chapter 3: financial statements, tools, and budgets power

Chapter 3:Financial Statements, Tools, and Budgets

Garman/Forgue

Personal FinanceNinth Edition

PPT slide program prepared by Amy Forgue and Ray Forgue.

Copyright ©Houghton Mifflin Company. All rights reserved. 3- 2

Learning Objectives

1. Identify your financial values, goals, and strategies.

2. Use balance sheets and cash-flow statements to measure your financial health and progress.


Learning Objectives

3. Evaluate your financial strength and progress using financial ratios.

4. Maintain the financial records necessary for managing your personal finances.

5. Outline and work toward achieving your financial goals through budgeting.


Financial Values, Goals, and Strategies

• Financial Planning: Managing income and wealth continuously through life to meet financial goals.



• Values define your financial success.

• Financial goals follow from values.

• Financial Goals: Specific objectives to be attained through financial planning and management efforts.



• Financial strategies guide your financial success.


Financial Statements

• Financial Statements measure your financial health and progress.

• Balance Sheet (or Net Worth Statement)



• Components of the balance sheet:– Assets

– Liabilities

– Net Worth



• Assets: What Is owned– Monetary Assets (or liquid assets or

cash equivalents)

– Tangible (or use) assets

– Investment (or capital) assets



• Liabilities: What Is owed– Short-term (or current) liability

– Long-term liability



• Net Worth: What is left


Strategies to Increase Your Net Worth

• Increase Assets.

• Decrease Liabilities.

• or both!


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)


Cash-Flow Statement

• Expenses– Fixed Expenses

– Variable Expenses


Financial Ratios

• Basic liquidity ratio

• Liquidity: The speed and ease with which an asset can be converted to cash.


Financial Ratios

• Asset-to-debt ratio

• Do you have enough assets compared to liabilities?


Financial Ratios

• Debt service-to-income ratio

• Can you meet your total debt obligations?


Financial Ratios

• Debt payments-to-disposable income ratio

• Can you pay your debts?


Financial Ratios

• Investment assets-to-total assets ratio

• Do you need to invest more?


Financial Record Keeping

• Financial record keeping saves time and makes you money.

• Financial Records: Documents that evidence financial transactions.


Budgeting

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


Budgeting

Rules for successful budgeting:1. Keep it simple.

2. Make it personal.

3. Keep it flexible.

4. Be positive.


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)



• Revise budget estimates.

• Earn more income.

• Cut back on expenses.

• Try a combination of more income and fewer expenses.



• Plan cash flows.

• Cash-Flow Calendar

• Revolving Savings Fund


Budgeting – Action During

• Control spending.

• Monitor unexpended balances to control overspending.

• Use a subordinate budget.

• Pay by check to record the purpose of expenditures.


Budgeting – Action During

• Keep track of credit transactions.

• Justify exceptions.

• Use the envelope system.


Budgeting – Action After

• Evaluate budgeting progress.

• Budget Variance: Difference between amount budgeted and actual amount spent or received.


Budgeting

• Record Keeping: Recording sources and amounts of dollars earned and spent.

• Adding up actual income and expenditures


What to Do with Budgeted Money Left 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.


What to Do with Budgeted Money Left Over at the End of the Month

• Put toward a mortgage or other loan.

• Invest in a retirement account.

• Spend like “made money.”


Top 3 Financial Missteps in Financial Statements, Tools and Budgets

People slip up in building and maintaining good credit when they do the following:

1. Fail to plan for occasional, non-monthly expenditures.

2. Underestimate how much you spend each month.

3. Using credit cards to “balance” your budget.


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 statements monthly or quarterly and compile them into an annual statement.

• Calculate your financial ratios annually to assess your financial progress.



• 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.

chapter 3: financial statements, tools, and budgets power

Documents

financial goals

financial health

financial success

financial transactions

financial statements

strategies financial

financial ratios asset

financial statements