Personal Financial Statements

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Personal Financial Statements

• Section 3.2

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Personal Financial Statements

• Documents that provide information about your
  current financial position and present a summary
  of your income and spending.
• Determine what you own and what you owe.
• Measure your progress toward your financial
  goals
• Track your financial activities
• Organize information that you can use when you
  file your tax return or apply for credit

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Personal Financial Statements

• Balance sheet-
• Also called a net worth statement
• A financial statement that list the items of
  value that you own, the debts you owe, and your
  net worth.
• Net Worth-
• The difference between the amount that you own
  and the debts that you owe.
• Measure of your current financial position

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• Balance Sheet orNet Worth Statement

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STEP 1- Determine your assets

• Assets
• Any items that you own, including cash, property,
  personal possessions and investments.
• Liquid Assets
• Cash and items that can be quickly converted to
  cash
• Real Estate
• Land and anything on it house/building
• Personal Possessions
• Items of value other then real estate
• Investment Assets
• Retirement Accounts, securities such as stocks
  and bonds

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Step 2-Determine Your Liabilites

• Liabilities
• Debts that you owe.
• Current Liabilities
• Short-term debts that have to be paid within a
  year or so.
• Long-term liabilities
• Debts that dont have to be fully repaid for at
  least a year.

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Step 3-Calculate Your Net Worth

• Assets Liabilities Net Worth
• 50000 - 23000 27,000
• Insolvency?
• The condition that occurs if your liabilities
  are greater then your assets.

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Step 4-Evaluate Your Financial Situation

• Use the Balance sheet to track you financial
  progress
• Update your balance sheet, make a new one and
  chart changes over time.
• Rule
• You can increase your net worth by increasing
  your savings, increasing the value of your
  investments, reducing your expenses, and/or
  reducing your debts.

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Cash Flow StatementIncome Versus Expenses

• Cash flow
• The money that actually goes into and out of your
  wallet and bank accounts.
• Cash inflow is the money you receive, or your
  income
• Cash outflow includes all the money that you
  spend
• A cash flow statement is simply a summary of your
  cash flow during a particular period.
• Giving important feedback on income and spending
  patterns

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Step 1-Record Your Income

• List all your sources of income
• Take-home pay (net pay)
• Amount of income left after taxes and other
  deductions are taken out of gross pay.
• Discretionary income
• The money left over after you have paid for the
  essentialsfood, clothing, shelter,
  transportation, and medication.
• Evaluation of a persons strength of income

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Step 2-Record Your Expenses

• Two Types
• Fixed
• Those that are more or less the same each month
• Cable television charges, rent, car payment, and
  mortgage payment
• Variable
• Those that may change from month to month
• Food, clothing, utilities, and medical costs

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Step 3-Determine Your Net Cash Flow

• Income Expenses Net Cash Flow
• 2,500 - 1,900 600
• Positive Cash Flow equals a surplus, extra money
  that can be spent or saved depending on financial
  goals and values.
• Negative Cash Flow a deficit, spend more money
  than you earn or receive

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Analyzing Financial Position from Personal
Financial Statements

• When net cash flow changes so does net worth
• Every time you create a deficit by spending more
  than you earn, your net worth declines
• To make up for a deficit, you can either borrow
  money (increasing your liabilities) or draw from
  your savings (decreasing your assets) In either
  case your net worth declines.
• If you end with a surplus, your net worth will
  probably go up. Saving money adding to your
  assets, or pay off previous debt reducing your
  liabilities.
• Figure 3-4 page 73

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Budgeting to Achieve Your Financial Goals

• Section 3.3

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Preparing a Practical Budget

• Budget
• A plan for using your money in a way that best
  meets your wants and needs.
• Essential to intelligent money management.
• Learn how to live within your income and how to
  spend your money wisely.
• Develop good money management skills that will
  help you reach your financial goals.

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Step 1-Setting Your Financial Goals

• Your financial goals are the purposes you want to
  accomplish with your money.
• What you do with your money today will affect
  your ability to achieve financial goals in the
  future.
• Financial goals-specific, a definite time frame
  separate goals into short-term, intermediate, and
  long-term goals.

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Step 2-Estimating Your Income

• Record your estimated income
• Include all sources of income
• Take-home pay, income from investments and
  savings
• Step 3-Budget for Unexpected Expenses and Savings
• Save three to six months of living expenses

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Step 4-Budgeting for Fixed ExpensesStep
5-Budgeting for Variable Expenses (Figure 3.5
page 77)CPI Consumer Price Index- a measure of
the changes in prices of commonly purchased goods
and services in the United StatesFinancial
Experts, Friends and FamiliesStep 6-Recording
What You SpendBudget variance-the difference
between the budgeted amount and the actual amount
that you spend. Surplus/DeficitStep 7-Reviewing
Spending and Saving PatternsReview your
financial progressRevise your goals and
adjusting your budget
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How to Budget Successfully

• Money management experts agree that a budget
  should have several important characteristics.
• Carefully planned
• Cannot be wild guesses, spending categories must
  cover all expenses
• Practical
• Flexible
• Written and easily accessible

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Ways to Increase Your Savings

• Increasing your savings is the key to
  establishing a sound financial future.
• Set aside a fixed amount as savings before you
  sit down to pay your bills
• Payroll Savings Deductions
• Start small make an effort to spend less each
  day, ex. save small

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How you save, though, is less important than the
action of saving. The earlier you start, the
better. Even small amounts of savings can grow
faster than most people realize. These savings
can help you reach your financial goals.