1. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill Chapter 3 Money Management Strategy: Financial Statements and Budgeting 3-1 Personal Finance 7e Kapoor Dlabay Hughes

2. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill Planning for Successful Money Management Daily spending and saving decisions are at the center of financial planning. Decisions must be coordinated with your needs, goals, and personal situations. Money management means the day-to- day financial activities necessary to manage personal economic resources, while working toward long-term financial security. 3-2

3. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill Opportunity Cost and Money Management Spending money on current living expenses reduces the amount you can save and invest. Saving and investing for the future reduces the amount you can spend now. Buying on credit ties up future income. Using savings for purchases results in lost interest and means savings cant be used for other purposes. Comparison shopping can save money but takes your valuable time. 3-3

4. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill Major Money Management Activities Creating and implementing a plan for spending, and saving (budgeting). Creating personal financial statements (balance sheets and cash flow statements of income and outflow). 3-4 Storing and maintaining personal financial records and documents.

5. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill Benefits of an Organized System of Financial Records Handling daily business affairs, including payment of bills on time. Planning and measuring financial progress. Completing required tax reports. Making effective investment decisions. Determining available resources for current and future buying. 3-5

6. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill What to Keep in Your Home File Items you refer to often. Personal and employment records. Money management records. Tax records. Financial services records. Credit records. Consumer purchase and auto records. Housing records. Insurance records. Investment records. Estate planning and retirement records. 3-6

7. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill 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. CDs and credit and banking account numbers. Mortgage papers and titles. List of insurance policy numbers. Stock and bond certificates. Coins and other collectibles. Copy of will. 3-7

8. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill Records on Personal Computer Home computer. Current and past budgets. Summary of checks written and other banking transactions. Past income tax returns prepared with tax preparation software. Account summaries and performance results of investments. Computerized versions of wills, estate plans, and other documents. 3-8

9. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill How Long to Keep Records Birth certificates, wills, and Social Security information should be kept indefinitely. Keep records on personal property and investments as long as you own them. Keep documents related to the purchase and sale of real estate indefinitely. Copies of tax returns and supporting data should be kept six years. 3-9

10. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill 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. 3-10

11. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill 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 (< 1 year). Long term liabilities. Compute your net worth. Assets minus liabilities. Insolvent means liabilities far exceed assets. 3-11

12. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill Where Did Your Money Go? Components of a Cash Flow Statement Shows inflow and outflow during a given time period. Record inflow. Net 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. Use this statement as a basis for creating a spending, saving and investment plan. 3-12

13. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill Purposes of a Budget In contrast to cash flow which was a record of how you spent money in a past time period, a budget is a plan for spending in the future, such as for the next month. A budget helps you… Live within your income. Spend your money wisely. Reach your financial goals. Prepare for financial emergencies. Develop wise financial management habits. 3-13

14. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill Creating and Implementing a Budget Assessing your current situation. Measure your current financial position. Determine your needs, values and life situation. Steps in the budgeting process. 1 Set financial goals. 2 Estimate income from all sources. 3 Budget amount for an emergency fund, periodic expenses and financial goals. 4 Budget set amounts that you are obligated to pay. These are your fixed expenses. 3-14

15. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill Creating and Implementing a Budget Steps in the budgeting process (continued). 5 Budget estimated amounts that are to be spent for various household and living expenses. These are your variable expenses. 6 Record actual amounts for inflows and outflows, comparing actual amounts with budgeted amounts to determine variances. Deficits and surpluses. 7 Review your spending and savings patterns and evaluate whether revisions are needed in your savings and spending plans. 3-15

16. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill Characteristics of Successful Budgeting Well planned. Realistic. Flexible. Clearly communicated. 3-16

17. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill 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. To buy special items like recreational equipment or to pay for a vacation. To provide for long-term expenses such as retirement or the education of children. To earn income from the interest on savings for use in paying living expenses. 3-17

18. © The McGraw-Hill Companies, Inc., 2004. All Rights Reserved. Irwin/McGraw-Hill The End