1 Money Management Skills: Financial Statements and Budgeting Or “We Spent How Much On What?!” C HAPTER 2

2 Money Management, Defined Money Management –  Day-to-day financial activities necessary to manage current personal economic resources while working toward long-term financial security “How Come We Always Have Too Much Month at the End of the Money!”

3 Major Money Management Activities Store and maintain personal financial records and documents Create personal financial statements  Cash Flow Statement (income vs. expenses)  Net Worth Statement (assets vs. liabilities) Create and implement a plan for spending and saving (Arrgh! Budgeting!)

4 Why Keep Financial Records? To help make spending decisions To plan future spending To pay bills on time To see changes in net worth To make good investment decisions To prepare your income tax forms In preparation of applying for a loan So you know what is happening to your money!

5 What to Keep in Your Home File Items you refer to often  Personal and employment records  Tax records  Financial services records  Money management records  Credit records  Consumer purchase records  Insurance records  Investment records  Housing and car records  Estate planning and retirement records

6 Safe deposit box is for records and items that would be hard to replace  Birth, marriage and death certificates  Citizenship and military papers  Adoption and custody papers  Serial numbers and photos of valuables  CDs and account numbers  Mortgage papers and titles  List of insurance policy numbers  Stock and bond certificates  Coins and collectibles  Copy of will Discussion: What about just buying a home safe? What to Keep in Your Safe Deposit Box

7 Other Places to Keep Records Automobile  Vehicle registration (I disagree) Lawyer or Executor or Both  Original of your will & other estate documents Home computer (Encrypted?)  Current and past budgets  Checking account records  Wills, estate plans, investments  Past income tax returns

8 Successful Budgets Are... Well planned Realistic Flexible Clearly communicated Next To Impossible! Discussion: Does Budgeting ever work?

9 Saving is easier than Budgeting “Spend Less Than You Earn” “Live Beneath Your Means” “Pay Yourself First” “Make Love, Not Loans!” Discussion: The “Pay Yourself 10% First” Solution Is it reasonable? For those of you old enough to remember (or are into vinyl music), do I sound like a broken record?

10 The Extreme Viewpoint Keep a small notebook with you at all times Record every monetary transaction you make  No matter how small Update your cash flow statement constantly Devotees of “Your Money or Your Life” Did anyone check out their forums?

11 Personal Financial Statements Net Worth Statement  “A snapshot of your financial situation”  Assets versus Liabilities  a.k.a. Balance Sheet Cash Flow Statement  “The movie of your financial life”  Income versus Expenses  a.k.a. Income Statement, Budget Let’s look at each one in detail…

12 Components of a Net Worth Statement (a.k.a. Balance Sheet) Assets – What You Own  Liquid assets  Real estate  Personal possessions  Investment assets Liabilities – What You Owe  Current liabilities – One year or less (a.k.a. short-term)  Long-term liabilities – Greater than one year Net Worth – What You Have Left Over  Assets minus liabilities  Insolvent means liabilities far exceed assets  Rule of thumb: If short-term liabilities >= income …

13 Components of a Cash Flow Statement (a.k.a. Income/Expense Statement, Budget) Shows inflow and outflow during a given time period – Income versus Expenses  Record cash inflows  Income from employment  Savings and investment income  Other sources  Record cash outflows  Fixed and variable expenses  Net cash flow can be a surplus or a deficit Used as a basis for creating a spending, saving, and investment plan Insolvency is better determined here.

14 Cash Flow / Net Worth Let’s start on those financial documents…