1. Money Management Strategy
Chapter 3

2. Section 3.1 Objectives
Discuss the relationship between opportunity costs and money management
Explain the benefits of keeping financial records and documents
Describe a system to maintain personal financial documents

3. Money Management and Trade-Offs
Plan to get most of your money
Keep track of where your money goes
Consider your values, goals, and state of your bank account to make better spending decisions

4. Benefits of Organizing Your Financial Documents
Find what you need in a hurry
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 the future
Make effective decisions about how to save money

5. Where to Keep Your Financial Documents
Home Files
Safe-Deposit Boxes
Home Computers

6. Home Files Types of files
Employment records
Money management records
Checkbook
Checks
Tax records
Receipts
Insurance records
Do not keep hard to replace documents here because no protection against fire, water, or theft

7. Safe-Deposit Boxes Types of files $100 or less per year
Birth certificates
Mortgage papers
Copy of will
CDs
Car titles
Account and policy numbers
$100 or less per year
Bank loss from fire or disasters is rare
Insurance protection
Could also use a fire-proof box

8. Home Computers Budgets Summary of banking transactions Tax records
Resume

9. Section 3.2 Objectives
Describe a personal balance sheet and cash flow statement
Develop a personal balance sheet and cash flow statement

10. Personal Financial Statements
Help you:
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

11. Personal Balance Sheet
Step One: Determine Your Assets
Step Two: Determine Your Liabilities
Step Three: Calculate Your Net Worth
Step Four: Evaluate Your Financial Situation

12. Step One: Determine Your Assets
Assets – Any items of value that you own
Liquid Assets – items quickly converted to cash
Real Estate – land and any structures, should list market value on balance sheet
Personal Possessions – Car and other things not real estate
Should list current value, not purchase value
Investment Assets – retirement accounts, stocks, bonds

13. Step Two: Determine Your Liabilities
Liabilities – debts you owe for longer than a month – so utility bills would not be a liability
Current Liabilities – debts that are paid within a year such as medical bills, cash loans, taxes
Long-term Liabilities – debts that do not have to be fully paid within a year such as car loans, student loans, mortgage loans

14. Step Three: Calculate Your Net Worth
Assets-Liabilities = Net Worth
Net worth is not what you can spend, just an indication of your general financial situation
With high net worth, a person could still have trouble paying the bills
May be insolvent – liabilities greater than assets

16. Step Four: Evaluate Your Financial Situation
Update every few months to track changes over time
Increase net worth by:
Increasing savings
Increasing your investments
Reducing your expenses
Reducing debt

17. Cash Flow Statement Two parts – cash inflow/cash outflow
Step One: Record Your Income
Step Two: Record Your Expenses

18. Step One: Record Your Income
All sources of income within a given month
Net income
Interest on investments/savings
Discretionary Income – amount of money left after paying for essentials – some financial experts say this good indication of the strength of your income

19. Step Two: Record Your Expenses
Can be either fixed or variable
Fixed – Cable TV, rent, loan payments, trash pick up
Variable – Food, clothes, electricity, medical costs, recreation

20. Step Three: Determine Your Net Cash Flow
Income – Expenses = Cash Flow
Surplus – Extra money
Deficit – More money spent than earned
Accurate cash flow statement can help you prepare and implement a spending, savings, and investment plan

21. Cash Flow Statement for Month Ending July 31, 2012
Income (Cash Inflow)
Take home pay
Allowance
Savings account interest
Total Income
$450
100 12
$562
Expenses (Cash Outflow)
Fixed Expenses (cable tv, rent, commuter expenses)
Variable Expenses (recreation, clothing, take-out food)
Total Expenses
$ 80
320
$400
Net Cash Flow
$162

22. Evaluating Your Financial Progress
Ratio
Calculation
Example
Meaning
Debt Ratio
Liabilities divided by net worth
$25,000/$50,000 = 0.5
Compare your liabilities to your net worth. A low debt ratio is desirable
Liquidity Ratio
Liquid assets divided by monthly expenses
$10,000/$4,000 = 2.5
Indicates number of months you would be able to pay your living expenses in case of an emergency. The higher the better.
Debt-payments Ratio
Monthly credit payments divided by take-home pay
$540/$3,600 = 15%
Indicates how much of a person’s earnings goes to pay debts (excluding mortgage). Most experts recommend a ration of less than 20%
Savings Ratio
Amount saved each month divided by gross monthly income
$600/$5,000 = 12%
Most financial experts recommend a saving ratio of at least 10%

23. Section 3.3 Objectives
Identify the steps of creating a personal budget
Discuss the advantage of increasing your savings

24. Budgeting for Financial Goals
Step One: Set Your Financial Goals
Step Two: Estimate Your Income
Step Three: Budget for Unexpected Expenses
Step Four: Budget for Fixed Expenses
Step Five: Budget for Variable Expenses
Step Six: Record What You Spend
Step Seven: Review Spending and Saving Patterns

25. Step 1: Set Your Financial Goals
Take into consideration:
Career
Lifestyle
Values
Hopes for the future
Be specific
Use time frame (short, intermediate, long-term)

26. Step 2: Estimate Your Income
Include all sources; paycheck, investments
Estimate income best you can if it varies from week to week

27. Step 3: Budget for Unexpected Expenses
Have emergency fund
3 to 6 months worth of living expenses

28. Step 4: Budget for Fixed Expenses
Mortgage
Car payments
Student loans
Insurance

29. Step 5: Budget for Variable Expenses
Medical costs
Heating and cooling
Other basic utilities

30. Step 6: Record What You Spend
Keep track of actual expenses and money paid out
Budget variance – difference between what was budgeted and what was spent – could be deficit or surplus

31. Step 7: Review Spending and Saving Patterns
Review financial progress
Revise goals if needed
If deficits, ask where you can cut
Use your financial goals to help decide what to cut

32. Budget Sucessfully A good budget is: Carefully planned Practical
Flexible
Written and easily accessible

33. Ways to Increase Your Savings
Pay yourself first
Payroll savings
Spending less to save