Chapter 3
Money Management
Strategy: Financial
Statements and
Budgeting
Chapter 3
Learning Objectives
Recognize relationships among financial
documents and money management activities
2. Design a system for maintaining personal
financial records
3. Develop a personal balance sheet and cash flow
statement
4. Create and implement a budget
5. Relate money management and savings
activities to achieve financial goals
1.
2
Planning for Successful
Money Management
Objective 1: Recognize relationships among
financial documents and money management
activities
 Daily spending and saving decisions are the
heart of financial planning
 Decisions must be coordinated with needs,
goals, and personal situations
 Money management is the day-to-day financial
activities needed to manage personal economic
resources, while working toward long-term
financial security
3
Planning for Successful
Money Management (continued)
OPPORTUNITY COST AND MONEYMANAGEMENT
 Spending money on current living expenses
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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 depletes savings
Comparison shopping can save money but takes
valuable time
4
COMPONENTS OF MONEY
MANAGEMENT
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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A System for Personal Financial Records
Objective 2: Design a system for maintaining
personal financial records
Benefits of an Organized System of Financial Records
 Handling daily business affairs, including
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
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A System for Personal Financial
Records (continued)
ITEMS IN YOUR HOME FILE
 Personal and employment records
 Money management records
 Tax records
 Financial services records
 Consumer purchase, auto and credit records
 Housing records
 Insurance records
 Investment records
 Estate planning and retirement records
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A System for Personal Financial
Records (continued)
ITEMS IN THE SAFE DEPOSIT BOX
 Records that would be hard to replace
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Birth, marriage and death certificates, copy of will
Citizenship and military papers
Adoption and custody papers
Serial numbers and photos of valuables
CDs and credit and banking account numbers
Mortgage papers and titles
List of insurance policy numbers
Stock and bond certificates
Coins and other collectibles
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A System for Personal Financial
Records (continued)
RECORDS ON YOUR PERSONAL COMPUTER

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Current and past budgets
Summary of checks written and other banking
transactions
Past income tax returns prepared with tax
preparation software
Account summaries and performance
results of investments
Computerized versions of wills,
estate plans, and other documents
9
A System for Personal Financial
Records (continued)
HOW LONG SHOULD RECORDS BE KEPT?
 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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Personal Financial Statements Measure
Financial Progress
Objective 3: Develop a personal balance sheet and
cash flow statement
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 data you can use when preparing tax forms
or applying for credit
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Personal Financial Statements Measure
Financial Progress (continued)
BALANCE SHEET: WHERE ARE YOU NOW?
Also called the Net Worth Statement or Statement of
Financial Planning
Preparation of Balance Sheet requires using the following
Steps
STEP 1: LISTING ITEMS OF VALUE
 Assets - what you own

