Chapter 3

1. Chapter 3 Financial Statements, Tools, and Budgets

2. Learning Objectives • Identify your financial values, goals, and strategies. • Use balance sheets and cash-flow statements to measure your financial health and progress. • Evaluate your financial strength and progress using financial ratios. • Collect and organizethe financial records necessary for managing your personal finances. • Achieveyour financial goals through budgeting.

3. Financial Values,Goals, and Strategies • Financial Planning: Managing income and wealth continuously through life to meet financial goals.

4. Financial Values,Goals, and Strategies • Valuesare fundamental beliefs that define your financial success. • Financial goals follow from values. • Financial Goals: Specific objectives to be attained through financial planning and management efforts. • Financial strategies are pre-established action plans that guide your financial success.

5. How to Achieve Financial Goals

6. Class Discussion Question #1 What are some of your own financial values, goals, and strategies? Why are they important?

7. Financial Statements • Financial Statementsdescribe an individual’s or family’s current financial condition. They measure your financial health and progress. • Balance Sheet (or Net Worth Statement) • Components of the balance sheet: • Assets minus • Liabilities equals • Net Worth

8. Net Worth by Age

9. Financial Statements • Assets: What Is owned: • Monetary Assets (or liquid assets orcash equivalents) • Tangible (or use) assets such as property, vehicles, land or a home • Investment (or capital) assets such as stocks, bonds, CD’s, mutual funds.

10. Financial Statements • Liabilities: What Is owed: • Short-term (or current) liability – credit cards, student loans, etc. • Long-term liability – mortgage, bank notes • Net Worth: What is left over • Strategies toIncrease Your Net Worth include: • Increase Assets, Decrease Liabilities or both!

11. Balance Sheet Example

12. Cash-Flow Statement • The Cash-Flow Statement tracks where your money came from and went. • Income • Expenses • Surplus (or Net Gain or Net Income) • Deficit (or Net Loss)

13. Personal Financeover the Life Cycle

14. Cash-Flow Statement • Expenses • Fixed Expenses: Stay the same month to month • Rent, Mortgage, • Auto Loan • Variable Expenses: Change from month to month • Utilities • Gasoline • Tuition

15. Cash Flow Statement Example

16. Financial Ratios • Basic liquidity ratio • Liquidity: The speed and ease with which an asset can be converted to cash. = Monetary (liquid) assets = $4,420 = 0.82 Monthly Expenses $5,398 The higher the ratio the better and needs to be at least 1

17. Financial Ratios • Asset-to-debt ratio • Do you have enough assets compared to liabilities? = Total Assets = $300,000 = 3 Total Debt $100,000 • Debt service-to-income ratio • Can you meet your total debt obligations? = Annual Debt Repayment = $20,000 = 25% Gross Income $80,000 • A ratio of 36% or less is desirable !

18. Financial Ratios • Debt payments-to-disposable income ratio • Can you pay your debts? = Monthly Non-Mortgage Debt Payments Disposable Income = $500/$5,000 = 10%, where 15% or less is ideal • Investment assets-to-total assets ratio • Do you need to invest more? = Investment Assets/Total Assets = $100K/$300K = 33.3% and may vary by age category

19. Financial Record Keeping • Financial record keeping saves time and makes you money. • Financial Records: Documents that evidence financial transactions.

20. Budgeting • Budget: A paper or electronic document usedto record both planned and actual income and expenditures over a period of time.

21. Budgeting Rules for successful budgeting: • Keep it simple. • Make it personal. • Keep it flexible. • Be positive.

22. Budgeting – Action Before • Set financial goals. • Long-term goals • Intermediate goals • Short-term goals • Make and reconcile budget estimates. • Take-home pay (or disposable income)

23. Budgeting – Action Before • Revise budget estimates. • Earn more income. • Cut back on expenses. • Try a combination of more income and fewer expenses.

24. About Financial Statements and Budgets

25. Budgeting – Action During • Control spending. • Monitor unexpended balances to control overspending. • Use a subordinate budget. • Pay by check to record the purpose of expenditures. • Keep track of credit transactions. • Justify exceptions. • Use the envelope system.

26. Budgeting – Action After • Evaluate budgeting progress. • Budget Variance: Difference between amount budgeted and actual amount spent or received.

27. What to Do with Budgeted MoneyLeft Over at the End of the Month • Put into a revolving savings fund. • Build a cash reserve in a savings account. • Pay down credit card debt. • Put toward a mortgage or other loan. • Invest in a retirement account.

28. Top 3 Financial Missteps in Financial Statements, Tools and Budgets People experience challenges in building and maintaining good credit when they do the following: • Fail to plan for occasional, non-monthly expenditures. • Underestimate how much you spend each month. • Using credit cards to “balance” your budget.

29. Good Money Habits in Financial Statements, Tools, and Budgets • Identify your financial values, goals, and strategies so you can always keep a balance between spending and saving and stay committed to your financial plans. • Develop your own balance sheet and update it annually. • Develop your own cash-flow statement and set up a spending plan for the next month that provides for savings for at least one of your goals. • Calculate your financial ratios annually to assess your financial progress.

30. Good Money Habits in Financial Statements, Tools, and Budgets • Develop a list of financial goals. Start with short-term goals and then expand your list to longer-range goals. Update and revise your goals annually. • Start an uncomplicated personal financial record-keeping system that meets your needs.

31. Questions ?