Planning for Successful
Money Management
Chapter 3
Money Management
Strategy: Financial
Statements and Budgeting
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Personal Finance 7e
Kapoor
Dlabay
Hughes
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Did You Know?
„ For
years, coworkers were amused by
a woman who carried a brown bag
lunch to her job each day. That
woman later retired in financial
comfort and lived her later years in
beachfront property. A daily coffee
and muffin can add up to over $1,300
a year.
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© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
“A Little Becomes a Lot”
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Homework
Read the short case and answer all four
case questions on p. 69.
Daily spending and saving decisions are
at the center of financial planning.
Decisions must be coordinated with your
needs, goals, and personal situations.
Money management means the day-today financial activities necessary to
manage personal economic resources,
while working toward long-term financial
security.
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Opportunity Cost and
Money 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
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takes your valuable time.
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Major Money Management Activities
Storing
and
maintaining
personal
financial
records
and
documents.
Creating
personal
financial
statements
(balance
sheets and
cash flow
statements
of income
and outflow).
Creating
and
implementing
a plan for
spending,
and saving
(budgeting).
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Benefits of an Organized
System of Financial Records
Records on Personal Computer
„ Home computer.
„ Handling daily business affairs, including
Š
payment of bills on time.
„ Planning and measuring financial progress.
„ Completing required tax reports.
„ Making effective investment decisions.
„ Determining available resources for current
and future buying.
Š
Current and past budgets.
Summary of checks written and other banking
transactions.
Š Past income tax returns prepared with tax
preparation software.
Š Account summaries and performance
results of investments.
Š Computerized versions of wills,
estate plans, and other documents.
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What to Keep in Your Home File
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Š Personal and employment records.
Š Money management records.
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Š Tax records.
Š Financial services records.
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Š Credit records.
Š Consumer purchase and auto records.
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Š Housing records.
Š Insurance records.
Š Estate planning and retirement records.
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Safe deposit box is for records and items that would be
hard to replace.
Š Birth, marriage and death certificates.
Š Citizenship and military papers.
Š Adoption and custody papers.
Š Serial numbers and photos of valuables.
Š CDs and credit and banking account numbers.
Š Mortgage papers and titles.
Š List of insurance policy numbers.
Š Stock and bond certificates.
Š Coins and other collectibles.
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Š Copy of will.
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Birth certificates, wills, and Social Security
information should be kept indefinitely.
Keep records on personal property and
investments as long as you own them.
Keep documents related to the purchase
and sale of real estate indefinitely.
Copies of tax returns and supporting data
should be kept six years.
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What to Keep in a Safe Deposit Box
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How Long to Keep Records
Items you refer to often.
Š Investment records.
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Purpose of Personal
Financial 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.
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Components of a Balance Sheet
Creating and Implementing a Budget
(net worth statement)
„ Assets - what you own.
„ Assessing your current situation.
Š
Liquid assets.
Š Real estate.
Š Personal possessions.
Š Investment assets.
„ Liabilities - what you owe
Š Current liabilities (< 1 year).
Š Long term liabilities.
„ Compute your net worth.
Š Assets minus liabilities.
Š Insolvent means liabilities far exceed assets.
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Where Did Your Money Go?
Components of a Cash Flow Statement
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„ Steps in the budgeting process (continued).
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Budget estimated amounts that are to be spent
for various household and living expenses.
These are your variable expenses.
Record actual amounts for inflows and
outflows, comparing actual amounts with
budgeted amounts to determine variances.
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Purposes of a Budget
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Creating and Implementing a Budget
„ Shows inflow and outflow during a given time
period.
Š Record inflow.
y Net income from employment.
y Savings and investment income.
y Other sources.
Š Record cash outflows.
y Fixed and variable expenses.
y Net cash flow can be a surplus or a deficit.
„ Use this statement as a basis for creating a
spending, saving and investment plan.
Measure your current financial position.
Determine your needs, values and life situation.
Steps in the budgeting process.
1 Set financial goals.
2 Estimate income from all sources.
3 Budget amount for an emergency fund, periodic
expenses and financial goals.
4 Budget set amounts that you are obligated to
pay. These are your fixed expenses.
Š
Deficits and surpluses.
Review your spending and savings
patterns and evaluate whether
revisions are needed in your
savings and spending plans.
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Characteristics of Successful Budgeting
In contrast to cash flow which was a
record of how you spent money in a past
time period, a budget is a plan for
spending in the future, such as for the
next month. A budget helps you…
„ Well planned.
„ Realistic.
„ Flexible.
„ Clearly communicated.
Š Live within your income.
Š Spend your money wisely.
Š Reach your financial goals.
Š Prepare for financial emergencies.
Š Develop wise financial management habits.
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Saving to Achieve Financial Goals
„ Common reasoning for saving include…
Š To set aside money for irregular and unexpected
expenses.
Š To pay for the replacement of expensive items,
such as appliances, cars or a down payment on
a house.
Š To buy special items like recreational equipment
or to pay for a vacation.
Š To provide for long-term expenses such as
retirement or the education of children.
Š To earn income from the interest on savings for
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use in paying living expenses.
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Homework
„
„
Read Chapter 5, Savings Plans and
Payment Accounts.
Work out all of the financial planning
problems (p. 91-92), and the financial
planning case on p. 93.
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