CHAPTER THREE: MONEY MANAGEMENT & STRATEGY

1. UNIT ONE PLANNING PERSONAL FINANCES CHAPTER THREE: MONEY MANAGEMENT & STRATEGY “I didn't end up going bankrupt... I made some great investments and I held on to my money, which also enables me to have the freedom to do what I want now. But it's not about finances. No matter what, it's about keeping it real.” -Vanilla Ice

2. CHAPTER THREE: MONEY MANAGEMENT & STRATEGY LESSON ONE – DETERMINING NET WORTH

3. Every time you make a decision, you choose one thing and reject another. What is that called? • What is Money Management? • When decisions regarding Money Management, you must always consider the financial trade-offs • Trade-offs can be difficult to resolve because they may be benefits for each side • How you can be sure you are making the right Money Management decision? MONEY MANAGEMENT & STRATEGY

4. Consider the factors that influence your decision making (i.e. goals, values, wants, needs, etc.) • Always set a financial objective (or goal) when you are ready to become financially independent MONEY MANAGEMENT & STRATEGY

5. ORGANIZING FINANCIAL DOCUMENTS • The first step of effective money management is to organize your personal financial documents • There are several types of personal financial documents: • Bank Statements • Paycheck Stubs • Ownership Titles (cars, boats, etc.) • Tax Forms • Monthly Budgets • Cash Flow Spreadsheets MONEY MANAGEMENT & STRATEGY

6. ORGANIZING FINANCIAL DOCUMENTS • Organizing your personal financial documents will allow you to: • Plan and measure your financial progress • Handle routine money matters (paying bills on time) • Wealth forecasting • Make effective decisions about how to save money MONEY MANAGEMENT & STRATEGY

7. PERSONAL FINANCIAL STATEMENTS • Personal Balance Sheet • also known as a “Net Worth Statement” • Net worth is the difference between the amount that you own and the debts that you owe • There are four steps to creating a personal balance sheet MONEY MANAGEMENT & STRATEGY

8. PERSONAL BALANCE SHEETS • STEP ONE: Determine Your Assets • Assets are any items of value that an individual or company owns, including cash, property, personal possessions, and investments • To determine assets, you must consider the four categories of wealth: • Liquid Assets– cash, checking accounts, savings accounts, etc. • Real Estate– land, houses, buildings (at market value) • Personal Possessions– cars, furniture/appliances, electronics, etc. • Investments - stocks, bonds, pensions, retirement accounts MONEY MANAGEMENT & STRATEGY

9. PERSONAL BALANCE SHEETS • STEP TWO: Determine Your Liabilities • Liabilitiesare debts that you owe • There are two types of liabilities: • Current Liabilities– medical bills, credit card bills, taxes • Long Term Liabilities– mortgages, student loans, car loans MONEY MANAGEMENT & STRATEGY

10. PERSONAL BALANCE SHEETS • STEP THREE: Calculate Your Net Worth • To calculate your net worth, you simply subtract your liabilities from your assets (A – L = Net Worth) • Even if you have a high net worth, you may still have difficulty paying your bills (especially when your assets are not liquid) • If you cannot pay your debts (or if your liabilities are greater than your assets) you will be considered insolvent MONEY MANAGEMENT & STRATEGY

11. PERSONAL BALANCE SHEETS • STEP FOUR: Evaluate Your Financial Situation • You can use your personal balance sheet to evaluate your situation • You should create a new balance sheet every few months • You can increase your net worth by increasing your savings, increasing your investments, reducing your expenses, and/or reducing your debts MONEY MANAGEMENT & STRATEGY

12. CHAPTER THREE: MONEY MANAGEMENT & STRATEGY LESSON TWO – CASH FLOW STATEMENTS

13. CASH FLOW STATEMENTS • What is Cash Flow? • Cash inflow (money you receive / income) • Cash outflow (money you spend) • A Cash Flow Statement is a summary of your cash flow during a particular period, usually a month or a year MONEY MANAGEMENT & STRATEGY

14. CASH FLOW STATEMENTS • There are three steps to creating a Cash Flow Statement • STEP ONE: Record Your Income (inflow) • List all your sources of income during a given month • Only include “take-home pay” in on your statement MONEY MANAGEMENT & STRATEGY

15. CASH FLOW STATEMENTS • There are three steps to creating a Cash Flow Statement • STEP TWO: Record Your Expenses(outflow) • Break down expenses between “fixed” and “variable” • Identify expenses prior to categorizing them MONEY MANAGEMENT & STRATEGY

16. CASH FLOW STATEMENTS • There are three steps to creating a Cash Flow Statement • STEP THREE: Determine Your Net Cash Flow • Subtract expenses from your income (I - E) • A positive cash flow is known as a surplus • A negative cash flow is known as a deficit MONEY MANAGEMENT & STRATEGY

17. YOUR FINANCIAL POSITION • Every time your cash flow changes, so does your net worth • Whenever you experience a deficit, your net worth declines • Increase liabilities or reduce assets • A surplus will result in an increase of net worth • Increase assets or reduce liabilities • Net worth and Cash Flow can give you additional information on your financial situation (Figure 3.4) MONEY MANAGEMENT & STRATEGY

18. CHAPTER THREE: MONEY MANAGEMENT & STRATEGY LESSON THREE – FINANCIAL CALCULATIONS

19. YOUR FINANCIAL POSITION • DEBT RATIO: Total Liabilities / Net Worth • The lower the better • LIQUIDITY RATIO: Liquid Assets / Monthly Expenses • Indicates the number of months your would be able to pay your living expenses… the higher the better • DEBT – PAYMENTS RATIO: Mo. Credit Paymnts / Take Home Pay • Indicates how much of a person’s earning go to debts (excluding mortgage) – should be less than 20% • SAVINGS RATIO: Amount Saved Each Month / Gross Monthly Income (should be at least 10%) MONEY MANAGEMENT & STRATEGY

20. CLASS WORK • Complete THINK CRITICALLY, USE MATH SKILLS, and SOLVE MONEY PROBLEMS on page 73 of your textbook • QUIZ on Wednesday (Take-home) MONEY MANAGEMENT & STRATEGY