Chapter 3 Money Management Strategy

Personal Financial Statements Section 3.2

Calculating Your Net Worth O wner’s E quity (aka Net Worth) L iabilities (What you owe) A ssets (What you own) Assets—any items of value that an individual or company owns, including cash, property, personal possessions, and investments Liabilities—debts that you owe Net Worth—the difference between the amount that you own and the debts that you owe

Calculating Your Net Worth Ex. $140,000 - $105,000 = $35,000 Net Worth Ex. $100,000 - $120,000 = -$20,000 Net Worth Negative net worth is called insolvency (Liabilities>Assets) O wner’s E quity (aka Net Worth) L iabilities A ssets

Celebritynetworth.com Chris Tucker LeBron James Bill Gates Kim Kardashian Eli Manning Lindsay Lohan

Cash Flow Statement: Income vs. Expenses Cash flow*: Cash inflow aka income* Ex. Take home pay, gifts, interest from savings accounts, etc. Cash outflow aka expenses* Ex. Bills, recreation, clothing, etc. Cash Flow—the money that goes into and out of your wallet and bank accounts Income—the money you receive Expenses—all of the money you spend

Step 1: Record Your Income Gross pay – taxes & other deductions = Net Pay (aka Take-Home Pay*) Take-home pay + interest & “windfall” income = Inflow Take-home pay (net pay)—the amount of income left after taxes and other deductions are taken out of your gross pay

Step 2: Record Your Expenses Two Types: Fixed Expenses—expenses that are (for the most part) the same each month Ex. Rent, cable, etc. Variable Expenses—expenses that change from month to month Ex. Clothing, food, electricity Fixed + Variable Expenses = Outflow

Step 3: Determine your Net Cash Flow Ex. $800 – $550 = $250 Ex. $800 – $875 = -$75 If positive—SURPLUS* If negative—DEFICIT* Income – Expenses = Net Cash Flow Surplus—extra money that can be spent or saved, depending on a person’s financial goals and values Deficit—the financial situation that occurs when more money is spent than is earned or received

Money Rules #59

Budgeting for Financial Goals Section 3.3

Step 1: Set Financial Goals Your budget* should help you reach your goals Goals—the things you want to accomplish with your money Budget—a plan for using money to meet wants and needs

Step 2: Estimate Your Income Include all sources of income you know you will be receiving Ex. 12 hours/week * $8.50/hour * 4 weeks Do not include money you may or may not be getting (“windfall” ex. Gifts, bonuses)

Step 3: Budget for Unexpected Expenses and Savings Set aside money for: Emergency fund (unexpected expenses) Savings for short and long term goals Ex. Vacation, college, new car

Step 4: Budget for Fixed Expenses List expenses that do not change from month to month Ex. Mortgage or rent, insurance, etc.

Step 5: Budget for Variable Expenses List expenses that vary from month to month Ex. Food, utilities, recreation How to estimate Average previous months When in doubt, round up

Step 6: Record What You Spend Keep track of actual amounts of income and expenses Compare budgeted amount (estimate) to actual amount Difference = budget variance* Surplus—spent less than you planned; “under budget” Deficit—spent more than you planned; “over budget” Budget Variance—the difference between the budgeted amount and the actual amount that you spend

Step 7: Review Spending and Saving Patterns Review and make changes as necessary Ex. If you are always OVER budget (spending more than you plan), you need to CUT BACK! Ex. If you are always UNDER budget (spending less than you plan), you can allocate more to savings!

Money Rules #10