1. Chapter 3 Money Management Strategy: Financial Statements & Budgeting
Mrs. Jordan

2. Financial Plan
Is an orderly program for spending, saving, and investing the money you earn.
Financial planning helps you do the following:
Determine and evaluate how wisely you are using your money.
Get the most from your income.
Prevent careless and wasteful spending.
Organize your financial resources so that you can maintain personal financial fitness.
Avoid money worries and problems by understanding the proper methods of saving, spending and borrowing money.

3. Chapter 3 Learning Objectives:
Recognize relationships among financial documents and money management activities
Design a system for maintaining personal financial records
Develop a personal balance sheet and cash flow statement
Create and implement a budget
Relate money management and savings activities to achieve financial goals

4. Planning for Successful Money Management
Objective 1: Recognize relationships among financial documents and money management activities Daily spending and saving decisions are the heart of financial planning Decisions must be coordinated with needs, goals, and personal situations Money management is the day-to-day financial activities needed to manage personal economic resources, while working toward long-term financial security

5. Opportunity Cost
Daily decision making is a fact of life, and trade-offs have to be made. -Selecting an alternative means you give up something else.
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 depletes savings
Comparison shopping can save money but takes valuable time

6. COMPONENTS OF MONEY MANAGEMENT
Storing and maintaining personal financial records and documents
Creating personal financial statements (balance sheets and cash flow statements of income and outflow)
Creating and implementing a plan for
spending, and saving (budgeting)
Provide Written
Evidence
Basis for effective money management
Measure & Assess
Financial Position & Progress
These three components are interrelated.

7. A System for Personal and Financial Records
Objective 2: Design a system for maintaining personal financial records
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

8. Items for your Home File
Personal and employment records - Resume, Work History (current/past jobs) Company Name, Manager Name, Company Address, Length of Employment
Money management records - Budget (Monthly/Yearly)
Tax records - W-2’s, tax forms, pay stubs
College Records - Essays, transcripts, college information, application copies.
Financial services records
Consumer purchase, auto and credit records
Housing records
Insurance records
Investment records - Net Worth Statement, Personal Property Statement
Estate planning and retirement records

9. Items in your Safe Deposit Box
Records that would be hard to replace
Birth, marriage and death certificates, copy of will
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

10. How Long Should Records Be Kept?
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 seven years

11. Personal Financial Statements Measure Financial Progress
Objective 3: Develop a personal balance sheet and cash flow statement
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 data you can use when preparing tax forms or applying for credit

12. Balance Sheet: Where are you Now?
Also called the Net Worth Statement or Statement of Financial Planning
Preparation of Balance Sheet requires using the following Steps – -Balance Sheet Example on pg. 83 in textbook
STEP 1: LISTING ITEMS OF VALUE
Assets - what you own
Liquid assets - Cash and items that can easily be converted to cash.
Real estate - Home, condo, vacation property, land.
Personal possessions - Automobile, personal belongings.
Investment assets - Funds set aside for long-term financial needs.

13. Balance Sheet (Continued)
STEP 2: DETERMINING THE AMOUNTS OWED
Liabilities - what you owe others
Current liabilities (< 1 year) insurance premiums, charge accounts, tax payments.
Long term liabilities - auto loans, student loans, mortgage.
STEP 3: COMPUTING NET WORTH
Assets – Liabilities = Net Worth
Assets = Net Worth + Liabilities
Insolvency: is the inability to pay debts when they are due

14. Balance Sheet (Concluded)
Net Worth is an indication of the financial position at any given date
Ways to increase Net Worth
Increasing your savings
Reducing spending
Increasing the value of investments and other possessions
Reducing the amounts you owe

15. Create a Balance Sheet
Use the following items to prepare a balance sheet. Determine the total assets, total liabilities, net worth, total cash inflows, and total cash outflows.   
Rent for the month, $450 Auto insurance, $250
Monthly take-home salary, $1650 Household possessions, $4600
Cash in checking account, $770 Stereo equipment, $1500
Savings account balance, $2300 Payment for electricity, $75
Spending for food, $250 Lunches/parking for work, $220
Balance of educational loan, $3300 Donations, $50
Current value of automobile, $6500 Home computer, $1000
Telephone bill paid for month, $85 Value of stock investment, $1200
Credit card balance, $450 Clothing purchase, $ 100
Loan payment, $110 Entertainment, $250 15

