CHAPTER 3
MONEY MANAGEMENT STRATEGY:
FINANCIAL STATEMENTS &
BUDGETING
Mrs. Jordan
FINANCIAL PLAN
Is an orderly program for spending, saving, and investing the money
you earn.
Financial planning helps you do the following:
Determine and evaluate how wisely you are using your money.
Get the most from your income.
Prevent careless and wasteful spending.
Organize your financial resources so that you can maintain
personal financial fitness.
Avoid money worries and problems by understanding the proper
methods of saving, spending and borrowing money.
CHAPTER 3 LEARNING
OBJECTIVES:
1. 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
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
OPPORTUNITY COST
y decision making is a fact of life, and trade-offs have to be made
-Selecting an alternative means you give up something else.
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 depletes
savings
Comparison shopping can save money but takes valuable time
COMPONENTS OF MONEY MANAGEMENT
Storing
and
maintaining
personal
financial
records
and
documents
Provide Written
Evidence
Creating
personal
financial
statements
(balance
sheets and
cash flow
statements
of income
and
outflow)
Measure & Assess
Financial Position & Progress
Creating and
implementing
a plan for
spending,
and saving
(budgeting)
Basis for effective
money management
These three components are interrelated.
A SYSTEM FOR PERSONAL
AND 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
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time
Planning and measuring financial progress
Completing required tax reports
Making effective investment decisions
Determining available resources for current and future buying
ITEMS FOR YOUR
HOME FILE
• Personal and employment records - Resume, Work History
(current/past jobs) Company Name, Manager Name, Company Address, Length of
Employment
• Money management records - Budget (Monthly/Yearly)
• Tax records - W-2’s, tax forms, pay stubs
• College Records - Essays, transcripts, college information, application copies.
• Financial services records
• Consumer purchase, auto and credit records
• Housing records
• Insurance records
• Investment records - Net Worth Statement, Personal Property
Statement
• Estate planning and retirement records
ITEMS IN YOUR SAFE
DEPOSIT BOX
Records that would be hard to replace
• 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
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 seven
years
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
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 –
-Balance Sheet Example on pg. 83 in textbook
STEP 1: LISTING ITEMS OF VALUE
• Assets - what you own
• Liquid assets - Cash and items that can easily be converted to
cash.
•
Real estate - Home, condo, vacation property, land.
•
Personal possessions - Automobile, personal belongings.
•
Investment assets - Funds set aside for long-term financial needs.
BALANCE SHEET
(CONTINUED)
STEP 2: DETERMINING THE AMOUNTS OWED
Liabilities - what you owe others
•
Current liabilities (< 1 year) insurance premiums,
charge accounts, tax payments.
• Long term liabilities - auto loans, student loans,
mortgage.
STEP 3: COMPUTING NET WORTH
Assets – Liabilities = Net Worth
Assets = Net Worth + Liabilities
Insolvency: is the inability to pay debts when they are due
BALANCE SHEET
(CONCLUDED)
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
Create a Balance
Sheet
Use the following items to prepare a balance sheet. Determine the total assets,
total liabilities, net worth, total cash inflows, and total cash outflows.
Rent for the month, $450
Auto insurance, $250
Monthly take-home salary, $1650
Household possessions, $4600
Cash in checking account, $770
Stereo equipment, $1500
Savings account balance, $2300
Payment for electricity, $75
Spending for food, $250
Lunches/parking for work, $220
Balance of educational loan, $3300
Donations, $50
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Current value of automobile, $6500
Telephone bill paid for month, $85
Credit card balance, $450
Loan payment, $110
Home computer, $1000
Value of stock investment, $1200
Clothing purchase, $ 100
Entertainment, $250
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.
See example on page 86 in textbook.
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
CASH FLOW
STATEMENT (CONTINUED)
STEP 2: RECORD CASH OUTFLOWS
• Fixed Expenses - Do not vary from month to month.
Rent, Mortgage, Installment Loan, Student Loan, Cable, Phone…
• Variable expenses - Flexible payments that change
from month to month. Food, Clothing, Utilities, recreation,
medical expenses…
• STEP 3: DETERMINE NET CASH FLOWS
• The difference between income and outflows can
either be positive or negative (Surplus or Deficit)
• Cash flow statement provides the foundation for
preparing and implementing a budget
CASH FLOW STATEMENT
Complete your own!
