Personal Finance Spring 2006
Chapter 2 Objectives:
Objective [1]
Identify the main components of wise money management. Successful
money management requires a coordination of personal financial records,
personal financial statements, and budgeting activities. An organized system
of financial records and documents should provide ease of access as well as
security for financial documents that may be impossible to replace.
Objective [2]
Create a personal balance sheet and cash flow statement. A personal
balance sheet, also known as a net worth statement, is prepared by listing all
items of value (assets) and all amounts owed to others (liabilities). The
difference between your total assets and your total liabilities is your net
worth. A cash flow statement, also called a personal income and expenditure
statement is a summary of cash receipts and payments for a given period,
such as a month or a year.
Objective [3]
Develop and implement a personal budget. The budgeting process
consists of seven steps: (1) set financial goals; (2) estimate income; (3)
budget an emergency fund and savings; (4) budget fixed expenses; (5)
budget variable expenses; (6) record spending amounts; and (7) review
spending and saving patterns.
Objective [4]
Connect money management activities with saving for personal
financial goals. The relationship among the personal balance sheet, cash
flow statement, and budget provides the basis for achieving long-term
financial security. Future value and present value calculations may be used
to compute the increased value of savings for achieving financial goals.
Personal Finance Spring 2006
A Successful Money Management Plan
Components of Money Management
There are three major money management activities involved
in a successful plan:
1. Storing and maintaining personal financial records and
2. Creating personal financial statements (balance sheets,
cash inflows and outflows.
3. Creating and implementing a plan for spending and saving
A System for Personal Financial Records
It is recommended that financial documents that you use regularly
(credit card statements, work records, employment records, etc.) are kept in
your home files. Documents used occasionally (mortgage papers, adoption
and custody papers, etc.) be kept in a safe deposit box. Documents that are
for backup purposes (previous month’s budgets, summary of checking or
savings transactions, etc.) can be kept on your computer. Wherever you
decide to keep your documents it’s a good idea to keep a “Financial
Documents and Records” spreadsheet that tells where the documents are in
case something happens to you and someone needs to find specific
documents. Make sure you tell a family member or friend that you have
such a document and where you keep it. This document can look something
like the one below. You can revise the list to meet your needs. If you keep
more than one home file write which file the documents are in. If the file is
in your safe deposit box just check that column. If the document is kept
somewhere else describe where the document is kept.
Personal Finance Spring 2006
Financial Documents and Records
Jerry L. Basford
Home File
Money Management Records
Budget, financial statements
Personal/Employment Records
Current Resume
Social Security Card
Educational Transcripts
Birth, marriage, divorce certificates
Citizenship, military papers
Adoption, custody papers
Tax Records
Financial Service/Consumer Credit Records
Unused, cancelled checks
Savings, passbook statements
Savings certificates
Credit card information, statements
Credit contracts
Consumer Purchases, Housing, and
Automobile Records
Warranties, receipts
Owner's manual
Lease or mortgage papers, title, deed, property
tax information
Automobile title
Auto registration
Auto service record
Insurance Records
Insurance policy
Home inventory
Medical information (medical history)
Investment Records
Broker statements
Dividend reports
Stock/bond certificates
Rare coins, stamps, and collectibles
Estate Planning and Retirement
Pension, social security information
Personal Finance Spring 2006
Personal Financial Statement
There are three important financial statements: The Balance Sheet,
the Cash Flow Statement of Income and Outflow (often called an Income
Statement), and a Budget. These three documents describe your financial
position at three different times:
Cash Flow Statement
Balance Sheet
Each of these statements are made up of three parts. The Cash Flow
Statement and the Budget are made up of cash received (revenues), cash
outflows during the period (expenses) and cash surplus or deficit (net
income or net loss). The mathematical formula of how this statement works
Revenues – Expenses = Net income/(Net loss)
The difference between the Cash Flow Statement and the Budget is
that the Cash Flow Statement is a reconciliation of how much money you
have received, how much money you have spent, and what remains. The
Budget describes how much money you believe you will make, how much
you estimate you will spend and your anticipated balance.
The Balance Sheet is made up of assets, liabilities, and net worth.
Assets are the things you own (house, car, stereo, etc.). Liabilities are what
you owe (mortgage, car payment, etc.). Net worth is the difference between
your assets and liabilities. The mathematic formula for this statement is:
Assets – Liabilities = Net Worth
Organizing financial documents so they are accessible is a
prerequisite for successful financial management. Financial statements help
an individual plan spending as well as determine how money has been used
and what their financial condition is.
Personal Finance Spring 2006
Chapter 2 Key Terms
Assets (39) – anything that has monetary value that is owned by an individual. Things
you own.
Budget (45) – an estimate of revenues and expenses for a specific period.
Budget Variance (47) – the difference between the amount budgeted and the actual
amount earned or spent.
Cash Flow Statement (41) – a summary of cash receipts and payments for a given
payment, usually a month or a year. Also called an Income and Expense Statement.
Deficit (47) – an excess of expenses over revenues
Discretionary Income (42) – money left over after paying for housing, food, debt
payments, and other necessities
Fixed Expenses (43) – payments that do not vary from month to month.
Income and Expense Statement (41) – see Cash Flow Statement.
Insolvency (41) – inability to pay debts when they are due.
Liabilities (40) – claim on the assets of an individual. Things you owe.
Liquid Assets (39) - cash and items of value that can easily be converted to cash
Net Worth (41) – the difference between your total assets and total liabilities.
Surplus (47) – excess of revenues over expenses.
Variable Expenses (44) – flexible expenses that change from month to month.
Personal Finance Spring 2006
Chapter Review
When you have completed your work for a specific chapter, there is a chapter review.
Each chapter exam has 20 true/false and multiple-choice questions. Each question counts
one (1) point. Chapter review questions are based on information in the Focus on
Personal Finance textbook.
You can access a chapter review at, clicking on the
“HOMEWORK” tab and selecting the chapter review for the
chapter you are completing.
Before taking the chapter exam, consider five factors.
1. Have you completed the following learning activities for this chapter
A. Read the Chapter
B. Read the Chapter Summary
C. Reviewed the Vocabulary
3. Once you have finished answering all 20 questions and submit your test, you will
be sent your grade within 48 hours.
If you would like to discuss your test score or your grades for the course, please phone
me at (801) 581-3435. You may also e-mail me at [email protected]