Chapter 2 Money Management Strategy: Financial Statements and Budgeting 2-1 Kapoor Dlabay Hughes Ahmad Prepared by Cyndi Hornby, Fanshawe College  2004 McGraw-Hill Ryerson Ltd.

Learning Objectives – Chapter 2 1.Recognize relationships among financial documents and money management activities. 2.Create a system for maintaining personal financial records. 3.Develop a personal balance sheet and cash flow statement. 4.Create and implement a budget. 5.Calculate savings needed to achieve financial goals. 2-2

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 1 Recognize relationships among financial documents and money management activities. 2-3

 2004 McGraw-Hill Ryerson Ltd. Opportunity Cost & Money Management Spending money reduces the amount you can save and invest. Saving and investing reduces the amount you can spend now. Buying on credit ties up future income. Using savings for purchases results in lost interest -savings can’t be used for other purposes. Every decision made means you give up something else. Comparison shopping can save money but takes your valuable time. 2-4

 2004 McGraw-Hill Ryerson Ltd. Major Money Management Activities Create and implement a plan for spending (budgeting) and saving. Create personal financial statements of income and outflow (balance sheet and cash flow). 2-5 Store and maintain personal financial records and documents.

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 2 Create a system for maintaining personal financial records. 2-6

 2004 McGraw-Hill Ryerson Ltd. Why Keep Financial Records? 2-7 Handling daily business affairs, including paying of bills on time Planning and measuring financial progress Completing required tax forms Making effective investing decisions Determining available resources for current and future buying

 2004 McGraw-Hill Ryerson Ltd. 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. 2-8

 2004 McGraw-Hill Ryerson Ltd. What to Keep in a Safe Deposit Box 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. GIC’s and bank account numbers. Mortgage papers and titles. List of insurance policy numbers. Stock and bond certificates. Coins and collectibles. Copy of will. 2-9

 2004 McGraw-Hill Ryerson Ltd. Other Places to Keep Records Automobile. Vehicle registration. Lawyer. Original of your will and living will. Doctor and hospital. Copy of your living will. Home computer. Current and past budgets. Chequing account records. Wills, estate plans, investments. Past income tax returns. 2-10

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 3 Develop a personal balance sheet and cash flow statement. 2-11

 2004 McGraw-Hill Ryerson Ltd. Purpose of Personal Financial Statements Report your current financial position in relation to the value of the items you own and the amounts you owe. Measure your progress toward your financial goals. Maintain information on your financial activities. Provide information you can use when preparing tax forms or applying for credit. 2-12

 2004 McGraw-Hill Ryerson Ltd. Balance Sheet A financial statement that reports what an individual or family owns or owes; also called a net worth statement - = 2-13 Items of value (what you own) Amounts Owed (what you owe) Net Worth (your wealth)

 2004 McGraw-Hill Ryerson Ltd. Components of a Balance Sheet (Net Worth Statement) Assets - what you own. Liquid assets. Real estate. Personal possessions. Investment assets. Liabilities - what you owe Current liabilities. Long term liabilities. Net Worth. Assets minus liabilities. Insolvent means liabilities far exceed assets. 2-14

 2004 McGraw-Hill Ryerson Ltd. A financial statement that summarizes cash receipts and payments for a given period of time + = 2-15 Cash Flow Statement Total cash received during that time period Cash outflows during the time period Cash surplus or deficit

 2004 McGraw-Hill Ryerson Ltd. Components of a Cash Flow Statement Shows inflow and outflow during a given time period. Record income. 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. 2-16

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 4 Create and implement a budget. 2-17

 2004 McGraw-Hill Ryerson Ltd. Creating and Implementing a Budget Budget: A specific plan for spending income Purpose: Live within your budget Spend your money wisely Reach your financial goals Prepare for financial emergencies Develop wise financial management habits 2-18

 2004 McGraw-Hill Ryerson Ltd. The Budgeting Process Step 1: Setting Financial Goals plans for future activities that require you to plan your spending and investing Should be realistic; stated in specific, measurable terms; have a definite time frame; imply type of action to be taken 2-19

 2004 McGraw-Hill Ryerson Ltd. The Budgeting Process (con’t) Step 2: Estimating Income Estimate available money for given period of time – usually one month Based on number of times income received each month, spending should be planned accordingly Difficult if your earnings vary by season or income is irregular 2-20

 2004 McGraw-Hill Ryerson Ltd. The Budgeting Process (con’t) Step 3: Budgeting Emergency Fund and Savings Recommend 3-6 months of living expenses be established Step 4: Budgeting Fixed Expenses Will depend on your current needs and plans for the future Step 5: Budgeting Variable Expenses Will fluctuate by household situation, time of year, health, economic conditions, etc. 2-21

 2004 McGraw-Hill Ryerson Ltd. The Budgeting Process (con’t) Step 6: Recording Spending Amounts Record actual income and expenses Budget Variance – difference between amount budgeted & the actual amount received or spent Deficit – actual spending exceeds planned spending Surplus – actual spending less than planned spending 2-22

 2004 McGraw-Hill Ryerson Ltd. The Budgeting Process (con’t) Step 7: Reviewing Spending and Saving Patterns Review your financial progress Revise your goals and budget allocations 2-23

 2004 McGraw-Hill Ryerson Ltd. Successful Budgets Are... Well planned. Realistic. Flexible. Clearly communicated. 2-24

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 5 Calculate savings needed to achieve financial goals. 2-25

 2004 McGraw-Hill Ryerson Ltd. Saving to Achieve Financial Goals Common reasoning for saving include… To set aside money for irregular and unexpected expenses. To pay for the replacement of expensive items, such as appliances, cars or a down payment on a house. Save to buy special items or pay for a vacation. Put aside money to long-term expenses such as retirement or children's education. To earn income from the interest on savings for use in paying living expenses. 2-26

 2004 McGraw-Hill Ryerson Ltd. Selecting a Saving Technique Should make regular periodic savings deposits Can be a percentage of income (5-10%) or specific dollar amount Write a cheque each payday and deposit into a special savings account at another financial institution Payroll deduction Direct deposit Saving coins at end of each day 2-27

 2004 McGraw-Hill Ryerson Ltd. Suggestions for Dual-Income Households Pooled Income – incomes combined and bills paid from pool Sharing the Bills – each responsible for predetermined bills 50/50 – each contribute equally to pool Proportionate Contribution – each contribute percentage of his/her income 2-28