BUDGETING FOR SKILLED MONEY
MANAGEMENT
Objective 4: Create and implement a budget
A budget is an organized spending plan that helps you plan
your spending and saving so that you do not have to
borrow money to meet your needs.
The main purposes of a budget are to help you
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Live within your income
Spend your money wisely
Reach your financial goals
Prepare for financial emergencies
Develop wise financial management habits
STARTING THE
BUDGETING PROCESS
1.
2.
3.
4.
5.
6.
7.
8.
Set financial goals
Estimate income from all sources
Budget amount for an emergency fund – pay yourself first,
periodic expenses and financial goals (Try to set aside 10%)
Budget Fixed Expenses that you are obligated to pay
Budget Variable Expenses—the amounts that are to be spent for
household and living expenses
Record Spending Amounts—the actual amounts for inflows and
outflows, comparing actual amounts with budgeted amounts to
determine variances
Review Spending and Saving Patterns
Evaluate whether revisions are needed in your savings and
spending plans
First you need income…
Where Does My Money Go?
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Almost 31% of an individual’s paycheck is
deducted
Taxes are the largest expense most individuals will
have
Therefore, it is important to understand
the systematic deductions
U.S. tax system operates on an ongoing payment
system
Taxes are immediately paid on income earned
STARTING A NEW JOB
To receive a paycheck, an employee
must:
• Complete a Form W-4 Employee’s Withholding Allowance Certificate
• Complete a Form I-9 –
Employment Eligibility Verification
FORM W-4
Employee’s Withholding Allowance Certificate
• Determines the percentage of gross pay which will
be withheld for taxes
Allowances
• Used to determine the amount of federal taxes
withheld from the paycheck
• A person may claim a personal allowance if no one
else claims the person as a dependent
• Dependent – a person who relies on the
taxpayer for financial support
FORM W-4
Employment form that lets the employer know how much money to
take out of your paycheck. Exempt if make less than $6,200 in 2014.
FORM I-9
Employment Eligibility Verification Form
Used to verify the eligibility of individuals to avoid hiring undocumented
workers or others who are not eligible to work in the United States
Must provide documentation which establishes identity and
employment eligibility
• Examples include driver’s license, passport, Social Security card,
and birth certificate
FORM W-2
Wage and Tax Statement
States the amount of money earned and taxes paid throughout the
previous year
Used to file income taxes
By January 31, an employer should mail a Form W-2 to each
employee for the previous year
PAYING EMPLOYEES
Three methods employers may use to pay employees:
1.
Paycheck•
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Most common method
Employee responsible for handling the paycheck
Immediately see payroll stub and deductions
PAYING EMPLOYEES
CONTINUED
2. Direct Deposit•
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•
Employers directly deposit employee’s paycheck into the
authorized employee’s bank account
Employee receives the paycheck stub detailing the paycheck
deductions
Most secure because there is no direct handling of the check
Employee knows exactly when paycheck will be deposited and
available
PAYING EMPLOYEES CONTINUED
3. Payroll Card•
•
A payroll card electronically carries the balance of the
employee’s net pay
Funds are directly deposited by an employer into an account at a
financial institution that is linked to the payroll card
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•
Parties involved:
• Employer
• Employee
• Financial institution
Use the payroll card for ATM withdrawals or to make purchases
PAYROLL CARD
There are numerous fees associated with
payroll cards
• Number of fees depends upon the financial institution
• Examples:
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Monthly or annual fee
ATM fee
Inactivity fee
Fee after a specific number of transactions have been used
Replacement fee if the card is lost, stolen , or destroyed
Load fee (when funds are placed on the card account)
Point of sale (POS) fee for using the card at a POS terminal,
or an electronic payment processor
BENEFITS OF USING PAYROLL CARDS
Employers
• Lower internal costs
• Costs associated with
producing, handling, and
distributing pay checks is
