Organizing Financial Records Chapter 3

Opportunity Costs and Money Management Trade-offs and financial decisions Trade-offs and financial decisions Money management: planning how to get the most from your money Money management: planning how to get the most from your money Paycheck in bank or spend it Paycheck in bank or spend it Good reasons for both make the choice hard Good reasons for both make the choice hard You can never be 100% sure you made the right choice You can never be 100% sure you made the right choice

Benefits of Organizing Your Financial Documents Organize, organize, organize! Organize, organize, organize! Records that don’t relate to your day-to-day use of money Records that don’t relate to your day-to-day use of money Examples: Automobile ownership titles, birth certificates, and tax forms Examples: Automobile ownership titles, birth certificates, and tax forms

Benefits of organizing: Benefits of organizing: Plan and measure your financial progress Plan and measure your financial progress Handle routine money matters, such as paying bills on time Handle routine money matters, such as paying bills on time Determine how much money you will have now and in the future Determine how much money you will have now and in the future Make effective decisions about how to save money Make effective decisions about how to save money

Critical Thinking Question: Some people like to wait until an item they want goes on sale before they buy it. Some people like to wait until an item they want goes on sale before they buy it. When might this be a wise money management strategy? What might it make more sense to go ahead and buy the item, even if it is not on sale?

Where to Keep Your Financial Documents Home file Home file Safe-deposit box Safe-deposit box Computer Computer All three! All three!

Critical Thinking Question: Why might it be necessary to have easy access to auto repair records, bank statements, and receipts for purchases such as clothes or video games? Why might it be necessary to have easy access to auto repair records, bank statements, and receipts for purchases such as clothes or video games?

Home Files Simple to set up Simple to set up Examples: Examples: File drawer, several folders, cardboard box File drawer, several folders, cardboard box To make good use of what you have To make good use of what you have Sort through all your personal financial records and arrange by type of document Sort through all your personal financial records and arrange by type of document

Home Files Types of documents to keep in the home file: Types of documents to keep in the home file: Bank statements for checking account Bank statements for checking account No hard-to-replace documents No hard-to-replace documents Car title or paperwork related to a mortgage loan Car title or paperwork related to a mortgage loan Does not protect against fire, water, or theft Does not protect against fire, water, or theft

Safe-Deposit Boxes Important documents Important documents Car titles and mortgage loan papers Car titles and mortgage loan papers sonal/box_price.html sonal/box_price.html sonal/box_price.html sonal/box_price.html Kept in a locked, fireproof room Kept in a locked, fireproof room Only accessible during bank business hours Only accessible during bank business hours

Safe-Deposit Boxes Holder of the box has one key and bank keeps the other Holder of the box has one key and bank keeps the other Only accessible with both keys Only accessible with both keys Financial institution has insurance to cover losses Financial institution has insurance to cover losses Home fire-safe boxes Home fire-safe boxes

Home Computers Can not store rental agreements and cancelled checks Can not store rental agreements and cancelled checks Software designed for keeping records Software designed for keeping records Quicken Quicken QuickBooks QuickBooks Microsoft Money Microsoft Money

Critical Thinking With a partner discuss and write down possible advantages and disadvantages for each of three types of personal finance filing systems. With a partner discuss and write down possible advantages and disadvantages for each of three types of personal finance filing systems. Home Files Home Files Safe-Deposit Boxes Safe-Deposit Boxes Home Computers Home Computers

Section 3.2 Personal Financial Statements For a complete look at your financial situation create a personal balance sheet and a cash flow statement For a complete look at your financial situation create a personal balance sheet and a cash flow statement Personal financial statement: a document that provides information about an individual’s current financial position and presents a summary of income and spending Personal financial statement: a document that provides information about an individual’s current financial position and presents a summary of income and spending

