Title: Money Management Strategy
1Money Management Strategy
Chapter 3
2Organizing PersonalFinancial Records
- What Youll Learn
- How to recognize the relationship between
financial documents and money management
strategies - How to create a system to maintain your personal
financial documents
- Why Its Important
- Organizing your personal financial records can
help you make informed decisions about your
spending.
3Money Management
- Money management is planning how to get the most
from your money - Good money management can help you keep track of
where your money goes so that you can make it go
farther - Money management includes
- Organizing your personal financial records
- Preparing personal financial statements
- Creating a budget
4Personal Financial Documents
Personal financial documents include your bank
statements, paycheck stubs, car titles, birth
certificates, social security cards, tax forms,
cell phone contracts, and any other documents
that record information about how you spend your
money.
Organized documents help you
- Plan and measure your financial progress
- Handle routine money matters
- Determine how much money you have to spend later
and in the future - Make effective decisions about how to save money
5Where to Keep Documents
- Home Files
- Use for documents that are fairly easy to replace
- Advantages
- Easy to set up
- Easy to use and access
- Inexpensive
- Disadvantages
- Vulnerable to damage
6Where to Keep Documents
- Safe-Deposit Boxes
- Use for documents that are hard to replace
- Advantages
- Safe from damage
- Separate from other documents
- Access is limited
- Contents usually insured
- Disadvantages
- Harder to access
- Costs money (about 100 year)
7Where to Keep Documents
- Computer Files
- Use for documents that are easy to keep
electronically or that are useful in planning - Advantages
- Automatic calculation of amounts
- Usually has tool to help in tracking and planning
- Disadvantages
- Data can be lost
8Check Your Understanding
- Complete Worksheet Packet page 4
- Known these terms
- money management
- safe-deposit box
9Personal Financial Statements
- What Youll Learn
- How to develop a personal balance sheet and cash
flow statement - How to analyze your personal financial situation
- Why Its Important
- Personal financial statements can give you an
idea of where youre headed financially and where
you are now in relation to your financial goals.
10Personal Financial Documents
- Provide information about your current financial
position and present a summary of your income and
spending - Help you to
- 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 return or apply for credit
11Balance Sheet
- Financial statement that lists the items of value
that you own, the debts you owe, and your net
worth - Net worth, then, is the difference between the
amount that you own and the debts that you owe - Also known as net worth statement
12Creating the Balance Sheet
- Determine Your Assets
- Determine Your Liabilities
- Calculate Your Net Worth
- Evaluate Your Financial Situation
13Assets
- Assets are any items of value that you own
- Categories
- Liquid Assets cash and items that can be
quickly converted to cash - Real Estate land that a person or family owns
and anything that is on the land - Personal Possessions valuable belongings that
are not real estate - Investment Assets retirement accounts and
securities (investments) such as stocks, bonds,
and mutual funds
14Liabilities
- Liabilities are debts that you owe
- Liabilities include only those items that you
will owe for longer than a month - Categories
- Current liabilities short-term debts that have
to be paid within one year - Long-Term liabilities debts that dont have to
be fully paid for at least one year
15Net Worth
- The formula to calculate net worth is
- ASSETS LIABILITIES NET WORTH
Example What is Janines net worth if her
assets are worth 3,000 and her liabilities total
700? Formula Assets Liabilities Net
Worth Solution 3,000 - 700 2,300
16More on Net Worth
- What Net Worth Means
- Net worth is an indication of your general
financial situation. - A negative net worth means you are insolvent or
you have more debt than items of value. - A positive net worth is generally good, but it
doesnt mean you will always have an easy time
paying your bills especially if you have few
liquid assets
17Evaluate Your Financial Situation
- Use the balance sheet to track your financial
progress - Update your balance sheet every month noting the
change in net worth - Increasing keep doing what youre doing
- Decreasing changes are in order
- Staying the Same you may want to make some
changes
18Check Your Understanding
- Complete Worksheet Packet page 9
- Known these terms
- personal financial statements
- balance sheet
- net worth
- assets
- liquid assets
- real estate
- personal possessions
- investment assets
- market value
- liabilities
- current liability
- long-term liability
- insolvency
19Cash Flow Statement
- The cash flow statement tracks the amount of
money that actually goes into and out of your
wallet - Also known as an income statement
20Creating the Cash Flow Statement
- Determine Your Cash Inflows
- Determine Your Cash Outflows
- Determine Your Net Cash Flow
21Cash Inflows
- Your cash inflows represent your income
- Sources of income
- Take-home pay or net pay
- Gifts
- Bank account interest
- Gains on investments
- Sale of assets
22Cash Outflows
- Your cash outflows represent your expenses
- Types of Expenses
- Fixed expenses expenses that remain more or
less the same every month - Variable expenses expenses that change from
month to month
23Net Cash Flow
- The formula to calculate net cash flow is
- INCOME - EXPENSES NET CASH FLOW
Example What is Jasons net cash flow if his
income is 1,500 and his expenses add up to
1,350? Formula Income Expenses Net Cash
Flow Solution 1,500 - 1,350 150
24More on Cash Flow
- A surplus occurs if you have a positive cash flow
- A deficit occurs if you have a negative cash flow
- Some financial experts like to look at
discretionary income to evaluate the strength of
a persons income - Discretionary income is the money you have left
over after paying for essentials (food, clothing,
shelter, transportation, medication) - Represents the money you can spend on wants
25Putting It Together
- When your cash flow changes, so does your net
worth - A negative cash flow will decrease your net worth
- A positive cash flow will increase your net worth
- You can also use financial ratios to analyze your
financial position see worksheet packet page 7.