Liquid assets
 Real estate
 Personal possessions
 Investment assets
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Personal Financial Statements Measure
Financial Progress (continued)
STEP 2: DETERMINING THE AMOUNTS OWED
 Liabilities - what you owe
 Current liabilities (< 1 year)
 Long term liabilities
STEP 3: COMPUTING NET WORTH
 Assets – Liabilities = Net Worth
 Assets = Net Worth + Liabilities
 Insolvency is the inability to pay debts when they are
due
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Personal Financial Statements Measure
Financial Progress (continued)
Net Worth is an indication of the financial position at
any given date
Ways to increase Net Worth
 Increasing your savings
 Reducing spending
 Increasing the value of investments and other
possessions
 Reducing the amounts you owe
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Financial Ratio
 Debt ratio = liabilities / net worth
$25,000 / 50,000 = 0.5
High or low is better?
 Current ratio = liquid asset / current liabilities
$4,000 / 2,000 = 2
What does it mean?
High ratio means you have enough cash to pay bill
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Financial Ratio
 Liquidity ratio = liquid assets / monthly expenses
$10,000 / 4,000 = 2.5
What does it mean? Low or high is better?
 Debt-payments ratio = monthly credit payment / take-
home pay
$540 / 3,600 = 0.15
What does it mean?
17
Financial Ratio
 Savings ratio = amount saved each month / gross
income
$648 / 5,400 = 0.12
What is the a proper ratio?
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Personal Financial Statements Measure
Financial Progress (continued)
THE CASH FLOW STATEMENT
 Cash Flow is the actual inflow, outflow for a
given time period
 The Cash Flow statement is also called
personal income and expenditure
statement
19
Personal Financial Statements Measure
Financial Progress (continued)
THE CASH FLOW STATEMENT
The process of preparing cash flows statement follows
these steps
STEP 1: RECORD INCOME
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Wages, salaries, and commissions
Self-employment business income
Savings and investment income
Gifts, grants, scholarships and educational loans
Government payments, such as Social Security, public
assistance, and unemployment benefits
 Amounts received from pension and retirement
programs
 Alimony and child support payments
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Personal Financial Statements Measure
Financial Progress (continued)
STEP 2: RECORD CASH OUTFLOWS
 Fixed Expenses
 Variable expenses
STEP 3: DETERMINE NET CASH FLOWS
 The difference between income and outflows can
either be positive or negative
 Cash flow statement provides the foundation for
preparing and implementing a spending, saving,
and investment plan
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Budgeting for Skilled Money Management
Objective 4: Create and implement a budget
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A budget is a spending plan
The main purposes of a budget are to help you
 Live within your income
 Spend your money wisely
 Reach your financial goals
 Prepare for financial emergencies
 Develop wise financial management habits
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Budgeting for Skilled Money Management
(continued)
STARTING THE BUDGETING PROCESS
***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 Fixed Expenses that you are obligated to
pay
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Budgeting for Skilled Money Management
(continued)
***Steps in the budgeting process (con’t)
5. Budget Variable Expenses—the amounts that
are to be spent for household and living
expenses
6. Record Spending Amounts—the actual
amounts for inflows and outflows, comparing
actual amounts with budgeted amounts to
determine variances
7. Review Spending and Saving Patterns
8. Evaluate whether revisions are needed in your
savings and spending plans
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Budgeting for Skilled Money Management
(continued)
CHARACTERISTICS OF SUCCESSFUL BUDGETING
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Well-planned
Realistic
Flexible
Clearly communicated
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Selecting a Budgeting System

Mental budget – it is all in your head
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Physical budget-use envelopes for your
expenses such as food, rent, etc.
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Written budget – use spreadsheets
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Computerized budget – use software such as
Quicken (www.quicken.com)
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Money Management and Achieving
Financial Goals
Objective 5: Relate money management and savings
activities to achieve financial goals
IDENTIFYING SAVING GOALS…
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To set aside money for irregular and unexpected
expenses
To pay for the replacement of expensive items, such as
cars or a down payment on a house
To buy special items like recreational equipment or to
pay for a vacation
To provide for long-term expenses such as retirement
or the education of children
To earn income from the interest on savings for use in
paying living expenses
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Money Management and Achieving Financial
Goals (continued)
SELECTING A SAVINGS TECHNIQUE
 Payroll deductions into savings accounts
 Automatic payments from checking into savings
accounts or mutual funds
 Saving regularly in 401(k) plans
 Also save coins, make periodic deposits
 Write a check each payday as a % of income and
deposit into savings
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Money Management and Achieving Financial
Goals (continued)
 Balance Sheet reports current financial position
 Cash Flow Statement shows cash you have received
and spent in the past
 Budgets help you to spend and save to achieve
financial goals
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Assignments
 Prepare a balance sheet for yourself
 Prepare a cash flow statement for last month
 Prepare a monthly budget
 Monitor the budget and show variances
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Online Research
 Do an online search to see if you can find the savings
rate in the United States
…How does your savings ratio compare to the average?
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