Personal Finance Garman/Forgue Ninth Edition Chapter 3: Financial Statements, Tools, and Budgets PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Identify your financial values, goals, and strategies. Use balance sheets and cash-flow statements to measure your financial health and progress. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Evaluate your financial strength and progress using financial ratios. Maintain the financial records necessary for managing your personal finances. Outline and work toward achieving your financial goals through budgeting. Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Values, Goals, and Strategies Financial Planning: Managing income and wealth continuously through life to meet financial goals. Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Values, Goals, and Strategies Values define your financial success. Financial goals follow from values. Financial Goals: Specific objectives to be attained through financial planning and management efforts. Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Values, Goals, and Strategies Financial strategies guide your financial success. Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Statements Financial Statements measure your financial health and progress. Balance Sheet (or Net Worth Statement) Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Statements Components of the balance sheet: Assets Liabilities Net Worth Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Statements Assets: What Is owned Monetary Assets (or liquid assets or cash equivalents) Tangible (or use) assets Investment (or capital) assets Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Statements Liabilities: What Is owed Short-term (or current) liability Long-term liability Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Statements Net Worth: What is left Copyright ©Houghton Mifflin Company. All rights reserved.

Strategies to Increase Your Net Worth Increase Assets. Decrease Liabilities. or both! Copyright ©Houghton Mifflin Company. All rights reserved.

Cash-Flow Statement The Cash-Flow Statement tracks where your money came from and went. Income Expenses Surplus (or Net Gain or Net Income) Deficit (or Net Loss) Copyright ©Houghton Mifflin Company. All rights reserved.

Cash-Flow Statement Expenses Fixed Expenses Variable Expenses Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Ratios Basic liquidity ratio Liquidity: The speed and ease with which an asset can be converted to cash. Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Ratios Asset-to-debt ratio Do you have enough assets compared to liabilities? Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Ratios Debt service-to-income ratio Can you meet your total debt obligations? Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Ratios Debt payments-to-disposable income ratio Can you pay your debts? Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Ratios Investment assets-to-total assets ratio Do you need to invest more? Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Record Keeping Financial record keeping saves time and makes you money. Financial Records: Documents that evidence financial transactions. Copyright ©Houghton Mifflin Company. All rights reserved.

Budgeting Budget: A paper or electronic document used to record both planned and actual income and expenditures over a period of time. Copyright ©Houghton Mifflin Company. All rights reserved.

Budgeting Rules for successful budgeting: Keep it simple. Make it personal. Keep it flexible. Be positive. Copyright ©Houghton Mifflin Company. All rights reserved.

Budgeting – Action Before Set financial goals. Long-term goals Intermediate goals Short-term goals Copyright ©Houghton Mifflin Company. All rights reserved.

Budgeting – Action Before Make and reconcile budget estimates. Take-home pay (or disposable income) Copyright ©Houghton Mifflin Company. All rights reserved.

Budgeting – Action Before Revise budget estimates. Earn more income. Cut back on expenses. Try a combination of more income and fewer expenses. Copyright ©Houghton Mifflin Company. All rights reserved.

Budgeting – Action Before Plan cash flows. Cash-Flow Calendar Revolving Savings Fund Copyright ©Houghton Mifflin Company. All rights reserved.

Budgeting – Action During Control spending. Monitor unexpended balances to control overspending. Use a subordinate budget. Pay by check to record the purpose of expenditures. Copyright ©Houghton Mifflin Company. All rights reserved.

Budgeting – Action During Keep track of credit transactions. Justify exceptions. Use the envelope system. Copyright ©Houghton Mifflin Company. All rights reserved.

Budgeting – Action After Evaluate budgeting progress. Budget Variance: Difference between amount budgeted and actual amount spent or received. Copyright ©Houghton Mifflin Company. All rights reserved.

Budgeting Record Keeping: Recording sources and amounts of dollars earned and spent. Adding up actual income and expenditures Copyright ©Houghton Mifflin Company. All rights reserved.

What to Do with Budgeted Money Left Over at the End of the Month Put into a revolving savings fund. Build a cash reserve in a savings account. Pay down credit card debt. Copyright ©Houghton Mifflin Company. All rights reserved.

What to Do with Budgeted Money Left Over at the End of the Month Put toward a mortgage or other loan. Invest in a retirement account. Spend like “made money.” Copyright ©Houghton Mifflin Company. All rights reserved.

Top 3 Financial Missteps in Financial Statements, Tools and Budgets People slip up in building and maintaining good credit when they do the following: Fail to plan for occasional, non-monthly expenditures. Underestimate how much you spend each month. Using credit cards to “balance” your budget. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Financial Statements, Tools, and Budgets Identify your financial values, goals, and strategies so you can always keep a balance between spending and saving and stay committed to your financial plans. Develop your own balance sheet and update it annually. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Financial Statements, Tools, and Budgets Develop your own cash-flow statements monthly or quarterly and compile them into an annual statement. Calculate your financial ratios annually to assess your financial progress. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Financial Statements, Tools, and Budgets Develop a list of financial goals. Start with short-term goals and then expand your list to longer-range goals. Update and revise your goals annually. Start an uncomplicated personal financial record-keeping system that meets your needs. Copyright ©Houghton Mifflin Company. All rights reserved.