26Check Your Understanding
- Use your Personal Spending Record to prepare your
own Cash Flow Statement. - Worksheet packet pages 8, 10, 10A, 10B
- Terms to know
- personal spending record
- cash flow
- cash inflows
- cash outflows
- fixed expense
- variable expense
- income
- take-home pay
- discretionary income
- surplus
- deficit
- positive cash flow
- negative cash flow
- income statement
27Budgeting
- What Youll Learn
- How to create a budget that is practical for you
- How to achieve your financial goals by increasing
your savings
- Why Its Important
- Following a practical budget can help you achieve
your financial goals and develop wise financial
habits.
28What is a Budget?
- A budget is a plan for using your money in a way
that best meets your needs and wants. - Budgeting is essential to intelligent money
management and includes 6 steps.
29Steps in Budgeting
- Set financial goals
- Estimate your income
- Budget for the unexpected
- Budget for expenses
- Record what you spend
- Review spending and savings patterns
30Set Financial Goals
- I think weve said and done enough on this topic!
31Estimate Your Income
- Record expected income for the next month
- Include only income you can count on
- If your income is unpredictable, estimate what
you will receive in the next month and adjust it
down a little
32Budget for the Unexpected
- You should build up and maintain an emergency
fund. - Your emergency fund should be 3-6 months worth of
income. - This money is used in case of unemployment,
unexpected medical needs or any other financial
crisis.
33Budget for Expenses
- Fixed Expenses
- simply record the amounts
- Pay Yourself First (PYF) try payroll deduction
- Variable Expenses
- make your best guess based on previous months
- when in doubt, guess high!
- use guidelines about expenses published by
financial experts - http//www.practicalmoneyskills.com
- http//www.stats.bls.gov/news.release/cesan.toc.ht
m - asks friends and relatives what they spend
34Record What You Spend
- Keep track of your money for the next month and
record what you actually receive and spend - Calculate the budget variance the difference
between the actual amount you spent and what you
budgeted
35Review Patterns
- Your budget should be reviewed each month
- Deficits cut expenses/increase income
- Surplus consider placing more in savings for
long-term goal
36Budgeting Tips
- Plan carefully
- estimates should be based on some data
- cover all expenses
- Be practical
- Be flexible
- Write your budget down
- Be able to access your budget data easily
37Check Your Understanding
- Worksheet packet page 12A, 13, 12B
- Terms to know
- taxes
- federal income tax
- state income tax
- Social Security tax
- Medicare tax
- FICA
- Unemployment tax
- gross pay
- net pay
- pay yourself first
- United Way
- retirement plan
- budget
- Consumer Price Index
- budget variance
- cost/benefit analysis
- pay stub
- payroll deduction
- Occupational privilege tax
38Form W-4
- Tells your employer how much to withhold from
your paycheck for taxes.
39Form W-2
- Shows the income you earned from the employer and
the amount withheld for taxes.
40Check Your Understanding
- Worksheet packet pages 14-16 Unit 3 Puzzle,
Scrambled Words - Terms to know
- Form W-2
- Form W-4
- Allowance