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Chapter 3

Chapter 3. Money Management Strategy: Financial Statements and Budgeting. Personal Finance. 6e. Kapoor Dlabay Hughes. 3-1. Opportunity Cost and Money Management. Spending money on current living expenses reduces the amount you can save and invest.

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Chapter 3

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  1. Chapter 3 Money Management Strategy: Financial Statements and Budgeting Personal Finance 6e Kapoor Dlabay Hughes 3-1

  2. Opportunity Cost andMoney Management • Spending money on current living expenses reduces the amount you can save and invest. • Saving and investing for the future reduces the amount you can spend now. • Buying on credit ties up future income. • Using savings for purchases results in lost interest and means savings can’t be used for other purposes. • Comparison shopping can save money but takes your valuable time. 3-2

  3. Major Money Management Activities Createpersonalfinancialstatementsof incomeandoutflow(balancesheet andcash flow). Storeandmaintainpersonalfinancialrecordsanddocuments. Create and implement a plan for spending (budgeting) and saving. 3-3

  4. Why Keep Financial Records? • To help making spending decisions. • To plan future spending. • To pay bills on time. • To see changes in net worth. • To make good investment decisions. • To prepare your income tax forms. 3-4

  5. 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. 3-5

  6. 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. • CDs and account numbers. • Mortgage papers and titles. • List of insurance policy numbers. • Stock and bond certificates. • Coins and collectibles. • Copy of will. 3-6

  7. 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. • Checking account records. • Wills, estate plans, investments. • Past income tax returns. 3-7

  8. Purpose of PersonalFinancial 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. 3-8

  9. 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. 3-9

  10. Components of aCash 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. 3-10

  11. Creating and Implementing a Budget • Assessing your current situation. • Measure your current financial position. • Determine your needs, values and life situation. • Planning your financial direction. • Setting financial goals. • Creating budget allocations. • Budget amount for an emergency fund, periodic expenses and financial goals. • Budget set amounts that you are obligated to pay. • Budget estimated amounts that are to be spent for various household and living expenses. 3-11

  12. Creating and Implementing a Budget (continued) • Implementing your budget. • Monitoring spending, saving and investment patterns. • Selecting a budget system. • Budgeting systems include... • Mental budget, physical budget, written budget, and computerized budget. • Evaluating yourbudgeting program. • Reviewing your financial progress . • Revising (as needed) your financial goals and your budget allocations. 3-12

  13. Successful Budgets Are... • Well planned. • Realistic. • Flexible. • Clearly communicated. 3-13

  14. 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. 3-14

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