eliminated
Employees
• Safer than carrying large amounts
of cash
• Unbanked employees do not have
to pay check cashing fees
• Americans roughly spend $8
billion annually in check cashing
fees
Financial Institutions
• Can access electronic monthly
statement of transactions
• Profit from the fees charged
to employees, employers, and • Can receive a second card
• Give allowances to children
merchants
• Send money internationally
• Easily make online purchases
CONSUMER PROTECTION
WITH PAYROLL CARDS
Regulation E – Electronic Fund Transfer
Act
• Protects payroll card holder from fraudulent charges on lost or
stolen cards
• Card holder is only liable for $50 if a lost or stolen card is reported
within 48 hours
• Over four million paychecks are stolen annually with no protection
to employees
• Regulation E provides exceptional safety and protection for payroll
card holders
GROSS PAY
Gross Pay – amount of money you make before taxes
• Hourly: hours worked x rate of pay
• Ex: 40 * 5.85 = $234
• Salary: annual salary/number of pay periods in year
• Ex: 48,000/12 = 4,000 (if paid monthly)
Weekly: 52
Bi-monthly: 24 times
Bi-weekly: 26
• Overtime is calculated at 1.5 the rate of pay for hours worked over 40 hours in a 1
week period
• Ex: 5.85 * 1.5 = 8.775 (new rate of pay)
8.775 * 8 (overtime hours) = 70.2
If regular hourly pay was $234, you would add $70.2 to get total gross pay
amount:
$234 + 70.2 = $304.20 (gross pay)
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PAYCHECK
On-The-Go
Employee
SSN
Check #
Beakens, Joe
201-92-4856
164
Check Amount
$1,102.98
Employee Address
293 Michael Grove
Billings, MT 59102
Pay TypeGross Pay
Deductions
Current
Year-to-date
$1,353.33
Federal Withholding
State Withholding
Fed OASDI/EE or Social Security
Fed MED/EE or Medicare
Medical
401K
$106.00
$40.82
$83.91
$19.62
$0.00
$0.00
$503.46
$117.72
$636.00
$244.92
$0.00
$0.00
Totals
$250.35
$1,502.10
Pay Period 6/11/2004-7/11/2004
Pay Period
– The length of time for which an employee’s
wages are calculated; most are weekly, bi-weekly, twice a month,
or monthly
DEDUCTIONS
The amount of money subtracted from the gross pay earned for
mandatory systematic taxes, employee sponsored medical benefits,
and/or retirement benefits.
Federal Tax
• The amount required by law for employers to withhold from earned wages to pay
taxes
• The amount of money deducted depends on the amount earned and information
provided on the Form W-4
• Largest deduction withheld from an employee’s gross income
State Tax
• The percentage deducted from an individual’s paycheck to assist in funding
government agencies within the state
• The percentage deducted depends on the amount of gross pay earned
Local & City Tax – Many cities require an earnings tax
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•
Social Security Tax – also called FICA
This tax includes two separate taxes: Fed OASDI/EE or Social
MED/EE or Medicare
These two taxes can be combined as one line item or itemized
paycheck stub
Currently: 7.65% of gross pay
Security and Fed
separately on a
Social Security
– Nation’s retirement program, helps provide retirement income for elderly and pays
disability benefits
– Based upon a percentage (6.2%) of gross income, employer matches the
contribution made by the employee
Medicare
– Nation’s health care program for the elderly and disabled, provides hospital and
medical insurance to those who qualify
– Based upon a percentage (1.45%) of gross income
Optional deductions: union dues, healthcare, uniform,
retirement, etc.
NET PAY
Net Pay: the amount of money AFTER all deductions have
been taken out of your gross pay
• Also called “take home” pay or “disposable income” – it is the
amount you have available to spend from your paycheck
• Calculated: gross pay – deductions = net pay
Discretionary Income: money left over AFTER paying for
housing, food and other necessities
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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
Physical budget-use envelopes for your expenses such
as food, rent, etc.
Written budget – use spreadsheets
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…
• 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 (Net Worth)
Cash Flow Statement shows cash you have received and
spent in the past
Budget helps you to spend and save to achieve financial goals
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SAMPLE BUDGET
PERSONAL PROPERTY
INVENTORY
NET WORTH
STATEMENT