Chapter 2 Money Management Strategy: Financial Statements and Budgeting

1. Chapter 2Money ManagementStrategy: Financial Statements and Budgeting Kapoor Dlabay Hughes Ahmad Prepared by Cyndi Hornby, Fanshawe College 2-1  2004 McGraw-Hill Ryerson Ltd.

2. Learning Objectives – Chapter 2 • Recognize relationships among financial documents and money management activities. • Create a system for maintaining personal financial records. • Develop a personal balance sheet and cash flow statement. • Create and implement a budget. • Calculate savings needed to achieve financial goals. 2-2

3. Learning Objective # 1 Recognize relationships among financial documents and money management activities. 2-3

4. Opportunity Cost & Money Management • Spending money reduces the amount you can save and invest. • Saving and investing reduces the amount you can spend now. • Buying on credit ties up future income. • Using savings for purchases results in lost interest -savings can’t be used for other purposes. • Every decision made means you give up something else. • Comparison shopping can save money but takes your valuable time. 2-4

5. Major Money Management Activities Createpersonalfinancialstatementsof incomeandoutflow(balancesheet andcash flow). Create Storeandmaintainpersonalfinancialrecordsanddocuments. and implement a plan for spending (budgeting) and saving. 2-5

6. Learning Objective # 2 Create a system for maintaining personal financial records. 2-6

7. Why Keep Financial Records? • Handling daily business affairs, including paying of bills on time • Planning and measuring financial progress • Completing required tax forms • Making effective investing decisions • Determining available resources for current and future buying 2-7

8. What to Keep in Your Home File • Items you refer to often. • Personal and employment records. • Tax records. • Financial services records. • Money management records. • Credit records. • Consumer purchase records. • Insurance records. • Investment records. • Housing and car records. • Estate planning and retirement records. 2-8

9. What to Keep in a Safe Deposit Box • Safe deposit box is for records and items that would be hard to replace. • Birth, marriage and death certificates. • Citizenship and military papers. • Adoption and custody papers. • Serial numbers and photos of valuables. • GIC’s and bank account numbers. • Mortgage papers and titles. • List of insurance policy numbers. • Stock and bond certificates. • Coins and collectibles. • Copy of will. 2-9

10. Other Places to Keep Records • Automobile. • Vehicle registration. • Lawyer. • Original of your will and living will. • Doctor and hospital. • Copy of your living will. • Home computer. • Current and past budgets. • Chequing account records. • Wills, estate plans, investments. • Past income tax returns. 2-10

11. Learning Objective # 3 Develop a personal balance sheet and cash flow statement. 2-11

12. 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 information you can use when preparing tax forms or applying for credit. 2-12

13. Balance Sheet • A financial statement that reports what an individual or family owns or owes; also called a net worth statement - = Items of value (what you own) Amounts Owed (what you owe) Net Worth (your wealth) 2-13

14. Components of a Balance Sheet(Net Worth Statement) • Assets - what you own. • Liquid assets. • Real estate. • Personal possessions. • Investment assets. • Liabilities - what you owe • Current liabilities. • Long term liabilities. • Net Worth. • Assets minus liabilities. • Insolvent means liabilities far exceed assets. 2-14

15. Cash Flow Statement • A financial statement that summarizes cash receipts and payments for a given period of time + = Total cash received during that time period Cash outflows during the time period Cash surplus or deficit 2-15

16. Components of a Cash Flow Statement • Shows inflow and outflow during a given time period. • Record income. • Income from employment. • Savings and investment income. • Other sources. • Record cash outflows. • Fixed and variable expenses. • Net cash flow can be a surplus or a deficit. • Used as a basis for creating a spending, saving and investment plan. 2-16

17. Learning Objective # 4 Create and implement a budget. 2-17

18. Creating and Implementing a Budget • Budget: A specific plan for spending income • Purpose: • Live within your budget • Spend your money wisely • Reach your financial goals • Prepare for financial emergencies • Develop wise financial management habits 2-18

19. The Budgeting Process Step 1: Setting Financial Goals • plans for future activities that require you to plan your spending and investing • Should be realistic; stated in specific, measurable terms; have a definite time frame; imply type of action to be taken 2-19

20. The Budgeting Process (con’t) Step 2: Estimating Income • Estimate available money for given period of time – usually one month • Based on number of times income received each month, spending should be planned accordingly • Difficult if your earnings vary by season or income is irregular 2-20

21. The Budgeting Process (con’t) Step 3: Budgeting Emergency Fund and Savings • Recommend 3-6 months of living expenses be established Step 4: Budgeting Fixed Expenses • Will depend on your current needs and plans for the future Step 5: Budgeting Variable Expenses • Will fluctuate by household situation, time of year, health, economic conditions, etc. 2-21

22. The Budgeting Process (con’t) Step 6: Recording Spending Amounts • Record actual income and expenses • Budget Variance – difference between amount budgeted & the actual amount received or spent • Deficit – actual spending exceeds planned spending • Surplus – actual spending less than planned spending 2-22

23. The Budgeting Process (con’t) Step 7: Reviewing Spending and Saving Patterns • Review your financial progress • Revise your goals and budget allocations 2-23

24. Successful Budgets Are... • Well planned. • Realistic. • Flexible. • Clearly communicated. 2-24

25. Learning Objective # 5 Calculate savings needed to achieve financial goals. 2-25

26. Saving to Achieve Financial Goals • Common reasoning for saving include… • To set aside money for irregular and unexpected expenses. • To pay for the replacement of expensive items, such as appliances, cars or a down payment on a house. • Save to buy special items or pay for a vacation. • Put aside money to long-term expenses such as retirement or children's education. • To earn income from the interest on savings for use in paying living expenses. 2-26

27. Selecting a Saving Technique • Should make regular periodic savings deposits • Can be a percentage of income (5-10%) or specific dollar amount • Write a cheque each payday and deposit into a special savings account at another financial institution • Payroll deduction • Direct deposit • Saving coins at end of each day 2-27

28. Suggestions for Dual-Income Households • Pooled Income – incomes combined and bills paid from pool • Sharing the Bills – each responsible for predetermined bills • 50/50 – each contribute equally to pool • Proportionate Contribution – each contribute percentage of his/her income 2-28