chapter 2. money management day-to-day financial activities necessary to manage current personal...

Chapter 2

Money Management Skills

Money managementDay-to-day financial activities necessary to manage

current personal economic resources while working toward long-term financial security

Components of Money ManagementStoring and maintaining personal financial records

and documentsCreating personal financial statements

Balance sheet and cash flow statements of income and outflows

Creating and implementing a plan for spending and savingbudgeting

A Successful Money Mangement Plan

An organized system of financial records provides the basis for:1. Handling daily business activities such as bill

paying2. Planning and measuring financial progress3. Completing required tax reports4. Making effective investment decisions5. Determining available resources fro current

and future spending Most financial records are kept in one of

three places: Home file Safe deposit box Home computer

A System for Personal Financial Records

Home filePersonal and employment recordsMoney management recordsTax recordsFinancial services recordsCredit recordsConsumer purchase and automobile

recordsHousing recordsInsurance recordsInvestment recordsEstate planning and retirement records


Safe Deposit BoxBirth certificate, marriage certificate,

adoption records, custody papers, citizenship papers

Certificates of deposits, list of checking and savings account numbers

Serial number of expensive itemsPhotographs of valuable belongingsMortgage papers, title deedAutomobile titleStock and bond certificatesRare coins, stamps, gemsCopy of will


Personal ComputerCurrent and past budgetsSummary of written checks and other

banking transactionsPast income tax returnsAccount summaries and performance

results of investmentsComputerized version of will, estate

plan,


These reports provide information about your current financial position and present a summary of your income and spending

Include:Balance sheetCash flow statement

Purposes:Report your current financial positionMeasure your progress toward financial goalsMaintain information about your financial

activitiesProvide data for preparing tax forms or

applying for credit

Personal Financial Statements

Balance sheet (also called a net worth statement or statement of financial worth)Reports what you own and what you

oweWhat you own – what you owe = net

worthInvolves three steps:1. Listing items of value2. Determining amounts owed3. Computing net worth

Your Personal Balance Sheet

1. Listing items of value (assets) Cash and other tangible property with

monetary value Liquid assets—cash and items that can

easily be converted to cash Real estate—home, condo, vacation

property, land Personal possessions—autos and other

personal belongings Investment assets--funds set aside for

long-term financial needs

Steps to Creating a Balance Sheet

2. Determining amounts owed (liabilities) Current liabilities—debts you must

pay within a short time (usually less than a year)

Medical bills Tax payments Insurance premiums

Long-term liabilities—debts you do not have to pay in full until more than a year from now

Auto loans Educational loans mortgages


3. Computing net worth Difference between your total assets

and total liabilitiesASSETS – LIABILITIES = NET WORTH

Business balance sheets are expressed as:

ASSETS = LIABILITIES + NET WORTH A person can have a high net worth

and still have trouble paying debts when they are due

Net worth is not money available to use, but an indication of your financial position on a given date


How can an individual or family increase net worth?Increase savingsReduce spendingIncrease value of investments and other

possessionsReducing amount owed

Increasing Cash Flow

Cash flowActual inflow and outflow of cash during

a given time periodIncome from employment will represent

your most important cash inflowItems such as rent, food, and loans

represent cash outflowCash flow statement

Also called personal income and expenditure statement

Summary of cash receipts and payments for a given period of timeProvides data on your income and spending

patterns

Your Cash Flow Statement

1. Record IncomeInflows of cash for an individual or householdMain source is usually your paycheckOther sources:

CommissionsSelf-employment incomeInterest/dividendsGiftsGrantsscholarships

Disposable Income—money earned after taxes (also called net or take-home pay)

Discretionary Income—money left after all expenses are paid

Steps to Create a Cash Flow Statement

2. Record Cash OutflowsFixed expenses—payments that do not vary

month-to-monthRent/mortgageInstallment loan payments

Variable expenses—payments that change from month-to-monthFoodClothingUtilitiesRecreationMedical expensesGiftsdonations


3. Determine Net Cash Flow Difference between income and

outflows Surplus—positive difference

Can be used for: Investment Saving Paying off debt

Deficit—negative difference Must be made up by:

Using savings borrowing


Budget or Spending PlanPurpose:

to help you live within your incomespend money wisely reach your financial goals prepare for financial emergenciesdevelop wise financial management habits

Steps:Set financial goalsEstimate incomeBudget an emergency fund and savingsBudget fixed expensesBudget variable expensesRecord spending amountsReview spending and savings patterns

A Plan for Effective Budgeting

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