Chapter 5

2. Money Management Strategy Chapter 5 What money management techniques can you employ to achieve your future financial goals?

3. Money Management Strategy Chapter 5 Organizing and maintaining a personal financial plan are essential to budgeting for future financial goals.

4. Money Management Strategy Chapter 5 • money management • safe-deposit box • personal financial statement • net worth • assets • wealth • liquid assets • real estate • market value • liabilities • insolvency • cash flow • income • take-home pay • discretionary income • surplus • deficit • budget • budget variance

5. Money Management Strategy Chapter 5

6. Money Management Strategy Chapter 5 Section 1 Organizing Financial Records • Discuss the relationship between opportunity costs and money management. • Explain the benefits of keeping financial records and documents. • Describe a system to maintain personal financial documents.

7. Money Management Strategy Chapter 5 Section 1 Organizing Financial Records Opportunity Costs and Money Management How do your spending options fit: Your Goal of EffectiveMoney Management Your Current FinancialSituation Your Values money management day-to-day financial activities necessary to get the most from one’s money

8. Money Management Strategy Chapter 5 Section 1 Organizing Financial Records Organization of Financial Documents Financial Documents AutomobileTitles Pay Stubs BirthCertificates Bank Statements MarriageLicense Broker Reports Credit Card Statements Tax Forms

9. Money Management Strategy Chapter 5 Section 1 Organizing Financial Records Organization of Financial Documents

10. Money Management Strategy Chapter 5 Section 1 Organizing Financial Records Organization of Financial Documents Storing Your Financial Documents HomeFiles Safe-DepositBox HomeComputer safe-deposit box a small, secure storage compartment that can be rented in a bank (see example on next slide)

11. Safe Deposit Box

12. Money Management Strategy Chapter 5 Section 1 Organizing Financial Records How are the roles of maintaining financial records and managing opportunity costs in a sound financial plan similar and different? Managing opportunity costs and maintaining financial records are both critical to a sound financial plan. Making sound financial decisions to get the most out of your money is an important step. In order to make and track these decisions you need to maintain financial records to keep track of your money and determine your financial position.

13. Money Management Strategy Chapter 5 Section 2 Personal Financial Statements • Describe a personal balance sheet and cash flow statement. • Develop a personal balance sheet and cash flow statement.

14. Money Management Strategy Chapter 5 Section 2 Personal Financial Statements Personal Balance Sheet (see example on page 127, 147) Personal financial statements can help you: Determine what you own and what you owe Measure your progress toward your financial goals Track your financial activities Organize information required to file your tax return or apply for credit personal financial statement a statement that gives information about current financial position and presents a summary of income and spending

15. Money Management Strategy Chapter 5 Section 2 Personal Financial Statements Personal Balance Sheet Your personal balance sheet includes your net worth. personal balance sheet a financial statement that shows what one owns and debts that one owes net worth the difference between the amount you own and the debts you owe

16. Money Management Strategy Chapter 5 Section 2 Personal Financial Statements Personal Balance Sheet Your assets are an indication of your wealth. assets owned items of value, such as cash, real estate, personal possessions, and investments wealth property that has a money value or an exchangeable value

17. Money Management Strategy Chapter 5 Section 2 Personal Financial Statements Personal Balance Sheet Liquid Assets Real Estate Categories of Wealth Personal Possessions Investment Assets liquid assets cash and items that can be quickly converted to cash real estate land and any structures that are on it, such as a house or any other building

18. Money Management Strategy Chapter 5 Section 2 Personal Financial Statements Personal Balance Sheet What is market value? market value the price at which property would sell

19. Money Management Strategy Chapter 5 Section 2 Personal Financial Statements Personal Balance Sheet Types of Liabilities Current Liabilities Long-Term Liabilities • Insurance premiums • Current taxes • Utility bills • Medical bills • Home improvement loans • Vehicles • College tuition • Mortgage Loans liabilities debts that one owes

