1. Money Management Strategies
Chapter 3
Money Management Strategies

2. Opportunity Costs & Money Management
Money management—planning how to get the most out of your money
Trade-offs—sometimes your time is worth more than the extra money you will save on a particular item
Consider your values and goals when making money management decisions

3. What Are Financial Documents?
Paycheck stubs
Bank statements
Receipts
Automobile titles
Birth certificates
Tax forms
Social security cards
Paid bills
Credit card information
Contracts
Wills
Safe deposit box information
Certificates of Deposit (CDs)
Investment information
Loan information
Housing records
Insurance records
Retirement information

4. Where to Keep Your Financial Documents
1. Home file
Make sure it’s fireproof
Keep in a secure place
Arrange information according to the type of document
Label each folder
File information as soon as it’s received
2. Safe deposit box
Two keys—yours and the bank—both needed to open the box
Usually insured
Rented
3. Home computer
Be sure to back up
Password information
Good tool to plan future

5. Benefits of Organizing Your Financial Documents
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
Keep information all in one place (Ex: can look up utility bills when selling your home)

6. Ask Yourself
How will organizing your financial documents help you manage your money?
What steps would you take to create a home filing system?
What are the advantages of using a safe-deposit box to store your personal financial documents?

7. Personal Financial Statements
Personal Balance Sheet
Also called a Net Worth Statement
Lists items of value owned, debts owed and a person’s net worth
Net worth—a measure of your current financial position
Cash Flow Statement
Provides information about a person’s current financial position
Presents a summary of income and spending
Helps you determine what you owe and own
Tracks financial activities and progress
Helps to organize information

8. Personal Balance Sheet
Steps to complete a personal balance sheet
List assets—anything that is owned
Liquid assets
Real estate
Personal possessions
Investment assets
List liabilities—the debts you owe
Calculate your net worth = Assets - Liabilities

9. Types of Assets
Liquid assets—those assets most easily converted to cash (Ex: cash, savings)
Real Estate—land and structures on it
Recorded at market value—the price at which the property would sell
Long-term—not liquid or easily converted to cash
Personal possessions—cars and other things owned that are not real estate (Ex: tv, car, expensive jewelry)

10. Types of Liabilities Current liabilities Long-term liabilities
Short-term debts that can be paid within one year
Bills that take longer than one month to repay
Does not include utility bills like phone bills
Examples include:
Medical bills
Cash loans
Taxes
Long-term liabilities
Debts that have to be fully repaid for at least one year
Examples include:
Car loans
Student loans
Mortgages
Some medical bills

11. What Is Your Net Worth?
Net worth is the difference between your total assets and total liabilities
If you have a net worth of $50,000, does that mean you can spend $50,000? Why or why not?
Net worth is an indication of your general financial situation.
Insolvency—when you are not able to pay all your debts (liabilities are greater than assets).

12. Evaluate Your Financial Situation
Update your balance sheet every few months
You want your net worth to keep increasing!
If it’s decreasing, where do you need to make changes?
Increase your net worth by:
Increasing your savings or investments
Decreasing your expenses and debts

13. Cash Flow Statement
Cash Flow is the money you actually have to spend and save—divided into two parts:
Cash inflow—income or money received
Paycheck
Allowance
Interest on savings
Cash outflow—money you spend
Fixed expenses—cable tv, rent, etc.
Variable expenses—utilities, clothing, food
Gives you information on your income and spending patterns

14. Creating a Cash Flow Statement
Record your income
Income includes take-home pay—amount of money left after taxes and other deductions (not your salary)
Interest earned on investments
Savings
Record your expenses
Fixed—the same each month
Variable—change each month
Determine your net cash flow
Subtract your expenses from your income
If positive, you have a surplus (net worth increases)
If negative, you have a deficit (net worth decreases)

15. By the Numbers Debt Ratio Liabilities/ net worth $250/$500 = 0.5
Low debt ratio is best
Liquidity Ratio
Liq. Assets/ monthly expenses
$10,000/
$4,000 = 2.5
# of months take to pay; higher better
Debt-
payment Ratio
Monthly credit payments/
net pay
$540/$3,600 = 15%
Less than 20% best
Savings Ratio
Amnt saved/ gross income
$600/$5000 = 12%
At least 10%

16. Ask Yourself
How do you calculate your net worth when preparing a balance sheet?
How should you record your income on a cash flow statement?
If your personal financial statements indicate that you have a deficit, what might you do to change your financial situation?
Net Worth= Assets – liabilities
Interest income, paycheck and allowance—do not include bonuses or dividends unless they are regularly made
Spend less, make more