Personal financial statements can help you: Personal financial statements can help you: Determine what you own and what you owe Determine what you own and what you owe Measure your progress toward your financial goals Measure your progress toward your financial goals Track your financial activities Track your financial activities Organize information that you can use when you file your tax return or apply for credit Organize information that you can use when you file your tax return or apply for credit

Steps to Create a Personal Balance Sheet: Net worth: difference between the amount that you own and the debts that you owe Net worth: difference between the amount that you own and the debts that you owe Step 1: Determine Your Assets Step 1: Determine Your Assets Assets are items of value Assets are items of value Wealth an abundance of valuable material possessions or resources Wealth an abundance of valuable material possessions or resources Categories are: Categories are: Liquid assets, real estate, personal possessions, and investment assets Liquid assets, real estate, personal possessions, and investment assets

Assets Liquid Assets Liquid Assets Items that can be quickly converted to cash Items that can be quickly converted to cash Real Estate Real Estate Land and structures Land and structures Market value: what the property would sell for Market value: what the property would sell for Personal Possessions Personal Possessions Any other valuable belonging Any other valuable belonging Cars, collectables, antiques, ext. Cars, collectables, antiques, ext. Investment Assets Investment Assets Retirement accounts, securities, stocks and bonds Retirement accounts, securities, stocks and bonds

Critical Thinking Questions: What items do you have that might be valuable? What items do you have that might be valuable? How can you find out? How can you find out?

Steps to Create a Personal Balance Sheet: Step 2: Determine Your Liabilities Step 2: Determine Your Liabilities Current Liabilities: short-term debts to be paid within the year Current Liabilities: short-term debts to be paid within the year Medical bills, cash loans, and taxes Medical bills, cash loans, and taxes Long-Term Liabilities: don’t have to paid fully for at least a year Long-Term Liabilities: don’t have to paid fully for at least a year Student loans and mortgage loans Student loans and mortgage loans

Steps to Create a Personal Balance Sheet: Step 3: Calculate Your Net Worth Step 3: Calculate Your Net Worth Assets – Liabilities = Net Worth Assets – Liabilities = Net Worth Net worth does not mean how much cash you have Net worth does not mean how much cash you have Insolvency: financial state that occurs if liabilities are grater than assets Insolvency: financial state that occurs if liabilities are grater than assets

Steps to Create a Personal Balance Sheet: Step 4: Evaluate Your Financial Situation Step 4: Evaluate Your Financial Situation Use balance sheet as discussed earlier Use balance sheet as discussed earlier As a rule you can increase net worth by increasing your savings, increasing your investments, reducing your expenses, and/or reducing your debts As a rule you can increase net worth by increasing your savings, increasing your investments, reducing your expenses, and/or reducing your debts

Cash Flow Statement: Income Versus Expenses Cash flow: money that goes in and out of your wallet and bank accounts Cash flow: money that goes in and out of your wallet and bank accounts Income: money you receive Income: money you receive To create a cash flow statement follow these steps: To create a cash flow statement follow these steps: Record your income Record your income Record your expenses Record your expenses Determine your net cash flow Determine your net cash flow

Cash Flow Statement: Step 1: Record Your Income Step 1: Record Your Income List all sources of income during a given month List all sources of income during a given month Record the exact amount Record the exact amount Take-home pay: net pay Take-home pay: net pay Take-home pay + interest earnings on investments and savings = Cash Inflow Take-home pay + interest earnings on investments and savings = Cash Inflow Discretionary income: money left over after paying essentials (food, clothing, ext.) Discretionary income: money left over after paying essentials (food, clothing, ext.)

Cash Flow Statement: Step 2: Record Your Expenses Step 2: Record Your Expenses Fixed: Amount stays the same month to month Fixed: Amount stays the same month to month Cable Television charges, rent, bus fare, ext. Cable Television charges, rent, bus fare, ext. Variable: Amount changes month to month Variable: Amount changes month to month Food, clothing, electric, ext. Food, clothing, electric, ext.