20. Money Management Strategy Chapter 5 Section 2 Personal Financial Statements Personal Balance Sheet What is insolvency? insolvency the inability to pay debts when they are due

21. Money Management Strategy Chapter 5 Section 2 Personal Financial Statements Personal Balance Sheet Reduce Expenses How to Increase Your Net Worth Reduce Spending and Debts Increase Your Savings Increase Your Investments

22. Create Your Own Personal Balance Statement • Put your name on worksheet • Fill in all categories • List your personal possession assets using your best guess as to the value • Use a zero in category if it is not applicable • Record Total Assets and Total Liabilities • Calculate Net Worth

23. Money Management Strategy Chapter 5 Section 2 Personal Financial Statements Cash Flow Statement: (see example on page 131)Income Versus Expenses How to Create a Cash Flow Statement Record all your sources of income. Record all your expenses. Calculate your net cash flow. cash flow the amount of cash that is available at any given time income cash inflow, including paychecks, allowances, and interest earned

24. Money Management Strategy Chapter 5 Section 2 Personal Financial Statements Cash Flow Statement: Income Versus Expenses What is take-home pay? take-home pay amount of income left after taxes and other deductions are subtracted from gross pay

25. Money Management Strategy Chapter 5 Section 2 Personal Financial Statements Cash Flow Statement: Income Versus Expenses What is discretionary income? discretionary income the money left over after paying for essentials such as rent, utilities, clothing, transportation, and medications

26. Money Management Strategy Chapter 5 Section 2 Personal Financial Statements Cash Flow Statement: Income Versus Expenses What is a surplus? surplus extra money that you can spend or save

27. Money Management Strategy Chapter 5 Section 2 Personal Financial Statements Your Financial Position If you end the month with a positive cash flow, you can invest the surplus. If you end the month with a negative cash flow a deficit is created. deficit financial situation that occurs when more money is spent than received In-Class Activity: Complete a Personal Balance Statement for yourself. Fill in all blank lines, using a zero if the category is not applicable.

28. Partner Activity: Evaluate Financial Statements • Work with a partner (or alone, if you prefer) • Be sure to write your name(s) on the worksheet • There are two statements • Balance Sheet • Monthly Cash Flow Statement • Find the mistakes in each statement • Items in the wrong category • Math mistakes • Missing categories • Incorrect use • Remember…these are MONTHLY statements • Correct the statements • Be sure to answer the questions at the bottom of the worksheet

29. Money Management Strategy Chapter 5 Section 2 Personal Financial Statements How are a personal balance sheet and cash flow statement similar? How are they different? What role does each play in the development of a personal financial plan? A cash flow statement and a personal balance sheet both list expenses/liabilities and provide a snapshot of your financial situation. However, a cash flow statement does not break down all of your liabilities. It focuses on your monthly payments. A personal balance sheet does not show your income only the balance in your accounts.

30. Money Management Strategy Chapter 5 Section 3 Budgeting for Financial Goals • Identify the steps to create a personal budget. • Discuss the advantages of increasing your savings.

31. Money Management Strategy Chapter 5 Section 3 Budgeting for Financial Goals Preparing a Budget (see example on page 136) If you want to be successful at financial planning, you must have a budget. budget a plan for spending and investing money

32. Money Management Strategy Chapter 5 Section 3 Budgeting for Financial Goals Preparing a Budget Steps to Developing a Budget See page 135 7. Review Spending and Saving Patterns 6. Record What You Spend 5. Budget for Variable Expenses 4. Budget for Fixed Expenses 3. Budget for Unexpected Expenses 2. Estimate Your Income 1. Set Your Financial Goals

34. Money Management Strategy Chapter 5 Section 3 Budgeting for Financial Goals Preparing a Budget A budget variance can be a surplus or a deficit. budget variance the difference between the budgeted amount and the actual amount spent