17. Preparing a Practical Budget
Budget—a plan for using money to meet wants and needs
Learn how to live within your income
Learn how to spend your money wisely
7 steps in preparing a budget
Set your financial goals
Estimate your income
Unexpected expenses
Fixed expenses
Variable expenses
Record what you spend
Review spending and saving patterns

18. Budgeting for Income
Do include your take-home pay (salary less taxes and other deductions from your paycheck)
Taxes
Voluntary deductions
Do include interest earned on investments if it is regular interest
Do NOT include bonuses

19. Budget for Expenses Unexpected expenses
You should set aside some savings to help with or pay for unexpected expenses
Set aside 3-6 months living expenses
Fixed expenses—insurance, mortgage
Variable expenses
Look at previous year’s costs for some expenses such as heating/cooling
Take a year’s average for things such as car repairs

20. What Are Reasonable Expense Levels?
Use guidelines published by experts telling us what percentage of income should be spent on various items
Compare what you spend with the Consumer Price Index (CPI)
Produced by the US Department of Labor
A measure of the changes in prices for commonly purchased goods and services in the US
Compare your information with a friend’s

21. Keep Track of Actual Income & Expenses
Use two columns to list income and expenses
1st column—budgeted amounts
2nd column—actual amounts
Use a column to record the budget variance
The difference between the budgeted amount and the actual amount spent
Can end up with a surplus (you spent less than you thought you would) or a deficit (you spent more).

22. Budgeting Is a Continual Process
Prepare a budget summary
Review your budget monthly
Revise it several times per year

23. Adjusting Your Budget
After reviewing your budget, you may need to revise it
If you decide to cut expenses, you may need to revise or at least review your financial goals

24. Budgeting Successfully
Plan your budget carefully
Be practical
Be flexible
Write it out where you can look at it often (make it accessible)

25. Increase Your Savings Money that is saved earns interest income
Have a plan to increase your savings
Pay yourself first—set aside a fixed amount monthly
Use payroll savings if available—forced savings
Spend less each day
Bring a pop instead of buying one from a machine
Read your favorite magazine at the library instead of buying it
Car pool

26. Ask Yourself
What are some practical ways to budget for variable expenses?
If you continually experience budget deficits, how can you decide which expenses to cut?
What are three methods you might use to increase your savings?
Look at the previous year’s costs or take an average.
Variable expenses would be the most likely to be cut.
Pay yourself first, use forced savings (have it taken out of your paycheck), spend less each day

27. Money Management Strategies
Chapter 3 Review

28. Know All Your Terms Money management Safe deposit box
Personal financial statement
Personal balance sheet
Net worth
Assets
Wealth
Liquid assets
Real estate
Market value
Liabilities
Insolvency
Cash flow
Income
Take-home pay
Discretionary income
Surplus
Deficit
Budget
Consumer price index (CPI)
Budget variance
Trade-offs

29. Where to Organize Financial Documents*
1. Home file
Make sure it’s fireproof
Keep in a secure place
Arrange information according to the type of document
Label each folder
File information as soon as it’s received
2. Safe deposit box
Two keys—yours and the bank—both needed to open the box
Usually insured
Rented
3. Home computer
Be sure to back up
Password information
Good tool to plan future

30. Benefits of Organizing Your Financial Documents
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
Keep information all in one place (Ex: can look up utility bills when selling your home)

31. *Personal Financial Statements
Personal Balance Sheet
Also called a Net Worth Statement
Lists items of value owned, debts owed and a person’s net worth
Net worth—a measure of your current financial position
Cash Flow Statement
Provides information about a person’s current financial position
Presents a summary of income and spending
Helps you determine what you owe and own
Tracks financial activities and progress
Helps to organize information

32. Preparing a Practical Budget
Budget—a plan for using money to meet wants and needs
Learn how to live within your income
Learn how to spend your money wisely
7 steps in preparing a budget
Set your financial goals
Estimate your income
Unexpected expenses
Fixed expenses
Variable expenses
Record what you spend
Review spending and saving patterns

33. *Increase Your Savings
Money that is saved earns interest income!
Have a plan
Pay yourself first—set aside a fixed amount monthly
Use payroll savings if available—forced savings
Spend less each day
Bring a pop instead of buying one from a machine
Read your favorite magazine at the library instead of buying it
Car pool