Chapter 16 Money Management & Financial Planning

1. Chapter 16Money Management &Financial Planning Mrs. Wilson  Business Essentials

2. 16-1 Personal Financial Statements This lesson provides information about money management basics and the reports used to measure financial progress.

3. Money Management Basics • Money management – refers to the day-to-day financial activities associated with using limited income to satisfy your unlimited needs and wants • It involves getting the most for your money through careful planning, saving, and spending • If you learn to manage your money well, you will be able to buy what you really want

4. Money Management Basics • Wise money managers get the most from their limited incomes through careful planning, saving, and spending • They set goals, make wise decisions, buy wisely, and live within their incomes • A balance sheet is a record of assets and liabilities at a point in time • It reports what a person or family owns as well as owes

5. Personal Balance Sheet • Personal assets – items of values • Money in bank accounts • Investments • Furniture • Clothing • Automobiles • Jewelry • Rare coins • The current value of all assets of an individual or family is the first thing stated on a balance sheet

6. Personal Balance Sheet • Liabilities – amounts owed to others • These debts may include: • Credit card balances • Car loans • Home mortgage • Personal loans • A listing of your liabilities is the second item on a balance sheet • Net worth – the difference between a person’s assets and liabilities

7. Personal Balance Sheet • To examine changes in a person’s net worth, another financial statement can be helpful • Cash flow statement – reports net wages and other income along with spending for a period, such as for a month • Cash inflows – the money you have available to spend as a result of working or from other income, such as interest earned on your savings

8. Personal Balance Sheet • Cash outflows – amount spent for food, clothing, transportation, and other living costs • Keeping track of how much is spent for various living expenses will help you plan and control your spending

9. 16-2 Budgeting Techniques This lesson introduces budgeting activities along with an explanation of personal financial statements.

10. Budget Activities • Budget– allows you to meet your personal goals with a system of saving and wise spending • The main purposes of a budget are to help you do the following: • Live within your income • Achieve your financial goals • Buy wisely • Avoid credit problems • Plan for financial emergencies • Develop good money management skills

11. The Budget Process • Having a written budget is a key part of successful money management • The process of creating and using a budget involves 4 main steps: • Set financial goals • Plan budget categories • Maintain financial records • Evaluate your budget

12. The Budget Process • Most financial advisers recommend that an amount be set aside for savings as the first part of a budget • After savings, 2 types of living expenses must be considered: • Fixed expenses – costs that occur on a regular basis and are the same amount each time • Ex) rent, mortgage payments, insurance premiums • Variable expenses – living costs that differ each time and may not be as easy to estimate • Ex) food, clothing, utilities, medical and dental costs

13. The Budget Process • While the budget categories can vary for the different situations, 8 main divisions are commonly used: • Savings • Food • Clothing • Household • Transportation • Health & personal care • Recreation & education • Gifts & contributions

14. Successful Budgeting • Effective budgeting will be an ongoing learning process for you • The following are common characteristics of a successful budget: • Must be realistic • Should be flexible • Should be evaluated regularly • Must be well planned and clearly communicated • Should have a simple format