PERSONAL FINANCE

Chapter 3

Section 3.1 and 3.2

OPPORTUNITY COSTS Money Management

In order to manage your money well, you probably consider financial trade offs.

Spend your money on clothes or save it? Increasing amount of money to spend now. Contribute to long term financial security.

Shopping around for better deal on mp3 player? Save money by checking around for better deal. Using up your time spent shopping that you can’t

replace.

ORGANIZING FINANCIAL DOCUMENTS Helps you to….

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 future.

Make effective decisions about how to save money.

STORING FINANCIAL DOCUMENTS Home Files

Makes sure it is sorted to find things easily. Not for hard to replace documents.

Safe Deposit Boxes Car titles, mortgage loan papers, other important

docs. Can also use fire proof safe instead of safe deposit.

Home Computers Software to keep track of checking and savings

account info. Scanning documents to keep a digital copy. Make sure it’s safe.

PERSONAL FINANCIAL STATEMENT 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.

Create a Personal Balance Sheet

PERSONAL BALANCE SHEET STEP 1 Determine Your Assets

Any items of value that you own, including cash, property, personal possessions, and investments.

Four categories of wealth to determine assets Liquid Assets Real Estate Personal Possessions Investment Assets

PERSONAL BALANCE SHEET STEP 2 Determine Liabilities

Debts that you owe.

Current Liabilities Short term debts that have to be paid within one

year Medical bills, cash loans, taxes

Long-Term Liabilities Debts that do not have to be fully repaid for at least

a year Car loans, student loans, mortgage loans

Not Liabilities Telephone, rent, anything less than a month

PERSONAL BALANCE SHEET STEP 3 Calculate Your Net Worth

Subtract your liabilities from your assets, the difference is your net worth.

If you have a net worth of $62,300 that does not mean you have $62,300 to spend.

Net worth is only an indication of your general financial situation.

Insolvency is a financial state that occurs if liabilities are greater than assets.

PERSONAL BALANCE SHEET STEP 4 Evaluate Your Financial Situation

You an use a balance sheet to track your financial progress.

Update your balance sheet every few months to chart changes.

As a rule you can increase your net worth by increasing your savings, increasing your investments, reducing your expenses and reducing your debt.

CASH FLOW STATEMENT Cash Flow

The money that actually goes into and out of your wallet and bank accounts. Cash Inflow Cash Outflow

CASH FLOW STATEMENTSTEP 1 Record Your Income

List all of your sources of income during a given month and that is your cash inflow.

Record only your take home pay and interest earned on investments.

CASH FLOW STATEMENTSTEP 2 Record Your Expenses

Fixed expenses – the same each month Cable, rent, internet, trash, etc.

Variable expenses – can change from month to month. Electric bill, gas bill, medical costs, recreation,

etc.

The total of your fixed and variable expenses is your cash outflow.

CASH FLOW STATEMENTSTEP 3 Determine Your Net Cash Flow

Subtract expenses from your income

If your cash flow is positive, you have a surplus or extra money that can be spent or saved.

If you cash flow is negative, you have deficit, you spent more money than you earned.

EVALUATING YOUR FINANCIAL PROGRESSRatio Calculation Example Meaning

Debt Ratio

Liabilities divided by net worth

25,000/50,000 = 0.5

Low debt ratio is desirable.

Liquidity Ratio

Liquid assets divided by monthly expenses

10,000/4,000 = 2.5

Number of months you can pay your expenses.

Debt-Payments Ratio

Monthly credit payments divided by take home pay.

540/3,600= 0.15 or 15%

How much of earnings goes to pay debts. 20% or less is goal.

Savings Ratio

Amount saved each month divided by gross monthly income.

600/5,000= 0.12 = 12%

At least 10% is goal. 15% is better.

ASSIGNMENT Section 3.1 Assessment

1, 2, 3, 4

Section 3.2 Assessment1, 2, 3, 4

Save as Initials 3.2 AssessmentUpload to dropbox