CHAPTER THREE: MONEY MANAGEMENT & STRATEGY UNIT ONE PLANNING PERSONAL FINANCES “I didn't end up going bankrupt... I made some great investments and I held on to my money, which also enables me to have the freedom to do what I want now. But it's not about finances. No matter what, it's about keeping it real.” -Vanilla Ice

CHAPTER THREE: MONEY MANAGEMENT & STRATEGY LESSON ONE – DETERMINING NET WORTH

MONEY MANAGEMENT & STRATEGY Every time you make a decision, you choose one thing and reject another. What is that called? What is Money Management? When decisions regarding Money Management, you must always consider the financial trade-offs Trade-offs can be difficult to resolve because they may be benefits for each side How you can be sure you are making the right Money Management decision?

MONEY MANAGEMENT & STRATEGY Consider the factors that influence your decision making (i.e. goals, values, wants, needs, etc.) Always set a financial objective (or goal) when you are ready to become financially independent

MONEY MANAGEMENT & STRATEGY ORGANIZING FINANCIAL DOCUMENTS The first step of effective money management is to organize your personal financial documents There are several types of personal financial documents: Bank Statements Paycheck Stubs Ownership Titles (cars, boats, etc.) Tax Forms Monthly Budgets Cash Flow Spreadsheets

MONEY MANAGEMENT & STRATEGY ORGANIZING FINANCIAL DOCUMENTS Organizing your personal financial documents will allow you to: Plan and measure your financial progress Handle routine money matters (paying bills on time) Wealth forecasting Make effective decisions about how to save money

MONEY MANAGEMENT & STRATEGY PERSONAL FINANCIAL STATEMENTS Personal Balance Sheet also known as a “Net Worth Statement” Net worth is the difference between the amount that you own and the debts that you owe There are four steps to creating a personal balance sheet

MONEY MANAGEMENT & STRATEGY PERSONAL BALANCE SHEETS STEP ONE: Determine Your Assets Assets are any items of value that an individual or company owns, including cash, property, personal possessions, and investments To determine assets, you must consider the four categories of wealth: Liquid Assets – cash, checking accounts, savings accounts, etc. Real Estate – land, houses, buildings (at market value) Personal Possessions – cars, furniture/appliances, electronics, etc. Investments - stocks, bonds, pensions, retirement accounts

MONEY MANAGEMENT & STRATEGY PERSONAL BALANCE SHEETS STEP TWO: Determine Your Liabilities Liabilities are debts that you owe There are two types of liabilities: Current Liabilities – medical bills, credit card bills, taxes Long Term Liabilities – mortgages, student loans, car loans

MONEY MANAGEMENT & STRATEGY PERSONAL BALANCE SHEETS STEP THREE: Calculate Your Net Worth To calculate your net worth, you simply subtract your liabilities from your assets (A – L = Net Worth) Even if you have a high net worth, you may still have difficulty paying your bills (especially when your assets are not liquid) If you cannot pay your debts (or if your liabilities are greater than your assets) you will be considered insolvent

MONEY MANAGEMENT & STRATEGY PERSONAL BALANCE SHEETS STEP FOUR: Evaluate Your Financial Situation You can use your personal balance sheet to evaluate your situation You should create a new balance sheet every few months You can increase your net worth by increasing your savings, increasing your investments, reducing your expenses, and/or reducing your debts

CHAPTER THREE: MONEY MANAGEMENT & STRATEGY LESSON TWO – CASH FLOW STATEMENTS

MONEY MANAGEMENT & STRATEGY CASH FLOW STATEMENTS What is Cash Flow ? Cash inflow (money you receive / income) Cash outflow (money you spend) A Cash Flow Statement is a summary of your cash flow during a particular period, usually a month or a year

MONEY MANAGEMENT & STRATEGY CASH FLOW STATEMENTS There are three steps to creating a Cash Flow Statement STEP ONE: Record Your Income (inflow) List all your sources of income during a given month Only include “take-home pay” in on your statement

MONEY MANAGEMENT & STRATEGY CASH FLOW STATEMENTS There are three steps to creating a Cash Flow Statement STEP TWO: Record Your Expenses (outflow) Break down expenses between “fixed” and “variable” Identify expenses prior to categorizing them

MONEY MANAGEMENT & STRATEGY CASH FLOW STATEMENTS There are three steps to creating a Cash Flow Statement STEP THREE: Determine Your Net Cash Flow Subtract expenses from your income (I - E) A positive cash flow is known as a surplus A negative cash flow is known as a deficit

MONEY MANAGEMENT & STRATEGY YOUR FINANCIAL POSITION Every time your cash flow changes, so does your net worth Whenever you experience a deficit, your net worth declines Increase liabilities or reduce assets A surplus will result in an increase of net worth Increase assets or reduce liabilities Net worth and Cash Flow can give you additional information on your financial situation (Figure 3.4)

CHAPTER THREE: MONEY MANAGEMENT & STRATEGY LESSON THREE – FINANCIAL CALCULATIONS

MONEY MANAGEMENT & STRATEGY YOUR FINANCIAL POSITION DEBT RATIO: Total Liabilities / Net Worth The lower the better LIQUIDITY RATIO: Liquid Assets / Monthly Expenses Indicates the number of months your would be able to pay your living expenses… the higher the better DEBT – PAYMENTS RATIO: Mo. Credit Paymnts / Take Home Pay Indicates how much of a person’s earning go to debts (excluding mortgage) – should be less than 20% SAVINGS RATIO: Amount Saved Each Month / Gross Monthly Income (should be at least 10%)

MONEY MANAGEMENT & STRATEGY CLASS WORK Complete THINK CRITICALLY, USE MATH SKILLS, and SOLVE MONEY PROBLEMS on page 73 of your textbook QUIZ on Wednesday (Take-home)