Chapter 2
PERSONAL FINANCIAL
MANAGEMENT
OBJECTIVES
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Describe the importance of personal financial
management
Identify the significance of money management and
budgeting
Identify the difference between gross income and net
income
Create a personal budget
Recognize money wasters
Identify debt and debt-management resources
Identify wise use of credit
Describe the importance of savings and investments
Protect yourself from identity theft
FINANCIAL MANAGEMENT
Personal financial
management: the process
of controlling your income
and your expenses
FINANCIAL MANAGEMENT
Income
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Income: money coming in
Income may come from:
Parents
 Grants
 Student loans
 Job
After college and starting your new
career your income most likely will
increase
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FINANCIAL MANAGEMENT
Expense
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Expense: money going out
Common college expenses
include:
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Tuition, text books, supplies
Housing
Transportation
Hobbies and entertainment
Medical
PERSONAL FINANCIAL MANAGEMENT AFFECTS
WORK PERFORMANCE
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Personal finances impact all
areas of your life
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Finances assist you in reaching
life goals
Keep debt under control
Affect your work situation
PERSONAL FINANCIAL MANAGEMENT AFFECTS
WORK PERFORMANCE
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Maintain a positive credit report
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Use credit wisely
Begin savings and investment
now
Protect yourself from identity
theft
Pay your bills
YOUR PAYCHECK
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Do not overdo spending
Now is the time to manage your
money
Create a budget to help you
reach your goals
Financial success begins with
discipline and planning
MONEY MANAGEMENT
Budgeting
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Budget: a detailed financial plan used
to allocate money for a specific time
period
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Reflects your goals
Controls and prioritizes spending
Be honest and precise when creating a
budget
MONEY MANAGEMENT
Cash Management
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Cash management is the key to good
budgeting
 Record all transactions
 Carry a small amount of cash
 Reduce trips to the ATM
MONEY MANAGEMENT
Steps to Creating a Budget
1.
2.
3.
4.
Identify goals
Attach financial goals to personal goals
Determine monthly income (money in)
Determine monthly expenses (money out)
 Budget on a monthly basis
 Keep track of all spending
 Reduce money wasters
MONEY MANAGEMENT
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Fixed expenses: expenses
that do not change from month
to month
Flexible expenses: expenses
that change from month to
month
Money wasters: small
expenditures that you do not
realize are actually using up a
portion of your income
DEBT MANAGEMENT
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Debt management involves:
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Debt
Interest
Net worth
Assets
Liabilities
DEBT MANAGEMENT
Debt, Loans, and Interest
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Debt: money you owe for borrowed
funds
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Debt vs. expenses
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Debt includes a loan with interest
Expenses include bills that come regularly
Loan: a large debt that is paid in
smaller amounts over a period of time
and has interest added to the payment
Interest: the cost of borrowing money
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This is extra money paid to the lender
DEBT MANAGEMENT
Total Net Worth
Total Assets – Total Liabilities
= Total Net Worth
 Assets: what you own
 Car, home, furniture
 Liabilities: an obligation to pay
what you owe
 Car loan, home loan
 Net worth: the amount of
money that is yours after paying
off debt
DEBT MANAGEMENT
Steps to Get Out of Debt
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Do not create additional debt
Prioritize your debt
Pay off the smallest amount or
the amount with the largest
interest first
Take the extra cash from a paidoff debt and apply it to the next
debt on your priority list
TALK IT OUT
 What
are warning signs that you
may be getting into debt?
WISE USE OF CREDIT
Manage Your Credit
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Managing credit is the best way to
stay out of debt
Do not abuse the privilege of credit
and credit cards
Spend wisely and pay off the balance
each month
Use credit only for items you can
afford
Avoid taking out loans
TALK IT OUT
Identify potential terms and
conditions that you should
consider before getting credit
from a lender
SAVINGS AND INVESTMENTS
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Begin saving now
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Put away funds for short-term
goals or emergencies
Rule of thumb: Have at least five
months’ income saved for
emergencies
Have savings in a bank
Determine if you should use a
regular savings account or a
Certificate of Deposit
SAVINGS AND INVESTMENTS
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Begin investing now
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Opportunity to increase the value
of your money
Long term
Involves risk
Establish after you have a savings
account
IDENTITY THEFT
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Identity theft is when another
individual uses your personal
information to obtain credit in your
name
Prevent by:
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Disposing of any communication that
contains your personal information
Shred or cut up any mail and delete any
electronic correspondence
Keep copies of important information in a
safe place
IDENTITY THEFT
Tips to Remember
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Do not give out your social security number
over the telephone or Internet without
verifying the authenticity of the company and
individual requesting the information
Document all important numbers and keep
them in a safe place
Practice good personal financial management
Remove your name from credit card and
marketing lists
IDENTITY THEFT
If You Become a Victim of Identity Theft
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File a police report
Contact your bank, credit card companies,
and cell phone provider
Do not change your social security number,
contact the Social Security Administration
Fraud Department
Contact the credit reporting agency fraud
lines
Document everything you do