35. Money Management Strategy Chapter 5 Section 3 Budgeting for Financial Goals A Successful Budget Characteristics of an Effective Budget CarefullyPlanned EasilyAccessible Practical Flexible

36. Money Management Strategy Chapter 5 Section 3 Budgeting for Financial Goals Increasing Your Savings Savings Strategies Pay Yourself First Use PayrollSavings SpendLess

37. How much should you spend in each category? Choose a Strategy: • Find Average spending percentages nationally (CPI) • Use a template • Track your spending and create percentages off what you already spend

38. Determining Reasonable Expense Levels • Consumer Price Index • Produced by the U.S. Dept of Labor • Measures the changes in prices for commonly purchased goods and services in the U.S. • Compare the CPI to your actual budget • Can indicate when you are spending too much/little on various items http://www.bls.gov/news.release/cpi.t01.htm

39. Percentage Budgeting • Simple and straightforward concept • Instead of allocating fixed-dollar amounts to every line item, you establish a target percentage for each expense category • This process shows you the inherent trade-offs in your spending decisions • Can show you where you need to consider cutting back and where you may be able to afford to spend a little more • Flexible…easily adustable • Live with parents, use housing % elsewhere • Not as interested in food, use for clothing

40. Additional Resources for Suggested Budget Percents: • See Shared FilesClaxtonNewPersonalFinanceBudget Forensics Resources • Google “Budget Percentage Guidelines”

41. Budget Forensics Activity • Read “The Set Up” • Complete “The Investigation” • On page 2, Column 2, Calculate the Current Dollar Amount and % for each category • To get percent of Income: Divide money spent by income Example: $700 spent on housing divided by $2500 income = 700/2500 = .28 or 28% • On page 2, Column 3, Calculate Recommended Dollar Amount and % for each category • To get dollar amount: multiply income by percent Example $2500 income x .31 (31%) = $775 (To review formulas see bottom of worksheet)

42. Budget Forensics (continued) • Determine in which categories the family is overspending • i.e. Food = $ 2,500 x .15 (15%) = $375 (recommended) • The Pence’s current expenditures in food = $400 • The Pence’s are spending $25 more than the recommended amount • Re-allocate the expenditures into an appropriate category to solve the Pence’s saving problem • i.e. The “extra” $25 the Pence’s were spending on “Food” could instead be added to the “Savings” category • Write a simple explanation for each of your changes • Complete the “Assessment Questions” on the next page

43. Think About It…What Will Your Future Budget Look Like? (Activity continued) • Create a budget proposal for your future self • Use your “Monthly Income” from the “My Life” assignment • Create and classify a list of expenses • Assign Percentages and dollar amounts to each category of your budget (use “tips” at bottom of worksheet) • REMEMBER: When you total your percentages column it should equal 100%, which is equal to 100% of your monthly income • When budget is complete, review and adjust as needed…fill in simple reason as to why it was adjusted • Rubric is attached…Total Points Available = 100

44. Money Management Strategy Chapter 5 Section 3 Budgeting for Financial Goals Explain why it is sometimes difficult for people to increase their savings. How will increasing the amount you put in savings affect your budget? It is difficult to resist the temptation to spend any extra money each month. If you increase your savings you may need to adjust spending in another area such as your variable expenses.

45. Money Management Strategy Chapter 5 Balance of Trade What could a surplus in the balance of trade mean? Balance of trade is determined by subtracting total imports from total exports over a period of time. Strong Manufacturing Base High Tariffs Overseas Demand for U.S. Products Less Disposable Income for Consumers

46. Money Management Strategy Chapter 5

47. Money Management Strategy Chapter 5

48. Answer: Question #10, page 146$925 cost of trip- 250 parent’s contribution$675$675/12 = $56.25 needed per month8 hours x $10 per hour = $80$80 income-45 expenses (fixed and variable)$35$56.25 - 35.00$21.25 additional will need to be saved EACH month

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