Personal Finance Chapter 3 Section 3.1 and 3.2

Opportunity Costs Money Management In order to manage your money well, you probably consider financial trade offs. Spend your money on clothes or save it? Increasing amount of money to spend now. Contribute to long term financial security. Shopping around for better deal on mp3 player? Save money by checking around for better deal. Using up your time spent shopping that you can’t replace.

Organizing Financial Documents Helps you to…. Plan and measure your financial progress. Handle routine money matters, such as paying bills on time. Determine how much money you will have now and in future. Make effective decisions about how to save money.

Storing Financial Documents Home Files Makes sure it is sorted to find things easily. Not for hard to replace documents. Safe Deposit Boxes Car titles, mortgage loan papers, other important docs. Can also use fire proof safe instead of safe deposit. Home Computers Software to keep track of checking and savings account info. Scanning documents to keep a digital copy. Make sure it’s safe.

Personal Financial Statement Determine what you own and what you owe. Measure your progress toward your financial goals. Track your financial activities. Organize information that you can use when you file your tax return or apply for credit. Create a Personal Balance Sheet

Personal Balance Sheet Step 1 Determine Your Assets Any items of value that you own, including cash, property, personal possessions, and investments. Four categories of wealth to determine assets Liquid Assets Real Estate Personal Possessions Investment Assets

Personal Balance Sheet Step 2 Determine Liabilities Debts that you owe. Current Liabilities Short term debts that have to be paid within one year Medical bills, cash loans, taxes Long-Term Liabilities Debts that do not have to be fully repaid for at least a year Car loans, student loans, mortgage loans Not Liabilities Telephone, rent, anything less than a month

Personal Balance Sheet Step 3 Calculate Your Net Worth Subtract your liabilities from your assets, the difference is your net worth. If you have a net worth of $62,300 that does not mean you have $62,300 to spend. Net worth is only an indication of your general financial situation. Insolvency is a financial state that occurs if liabilities are greater than assets.

Personal Balance Sheet Step 4 Evaluate Your Financial Situation You an use a balance sheet to track your financial progress. Update your balance sheet every few months to chart changes. As a rule you can increase your net worth by increasing your savings, increasing your investments, reducing your expenses and reducing your debt.

Cash Flow statement Cash Flow The money that actually goes into and out of your wallet and bank accounts. Cash Inflow Cash Outflow

Cash Flow Statement Step 1 Record Your Income List all of your sources of income during a given month and that is your cash inflow. Record only your take home pay and interest earned on investments.

Cash Flow Statement Step 2 Record Your Expenses Fixed expenses – the same each month Cable, rent, internet, trash, etc. Variable expenses – can change from month to month. Electric bill, gas bill, medical costs, recreation, etc. The total of your fixed and variable expenses is your cash outflow.

Cash Flow Statement Step 3 Determine Your Net Cash Flow Subtract expenses from your income If your cash flow is positive, you have a surplus or extra money that can be spent or saved. If you cash flow is negative, you have deficit, you spent more money than you earned.

Evaluating your Financial progress Ratio Calculation Example Meaning Debt Ratio Liabilities divided by net worth 25,000/50,000 = 0.5 Low debt ratio is desirable. Liquidity Ratio Liquid assets divided by monthly expenses 10,000/4,000 = 2.5 Number of months you can pay your expenses. Debt-Payments Ratio Monthly credit payments divided by take home pay. 540/3,600 = 0.15 or 15% How much of earnings goes to pay debts. 20% or less is goal. Savings Ratio Amount saved each month divided by gross monthly income. 600/5,000 = 0.12 = 12% At least 10% is goal. 15% is better.

Assignment Section 3.1 Assessment Section 3.2 Assessment 1, 2, 3, 4 Section 3.2 Assessment Save as Initials 3.2 Assessment Upload to dropbox