Chapter 3 Money Management Strategy Todays topics are Opportunity Cost and Money Management Benefits of Organizing Your Financial Documents Organizing Your Personal Financial Records Money Management-planning how to get the most from your money Opportunity Cost and Money Management Financial Decisions involve trade-offs Money Time Use your values and goals to help make these tough decisions Become a better judge What are Financial Documents ? Personal Financial Documents Bank Statements Paycheck stubs Receipts Car titles Birth Certificates Tax Forms Benefits of Organization Plan and measure your financial progress Handle routine money matters deposits and paying bills Determine how much money you have available now and in the future Make effective decisions about how to save money Where to keep your Financial Documents Home file Safe-deposit boxes Computer You could use any of the above Home Files File Drawer, Folders, Cardboard Box Make it simple for you Arrange them by nature and type of each document Get organized, Train yourself to use your home files You might want a safe to protect important documents Safe Deposit Boxes -A small, secure storage compartment that you rent at a bank $100 a year or less What to keep in a Safe Deposit Box Car titles, Mortgage loan papers Rental Agreements Birth Certificates Valuable Collectibles Coins, Stamps More About Safe-Deposit Boxes Kept in locked, fire proof room Accessible only when bank is open Two lock system Safer than keeping things at home Most of the time your things are insured Keep copies at home Home Computers Computer programs to keep track of checks Good for keeping track of finances Keeps you aware! Assignment Section 3.1 Page 65 1-6 Personal Financial Statements Section 3.2 The Personal Balance Sheet Personal Financial Statements-Documents that provide information about your current financial position and present a summary of your income and spending. 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 that you can use when you file your tax return or apply for credit Creating a Balance Sheet Balance sheet/Net worth statement A financial statement that lists the items of value that your own, the debts that you owe, and your net worth Net worth-Difference between the amount that you own and the debts that you owe Create a balance sheet: Step 1 Determine your assets Any items of value that you own-cash, property, personal possessions, investments Step 1 continued: 4 Categories of Wealth 1. Liquid Assets Cash and items that can be quickly converted to cash 2. Real Estate Land and anything that is on it Record the market value Step 1 continued: 4 Categories of Wealth 3. Personal Possessions Cars, other valuable belongings Need to be valuable List at market Value 4. Investment Assets Retirement accounts Step 2: Determine your Liabilities Liabilities-Debts that you owe Current Liabilities-Short term debts that have to be paid within one year (Medical Bills, cash loans, taxes) Long Term Liabilities- Dont have to be fully repaid for at least a year Step 3: Calculate Your Net Worth Subtract your liabilities from your assets Assets-liabilities=Net worth Net worth does not equal how much money you have to spend Insolvency-Condition that occurs if your liabilities are greater than your assets Step 4: Evaluate Your Financial Situation Keep an updated balance sheet You may need to change it Increase your net worth by: Increasing savings Increasing value of investments Reducing expenses and debts Assignment Balance Sheet Use the example on page 69 and create your personal balance sheet Think of all of your debts and liabilities Make sure your titles and headings match the example If you do not have a certain type of asset of liability, remove the title off your balance sheet Utilize Microsoft Excel The Cash Flow Statement Income Versus Expenses Cash Flow Money that actually goes into and out of your wallet and bank accounts Two Parts of Cash Flow 1. Cash inflow Income 2. Cash outflow All of the money you spend Step 1: Record Your Income List all sources of income during a month Use exact amount that is available to use Not your Gross Pay Before taxes and other deductions Use your take-home pay/net pay Money left after taxes and other deductions Discretionary income-Money left after you have paid for essentials Step 2: Record Your Expenses Two Types of Expenses Fixed-About the same each month Variable-Change from month to month Step 3: Determine Your Net Cash Flow Subtract your Expenses from your Income Income-Expenses=Cash Flow Do you have a surplus or a deficit? Surplus-Extra money left that can be spent or saved Deficit-When you spend more than you earn Assignment - Cash Flow Statement and Text Questions Use the example on page 71 and create your personal cash flow statement Think of all of your incomes and expenses Make sure your titles and headings match the example Utilize Microsoft Excel Section 3.2 Page 74 1-6 Budgeting to Achieve Your Financial Goals Section 3.3 Preparing a Practical Budget Budget-A plan for using your money in a way that best meets your wants and needs Learn to live within your income and how to spend your money wisely Step 1: Setting Your Financial Goals What do you want to accomplish with your money? You need to plan Look at values and goals Make your goals specific Shot-term, intermediate, long-term goals Step 2: Estimate Your Income Record your estimated income for next month Include all sources of income Do not include Maybe Money This could be hard depending on your job/career Step 4: Budgeting for Fixed Expenses List fixed expenses Mortgage/rent, car and school loans, insurance Step 5: Budgeting for Variable Expenses Not as easy as planning for fixed expenses Medical costs Heating and cooling costs can vary When in doubt, guess high Consumer Price Index-A measure of the changes in prices for commonly purchased goods and services in the United States Allows you to check and see if you are spending too much money on a particular item What are some ways you could save money each month? Step 6: Recording what you Spend Keep track of your income and expenses Budgeted amount does not always equal actual amount spent Budget variance-The difference between the budgeted amount and the actual amount that you spend. Step 7: Reviewing Spending and Saving Patterns Budgeting is a continual process Reviewing your Financial Progress Revising your goals and adjusting your budget Assignment Section 3.3 Page 85 1-6