2-2-11

McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

2 Money Management Skills

2-2-33 Money Management Skills

1. Identify the main components of wise money management

2. Create a personal balance sheet and cash flow statement

3. Develop and implement a personal budget4. Connect money management activities with

saving for personal financial goals

Chapter Objectives

2-2-44Objective 1: Identify the main components of wise money management

Daily spending and saving decisions are at the center of financial planning.

Decisions must be coordinated with your needs, goals, and personal situations.

Money management means the day-to-day financial activities necessary to manage personal economic resources, while working toward long-term financial security.

2-2-55 Opportunity Cost and Money Management

Spending money on current living expenses reduces the amount you can save and invest.

Saving and investing for the future reduces the amount you can spend now.

Buying on credit ties up future income. Using savings for purchases results in lost

interest and means savings can’t be used for other purposes.

Comparison shopping can save money but takes your valuable time.

2-2-66 Components of Money Management

Creatingand

implementinga plan forspending, and saving (budgeting).

Creatingpersonalfinancial

statements(balance

sheets andcash flow

statements of income

and outflow).

Storingand

maintainingpersonalfinancialrecords

anddocuments.

2-2-77Benefits of an Organized System of Financial Records

Handling daily business affairs, including payment of bills on time.

Planning and measuring financial progress. Completing required tax reports. Making effective investment decisions. Determining available resources for current

and future buying.

2-2-88 What to Keep in Your Home File

Items you refer to often.– Personal and employment records.– Money management records. – Tax records.– Financial services records.– Credit records.– Consumer purchase and auto records.– Housing records. – Insurance records.– Investment records.– Estate planning and retirement records.

2-2-99 What to Keep in a Safe Deposit Box

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 credit and banking account numbers.– Mortgage papers and titles.– List of insurance policy numbers.– Stock and bond certificates.– Coins and other collectibles.– Copy of will.

2-2-1010 Records on Personal Computer

Home computer.– Current and past budgets.– Summary of checks written and other banking

transactions.– Past income tax returns prepared with tax

preparation software.– Account summaries and performance

results of investments.– Computerized versions of wills,

estate plans, and other documents.

2-2-1111 How Long to Keep Records

Birth certificates, wills, and Social Security information should be kept indefinitely.

Keep records on personal property and investments as long as you own them.

Keep documents related to the purchase and sale of real estate indefinitely.

Copies of tax returns and supporting data should be kept six years.

2-2-1212Objective 2: Create a personal balance sheet and cash flow statements

Benefits of these statements Report your current financial position in

relation to the value of the items you own and the amounts you owe.

Measure your progress toward your financial goals.

Maintain information on your financial activities.

Provide information you can use when preparing tax forms or applying for credit.

2-2-1313Components of a Balance Sheet(Net Worth statement)

Assets – List what you own.– Liquid assets.– Real estate.– Personal possessions.– Investment assets.

Liabilities –Determine what you owe– Current liabilities (< 1 year). – Long term liabilities.

Compute your net worth.– Assets minus liabilities.– Insolvent means liabilities far exceed assets.

2-2-1414 Ways to Increase Net Worth

1. Increase your savings

2. Increase the value of your investments and other possessions

3. Reduce amount owed

2-2-1515Components of a Cash Flow Statement:Inflows and Outflows

Shows inflow and outflow during a given time period.

1. Record Income• Net income from employment (Net Pay)• Savings and investment income.• Other sources.

2. Record cash outflows.• Fixed and variable expenses

3. Determine Net Cash Flow Use this statement as a basis for creating a

spending, saving and investment plan.

2-2-1616Objective 3: Develop and implement a Personal Budget

Budget: is a plan for spending in the future, such as for the next month. A budget helps you…– Live within your income.– Spend your money wisely.– Reach your financial goals.– Prepare for financial emergencies.– Develop wise financial management habits.

2-2-1717 7 Steps in the Budgeting Process

1. Set financial goals.

2. Estimate income from all sources.

3. Budget amount for an emergency fund, periodic expenses and financial goals.

4. Budget set amounts that you are obligated to pay. These are your fixed expenses.

2-2-1818 7 Steps in the Budgeting Process

5 Budget estimated amounts that are to be spent for various household and living expenses. These are your variable expenses.

6 Record actual amounts for inflows and outflows, comparing actual amounts with budgeted amounts to determine variances. Deficits and surpluses.

7 Review your spending and savings patterns and evaluate whether revisions are needed in your savings and spending plans.

(continued)

2-2-1919 Characteristics of Successful Budgeting

Well planned. Realistic. Flexible. Clearly communicated.

2-2-2020Objective 4: Connect money management activities with savings for personal financial goals

Financial Statements and Budget allow you to achieve your financial goals with

1. Balance Sheet: telling you where you are now

2. Cash Flow Statement: telling you what you received and spent over the past month

3. Budget: How to plan, spend and save to achieve financial goals

2-2-2121 Changes in Net Worth

Changes in Net Worth result from cash inflows and outflows.

Outflows>Inflows – Draw from savings or borrow– Lower assets or higher liabilities

Inflows>Outflows– Put money into savings or pay off debts– Higher net worth

2-2-2222 Selecting a Saving Technique

1. Write a check each payday and deposit in a savings account

2. Use payroll deduction to deposit a certain amount in savings

3. Save coins or spend less on certain items

2-2-2323 Saving to Achieve Financial Goals

Common reasoning for saving include…– To set aside money for irregular and unexpected

expenses.– To pay for the replacement of expensive items,

such as appliances, cars or a down payment on a house.

– To buy special items like recreational equipment or to pay for a vacation.

– To provide for long-term expenses such as retirement or the education of children.

– To earn income from the interest on savings for use in paying living expenses.