chapter 5 money management strategy. section 3.1 standard and poor’s pg. 58 organizing your...
TRANSCRIPT
Chapter 5
Money Management Strategy
Section 3.1
Standard and Poor’s pg. 58 Organizing your Personal Financial Records
Introductory Paragraph
Opportunity Costs and Money Management Common trade-offs see. Pg. 59 bullet list Other ways to save money: Price shop,
what trade-offs do you make by price shopping?
Whats your Financial ID? Pg. 60 When spending money think of the
following: Your values, Your Goals, and the State of your bank account
Benefits of Organizing Financial Documents 1st step to effective money management is
to organize your personal financial documents
Possible financial documents: Bank statements, paycheck stubs, sales receipts
Not as commonly thought of: Car titles, birth certificates, tax forms
Benefits of organizing your documents Ease of finding needed materials Plan and measure your financial progress Handle routine money matters, such as
depositing paychecks in the bank and paying bills on time
Determine how much $ you have available to spend now and in the future
Make effective decisions about how to save money
Where to keep your documents
Home Files: Folder system, file cabinet, shoebox, should be simple and allow quick access to documents. If keeping important documents in the home consider a
safe or lock box
Safe-Deposit Boxes: Small secure stage compartment that you can rent in a bank, usually under $100 to rent– Usually kept in fire proof room, two keys to unlock,
wise idea to keep copies at home as well
Continued
Home Computers: Can buy special software programs to track expenses/checks
Good to use for tracking a checking account Allows you to easily compare month to
month expenses What measures should you consider if using
home computer? See figure 3.1 pg. 64
Section 3-2
Personal Financial Statements
The Personal Balance Sheet: What are you worth now? For a complete look at your financial
situation you should create a personal balance sheet and a cash flow statement. Known as personal financial statements
Personal Financial Statements: Documents that provide information about your current financial position and present a summary of your income and spending
Personal Financial Statements can Help You… 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
To evaluate your financial situation Create a balance sheet Balance sheet (net worth statement):
Financial statement that lists the items of value that you own, the debts that you, and your net worth
Net Worth: The difference between the amount that you own and the debts that you owe.
Steps to Create a Balance Sheet Step 1) Determine your Assets: Any items of value that you
own (cash, personal property, personal possessions, investments)
To determine your assets you need to consider 4 categories of wealth
1. Liquid Assets: Cash and items that can be quickly converted to cash
2. Real Estate: Land that a person or family owns, and anything on it, record the market value or price at which you could sell the property
3. Personal Possessions: Anything valuable that is not real estate, record current market value (golf club example)
4. Investment Assets: Retirement accounts, stocks, bonds. Long term financial needs
Step 2) Determine Your Liabilities Liabilities: Debts that you owe Ex: Borrow money from parents to buy a
computer. Effects both assets and liabilities Current Liabilities: Short-term liabilities,
have to be paid within 1 year. Long-Term Liabilities: Debts that don’t
have to be fully repaid for at least a year (car loans, student loans, mortgages)
Liabilities include only those things you owe for longer then a month
Step 3) Calculate Your Net Worth Assets – Liabilities = Net Worth Net worth doesn’t necessarily mean you
have that much to spend People often have money problems when
they have too many assets that aren’t liquid See Figure 3.2 pg. 69 Insolvency: Condition that occurs if your
liabilities are greater than your assets
Step 4) Evaluate your Financial Situation Update balance sheet or make a new one
every month or chart your changes overtime Increase net worth by increasing your
savings, increasing value of your investments, reducing expenses, or reducing your debts
See Careers in Finance pg. 70
The Cash Flow Statement: Income Versus Expenses Cash Flow: The money that actually goes into and
out of your wallet and bank accounts Cash Inflow: Money you receive or your income Cash Outflow: All the money you spend Cash Flow statement is a summary of your cash
flow during a particular period, usually a month or year
Shows your spending patterns
Steps to Creating a Cash Flow Statement Step 1) Record your Income Record all your income for a month, and record as cash
inflow Record exact amount, amount after taxes Take-home pay: Net pay, amount of income left after
taxes and other deductions are taken out of your gross pay
Add interest into statement Discretionary income: The money left over after you
have paid for essentials. The higher your discretionary income the better
What is tax money going towards?
Step 2) Record your Expenses Two basic types: Fixed and Variable Fixed Expenses: Those that are more or less
the same each month Variable Expenses: Those that may change
from month to month Total of Fixed and Variable expenses is
your cash outflow
Step 3) Determine Your Net Cash Flow Income – Expenses= Net Cash Flow Surplus: Positive net cash flow Deficit: Spend more than you earn or
receive What is best way to improve your cash
flow?
Analyzing your Financial Position from your Personal Financial Statements As net cash flow changes so does net worth To make up for deficit you can borrow or
draw from savings, either way net worth declines
If extra money at end of month net worth increases, can save money or pay off debts
Section 3-3
Characteristics of a Successful Budget
Carefully Planned: No guesses, cover all expenses
Practical: Be Realistic Flexible: Unexpected expenses, shifts in
income as well. Needs to be easy to revise Needs to be written and easily accessible Pg. 135
Ways to Increase your Savings
Key to establishing your financial future Methods: Set aside fixed amount each time you pay your
bills Percentage of monthly income Payroll savings deduction Money saved each day, put in jar/extra change Pay credit card off each month