Cash Flow Statement: Step 3: Determine Your Net Cash Flow Step 3: Determine Your Net Cash Flow Income – Expenses Income – Expenses Surplus: extra money Surplus: extra money Deficit: money spent is greater than money earned Deficit: money spent is greater than money earned

Your Financial Position When net cash flow changes so does net worth When net cash flow changes so does net worth To make up for deficit: To make up for deficit: Borrow money ( Liabilities) Borrow money ( Liabilities) Draw from savings ( Assets) Draw from savings ( Assets)

Section 3.3 Budgeting for Financial Goals Budget: plan for using money to meet wants and needs Budget: plan for using money to meet wants and needs Step 1: Set your financial Goals Step 1: Set your financial Goals What do you want to do today that will effect tomorrow What do you want to do today that will effect tomorrow Make goals as specific as possible Make goals as specific as possible

Preparing a Practical Budget Step 2: Estimate your income Step 2: Estimate your income Income for next month Income for next month Don’t include money you MAY get Don’t include money you MAY get Figure 3.5 on page 76 Figure 3.5 on page 76 Step 3: Budget for unexpected expenses Step 3: Budget for unexpected expenses Losing a job, accidents, fire, ext. Losing a job, accidents, fire, ext.

Preparing a Practical Budget Step 4: Budget for fixed expenses Step 4: Budget for fixed expenses Items that don’t change month to month Items that don’t change month to month Step 5: Budget for variable expenses Step 5: Budget for variable expenses Items that vary from month to month Items that vary from month to month

Critical Thinking What emergency do you think you should save for? What emergency do you think you should save for? How much do you think you should have saved? How much do you think you should have saved?

Preparing a Practical Budget Step 6: Record what you spend Step 6: Record what you spend If you spend money on it, WRITE IT DOWN! If you spend money on it, WRITE IT DOWN! Budget variance: difference between the budgeted amount and the actual amount Budget variance: difference between the budgeted amount and the actual amount Step 7: Review spending and saving patterns Step 7: Review spending and saving patterns Budgeting is a continual process, you should review monthly Budgeting is a continual process, you should review monthly

Reviewing Financial Progress Reviewing Financial Progress If you spend more then you make you should review your spending If you spend more then you make you should review your spending Revising Goals and Adjusting Your Budget Revising Goals and Adjusting Your Budget If you always have deficits, ask yourself where you can cut your expenses If you always have deficits, ask yourself where you can cut your expenses

Money Saving Tips: Have Fun for Less Rent movie videos or DVDS or go to a matinee with friends Rent movie videos or DVDS or go to a matinee with friends Call a museum; many offer free admission one day a month Call a museum; many offer free admission one day a month Check with your local parks for free music concerts Check with your local parks for free music concerts Volunteer as an usher at a theater to see plays or concerts for free Volunteer as an usher at a theater to see plays or concerts for free Look in your newspaper’s calendar section for free events Look in your newspaper’s calendar section for free events

How to Budget Successfully Plan a good budget Plan a good budget Important characteristics: Important characteristics: A good budget is carefully planned A good budget is carefully planned A good budget is practical A good budget is practical A good budget is flexible A good budget is flexible A good budget must be written and easily accessible A good budget must be written and easily accessible

Ways to Increase Your Savings Pay Yourself First Pay Yourself First Consider your savings as fixed income Consider your savings as fixed income Payroll Savings Payroll Savings Portion of earnings are automatically deducted to savings account Portion of earnings are automatically deducted to savings account Spending Less to Save Spending Less to Save Save now and start small Save now and start small Go to the cheaper matinee movie over the expensive night rate Go to the cheaper matinee movie over the expensive night rate

Quick Tip Be a smart consumer and pay off your credit card bills before you put money away in a savings account. The interest rate charged on credit cards is usually higher than the interest you can earn from your savings account. Be a smart consumer and pay off your credit card bills before you put money away in a savings account. The interest rate charged on credit cards is usually higher than the interest you can earn from your savings account.