CHAPTER 3 MONEY MANAGEMENT STRATEGY

WHAT YOU’LL LEARN When you have completed this section (3.1), you’ll be able to: Discuss the relationship between opportunity costs & money management Explain the benefits of keeping financial records and documents. Describe a system to maintain personal financial documents.

ORGANIZING FINANCIAL RECORDS (3.1) Opportunity costs & money management By considering your values, goals, & current state of your bank account, you can make better spending decisions. Benefits of organizing your financial documents (paycheck stubs, bank statements, etc.) Why it’s important to have a system? Find documents quickly Plan & measure financial progress Handle routine money matters (pay bills on time) Where to keep your financial documents? (Figure 3.1 pg. 62) Home files Safe-deposit boxes Home computers

PERSONAL FINANCIAL STATEMENTS (3.2) Personal financial statement - summary of your income & spending Net worth – difference between what you own & debts that you owe. Personal Balance Sheet Steps Step 1: determine your assets – Assets – Wealth – Liquid assets – Real estate Market value – Personal possessions – Investment assets

STEP 2: DETERMINE YOUR LIABILITIES Liabilities – debts that you owe Current liabilities – short-term debts (ex. Medical bills) Long-term liabilities – take longer than a year to pay off (car or home loan) Step 3: calculate your net worth = assets - liabilities Insolvency occurs when liabilities exceed assets

STEP 4: EVALUATE YOUR FINANCIAL SITUATION As a rule, you can increase your net worth by… Increasing your savings Increasing investments Reducing expenses Reducing debts

CASH FLOW STATEMENT: INCOME VERSUS EXPENSES Cash flow – money that actually goes into (inflow) & out of your wallet (outflow) Income – paycheck from job, allowance from parents, interest from bank account Steps for cash-flow statement Step 1: record your income – Take-home pay – Discretionary income Step 2: record your expenses Step 3: determine your cash flow – Surplus – deficit

BUDGETING FOR FINANCIAL GOALS (3.3) Budget – plan for using money to meet wants & needs. Step 1: Set Your Financial Goals Step 2: Estimate Your Income Step 3: Budget for Unexpected Expenses Step 4: Budget for Fixed Expenses Step 5: Budget for Variable Expenses – Consumer price index (CPI) Step 6: Record What You Spend (budget variance) Step 7: Review Spending & Saving Patterns – Reviewing financial progress – Revising goals & adjusting your Budget

HOW TO BUDGET SUCCESSFULLY A budget should have several important characteristics: Carefully planned budget Practical Flexible Written & easily accessible

WAYS TO INCREASE YOUR SAVINGS Pay yourself first Payroll savings Spending less to save