Longwood University 201 High Street Farmville, VA 23901 Personal Finance Bennie Waller wallerbd@longwood.edu 434-395-2046 Longwood University 201 High Street Farmville, VA 23901

Financial Statements

Measuring your financial health Where does all your money go? Planning and budgeting requires control Evaluate your financial health Develop a plan of action

Balance sheets are used to measure wealth Measuring your financial health Balance sheets are used to measure wealth A snapshot of your financial status at a particular time. Assets you own Debt or liabilities you’ve incurred Your net worth or equity

Personal Balance Sheet

Personal Balance Sheet

Personal Balance Sheet See Example of Louise and Larry Tate Balance sheet in textbook and textbook PowerPoint slides.

Assets: what you own Assets are your possessions even if you owe money on them. Car, home, boat Cash or liquid assets Investments Other tangible assets such as furniture, jewelry, cars Assets are listed using their fair market value

Liabilities: what you owe Liabilities represent something that you owe and must be paid in the future. Current liabilities must be paid off within the next year. Utility bills, credit cards Long-term liabilities come due beyond a year. Home, car, student loans List only the unpaid balances.

Net Worth: A measure of wealth Net worth = total assets - total debt If liabilities > assets, you are said to be insolvent and to have negative net worth. If liabilities < assets, positive net worth.

Income Statement to trace your money An income statement shows where your money has come from and where it has gone over some period of time.

Personal Income Statement See example of Louise and Larry Tate’s Personal Income statement example in the textbook and textbook PowerPoints

Income Statement

How People Spend their Money

Financial Ratios Financial ratios allow you analyze raw data in the balance sheet or income statement then compare it to targets. Ratios help you understand how you are managing financial resources.

Liquidity ratios Question 1: Do I Have Enough Liquidity to Meet Emergencies? Current ratio: current assets divided by current liabilities. Month’s Living Expenses Covered Ratio: current assets divided by monthly living expenditures Should aim for 3 to 6 months of liquid assets maybe less with enough credit capacity

Other ratios Question 2: Can I Meet My Debt Obligations? Debt Ratio: total debt divided by total assets. This ratio should decrease as you get older. Long-term Debt Coverage Ratio: total income available for living expenses divided by total long-term debt payments Less than 2.5 is a red flag Savings Ratio: income available for saving and investments divided by income available for living expenses

Other ratios Question 3: Am I Saving as Much as I Think I Am? Savings Ratio: income available for saving and investments divided by income available for living expenses. Effective saving is by paying yourself first

Record keeping Good record keeping is needs for accurate taxes. It allows for the tracking and sources of expenses. Financial planning software is available and will help you to; Track your financial dealings. Credit card and check expenditures are easy to track, but cash expenditures must be tracked as they occur. File and store your financial records so they are readily accessible.

Thank You