17. Cash Flow Statement
Cash Flow is the actual inflow, outflow for a given time period.
The Cash Flow statement is also called personal income and expenditure statement.
See example on page 86 in textbook.
The process of preparing cash flows statement follows these steps:
STEP 1: RECORD INCOME
Wages, salaries, and commissions
Self-employment business income
Savings and investment income
Gifts, grants, scholarships and educational loans
Government payments, such as Social Security, public assistance, and unemployment benefits
Amounts received from pension and retirement programs
Alimony and child support payments

18. Cash Flow Statement (Continued)
STEP 2: RECORD CASH OUTFLOWS
Fixed Expenses - Do not vary from month to month. Rent, Mortgage, Installment Loan, Student Loan, Cable, Phone…
Variable expenses - Flexible payments that change from month to month. Food, Clothing, Utilities, recreation, medical expenses…
STEP 3: DETERMINE NET CASH FLOWS
The difference between income and outflows can either be positive or negative (Surplus or Deficit)
Cash flow statement provides the foundation for preparing and implementing a budget

19. Cash Flow Statement
Complete your own!

20. Budgeting for Skilled Money Management
Objective 4: Create and implement a budget
A budget is an organized spending plan that helps you plan your spending and saving so that you do not have to borrow money to meet your needs.
The main purposes of a budget are to help you
Live within your income
Spend your money wisely
Reach your financial goals
Prepare for financial emergencies
Develop wise financial management habits

21. Starting the Budgeting Process
Set financial goals
Estimate income from all sources
Budget amount for an emergency fund – pay yourself first, periodic expenses and financial goals (Try to set aside 10%)
Budget Fixed Expenses that you are obligated to pay
Budget Variable Expenses—the amounts that are to be spent for household and living expenses
Record Spending Amounts—the actual amounts for inflows and outflows, comparing actual amounts with budgeted amounts to determine variances
Review Spending and Saving Patterns
Evaluate whether revisions are needed in your savings and spending plans

22. Where Does My Money Go? First you need income…
Almost 31% of an individual’s paycheck is deducted
Taxes are the largest expense most individuals will have
Therefore, it is important to understand the systematic deductions
U.S. tax system operates on an ongoing payment system
Taxes are immediately paid on income earned

23. To receive a paycheck, an employee must:
Starting a New Job
To receive a paycheck, an employee must:
Complete a Form W Employee’s Withholding Allowance Certificate
Complete a Form I-9 – Employment Eligibility Verification

24. Form W-4 Employee’s Withholding Allowance Certificate
Determines the percentage of gross pay which will be withheld for taxes
Allowances
Used to determine the amount of federal taxes withheld from the paycheck
A person may claim a personal allowance if no one else claims the person as a dependent
Dependent – a person who relies on the taxpayer for financial support

25. Form W-4
Employment form that lets the employer know how much money to take out of your paycheck. Exempt if make less than $6,200 in 2014.

26. Form I-9 Employment Eligibility Verification Form
Used to verify the eligibility of individuals to avoid hiring undocumented workers or others who are not eligible to work in the United States
Must provide documentation which establishes identity and employment eligibility
Examples include driver’s license, passport, Social Security card, and birth certificate

27. Form W-2 Wage and Tax Statement
States the amount of money earned and taxes paid throughout the previous year
Used to file income taxes
By January 31, an employer should mail a Form W-2 to each employee for the previous year

28. Three methods employers may use to pay employees:
Paying Employees
Three methods employers may use to pay employees:
Paycheck-
Most common method
Employee responsible for handling the paycheck
Immediately see payroll stub and deductions

29. Paying Employees continued
Direct Deposit-
Employers directly deposit employee’s paycheck into the authorized employee’s bank account
Employee receives the paycheck stub detailing the paycheck deductions
Most secure because there is no direct handling of the check
Employee knows exactly when paycheck will be deposited and available

30. Paying Employees continued
3. Payroll Card-
A payroll card electronically carries the balance of the employee’s net pay
Funds are directly deposited by an employer into an account at a financial institution that is linked to the payroll card
Parties involved:
Employer
Employee
Financial institution
Use the payroll card for ATM withdrawals or to make purchases

31. Payroll Card There are numerous fees associated with payroll cards
Number of fees depends upon the financial institution
Examples:
Monthly or annual fee
ATM fee
Inactivity fee
Fee after a specific number of transactions have been used
Replacement fee if the card is lost, stolen , or destroyed
Load fee (when funds are placed on the card account)
Point of sale (POS) fee for using the card at a POS terminal, or an electronic payment processor

