much Month at the End of the Money!”

3

Major Money Management Activities

Store and maintain personal financial records and documents

Create personal financial statements Cash Flow Statement (income vs. expenses) Net Worth Statement (assets vs. liabilities)

Create and implement a plan for spending and saving (Arrgh! Budgeting!)

4

Why Keep Financial Records?

To help make spending decisions To plan future spending To pay bills on time To see changes in net worth To make good investment decisions To prepare your income tax forms In preparation of applying for a loan

So you know what is happening to your money!

5

What to Keep in Your Home File Items you refer to often

Personal and employment records Tax records Financial services records Money management records Credit records Consumer purchase records Insurance records Investment records Housing and car records Estate planning and retirement records

6

Safe deposit box is for records and items that would be hard to replace Birth, marriage and death certificates Citizenship and military papers Adoption and custody papers Serial numbers and photos of valuables CDs and account numbers Mortgage papers and titles List of insurance policy numbers Stock and bond certificates Coins and collectibles Copy of will

Discussion: What about

just buying a home safe?

What to Keep in Your Safe Deposit Box

7

Other Places to Keep Records Automobile

Vehicle registration (I disagree)

Lawyer or Executor or Both Original of your will & other estate documents

Home computer (Encrypted?) Current and past budgets Checking account records Wills, estate plans, investments Past income tax returns

www.pgp.com

8

Successful Budgets Are...

Well plannedRealisticFlexibleClearly communicatedNext To Impossible!

Discussion: Does Budgeting ever work?

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Saving is easier than Budgeting

“Spend Less Than You Earn”“Live Beneath Your Means”“Pay Yourself First”“Make Love, Not Loans!”

Discussion: The “Pay Yourself 10% First” SolutionIs it reasonable?

For those of you old enough to remember (or are into vinyl music), do I sound like a broken record?

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The Extreme Viewpoint

Keep a small notebook with you at all times

Record every monetary transaction you make No matter how small

Update your cash flow statement constantly

Devotees of “Your Money or Your Life”www.simplelivingforums.net

Did anyone check out their forums?

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Personal Financial Statements

Net Worth Statement “A snapshot of your financial situation” Assets versus Liabilities a.k.a. Balance Sheet

Cash Flow Statement “The movie of your financial life” Income versus Expenses a.k.a. Income Statement, Budget

Let’s look at each one in detail…

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Components of a Net Worth Statement(a.k.a. Balance Sheet)

Assets – What You Own Liquid assets Real estate Personal possessions Investment assets

Liabilities – What You Owe Current liabilities – One year or less (a.k.a. short-term) Long-term liabilities – Greater than one year

Net Worth – What You Have Left Over Assets minus liabilities Insolvent means liabilities far exceed assets

Rule of thumb: If short-term liabilities >= income …

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Components of a Cash Flow Statement(a.k.a. Income/Expense Statement, Budget)

Shows inflow and outflow during a given time period – Income versus Expenses Record cash inflows

Income from employment Savings and investment income Other sources

Record cash outflows Fixed and variable expenses Net cash flow can be a surplus or a deficit

Used as a basis for creating a spending, saving, and investment plan

Insolvency is better determined

here.

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Cash Flow / Net Worth

Let’s start on those financial documents…