32. Benefits of Using Payroll Cards
Employers
Lower internal costs
Costs associated with producing, handling, and distributing pay checks is eliminated
Financial Institutions
Profit from the fees charged to employees, employers, and merchants
Employees
Safer than carrying large amounts of cash
Unbanked employees do not have to pay check cashing fees
Americans roughly spend $8 billion annually in check cashing fees
Can access electronic monthly statement of transactions
Can receive a second card
Give allowances to children
Send money internationally
Easily make online purchases

33. Consumer Protection with Payroll Cards
Regulation E – Electronic Fund Transfer Act
Protects payroll card holder from fraudulent charges on lost or stolen cards
Card holder is only liable for $50 if a lost or stolen card is reported within 48 hours
Over four million paychecks are stolen annually with no protection to employees
Regulation E provides exceptional safety and protection for payroll card holders

34. Gross Pay Gross Pay – amount of money you make before taxes
Hourly: hours worked x rate of pay
Ex: 40 * 5.85 = $234
Salary: annual salary/number of pay periods in year
Ex: 48,000/12 = 4,000 (if paid monthly) Weekly: 52 Bi-monthly: 24 times Bi-weekly: 26
Overtime is calculated at 1.5 the rate of pay for hours worked over 40 hours in a 1 week period
Ex: 5.85 * 1.5 = (new rate of pay) * 8 (overtime hours) = 70.2
If regular hourly pay was $234, you would add $70.2 to get total gross pay amount: $ = $ (gross pay) 34

35. Paycheck
Pay Period
The length of time for which an employee’s wages are calculated; most are weekly, bi-weekly, twice a month, or monthly

36. Deductions
The amount of money subtracted from the gross pay earned for mandatory systematic taxes, employee sponsored medical benefits, and/or retirement benefits.
Federal Tax
The amount required by law for employers to withhold from earned wages to pay taxes
The amount of money deducted depends on the amount earned and information provided on the Form W-4
Largest deduction withheld from an employee’s gross income
State Tax
The percentage deducted from an individual’s paycheck to assist in funding government agencies within the state
The percentage deducted depends on the amount of gross pay earned
Local & City Tax – Many cities require an earnings tax 36

37. Optional deductions: union dues, healthcare, uniform, retirement, etc.
Social Security Tax – also called FICA This tax includes two separate taxes: Fed OASDI/EE or Social Security and Fed MED/EE or Medicare
These two taxes can be combined as one line item or itemized separately on a paycheck stub
Currently: 7.65% of gross pay
Social Security
Nation’s retirement program, helps provide retirement income for elderly and pays disability benefits
Based upon a percentage (6.2%) of gross income, employer matches the contribution made by the employee
Medicare
Nation’s health care program for the elderly and disabled, provides hospital and medical insurance to those who qualify
Based upon a percentage (1.45%) of gross income
Optional deductions: union dues, healthcare, uniform, retirement, etc.

38. Net Pay
Net Pay: the amount of money AFTER all deductions have been taken out of your gross pay
Also called “take home” pay or “disposable income” – it is the amount you have available to spend from your paycheck
Calculated: gross pay – deductions = net pay
Discretionary Income: money left over AFTER paying for housing, food and other necessities 38

39. Characteristics of Successful Budgeting
Well-planned
Realistic
Flexible
Clearly communicated 39

40. Selecting a Budgeting System
Mental budget – it is all in your head
Physical budget-use envelopes for your expenses such as food, rent, etc.
Written budget – use spreadsheets
Computerized budget – use software such as Quicken ( 40

41. Money Management and Achieving Financial Goals
Objective 5: Relate money management and savings activities to achieve financial goals
IDENTIFYING SAVING GOALS…
To set aside money for irregular and unexpected expenses
To pay for the replacement of expensive items, such as 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 41

42. Money Management and Achieving Financial Goals (continued)
SELECTING A SAVINGS TECHNIQUE
Payroll deductions into savings accounts
Automatic payments from checking into savings accounts or mutual funds
Saving regularly in 401(k) plans
Also save coins, make periodic deposits
Write a check each payday as a % of income and deposit into savings 42

43. Money Management and Achieving Financial Goals (continued)
Balance Sheet reports current financial position (Net Worth)
Cash Flow Statement shows cash you have received and spent in the past
Budget helps you to spend and save to achieve financial goals 43

44. Sample Budget

45. Personal Property Inventory

46. Net Worth Statement