Chapter 2 Money Management Strategy: Financial Statements and Budgeting

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Chapter 2Money ManagementStrategy Financial
Statements and Budgeting
Kapoor Dlabay Hughes Ahmad Prepared
by Cyndi Hornby, Fanshawe College
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? 2004 McGraw-Hill Ryerson Ltd.
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Learning Objectives Chapter 2

1. Recognize relationships among financial documents
   and money management activities.
2. Create a system for maintaining personal
   financial records.
3. Develop a personal balance sheet and cash flow
   statement.
4. Create and implement a budget.
5. Calculate savings needed to achieve financial
   goals.

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Learning Objective 1

• Recognize relationships among financial documents
  and money management activities.

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Opportunity Cost Money Management

• Spending money reduces the amount you can save
  and invest.
• Saving and investing reduces the amount you can
  spend now.
• Buying on credit ties up future income.
• Using savings for purchases results in lost
  interest -savings cant be used for other
  purposes.
• Every decision made means you give up something
  else.
• Comparison shopping can save money but takes your
  valuable time.

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Major Money Management Activities
Createpersonalfinancialstatementsof
incomeandoutflow(balancesheet andcash flow).
Create
Storeandmaintainpersonalfinancialrecordsand
documents.
and
implement
a plan for spending (budgeting)
and
saving.
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Learning Objective 2

• Create a system for maintaining personal
  financial records.

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Why Keep Financial Records?

• Handling daily business affairs, including paying
  of bills on time
• Planning and measuring financial progress
• Completing required tax forms
• Making effective investing decisions
• Determining available resources for current and
  future buying

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What to Keep in Your Home File

• Items you refer to often.
• Personal and employment records.
• Tax records.
• Financial services records.
• Money management records.
• Credit records.
• Consumer purchase records.
• Insurance records.
• Investment records.
• Housing and car records.
• Estate planning and retirement records.

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What to Keep in a Safe Deposit Box

• Safe deposit box is for records and items that
  would be hard to replace.
• Birth, marriage and death certificates.
• Citizenship and military papers.
• Adoption and custody papers.
• Serial numbers and photos of valuables.
• GICs and bank account numbers.
• Mortgage papers and titles.
• List of insurance policy numbers.
• Stock and bond certificates.
• Coins and collectibles.
• Copy of will.

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Other Places to Keep Records

• Automobile.
• Vehicle registration.
• Lawyer.
• Original of your will and living will.
• Doctor and hospital.
• Copy of your living will.
• Home computer.
• Current and past budgets.
• Chequing account records.
• Wills, estate plans, investments.
• Past income tax returns.

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Learning Objective 3

• Develop a personal balance sheet and cash flow
  statement.

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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 information you can use when preparing
  tax forms or applying for credit.

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Balance Sheet

• A financial statement that reports what an
  individual or family owns or owes also called a
  net worth statement
• -

Items of value (what you own)
Amounts Owed (what you owe)
Net Worth (your wealth)
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Components of a Balance Sheet(Net Worth
Statement)

• Assets - what you own.
• Liquid assets.
• Real estate.
• Personal possessions.
• Investment assets.
• Liabilities - what you owe
• Current liabilities.
• Long term liabilities.
• Net Worth.
• Assets minus liabilities.
• Insolvent means liabilities far exceed assets.

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Cash Flow Statement

• A financial statement that summarizes cash
  receipts and payments for a given period of time

Total cash received during that time period
Cash outflows during the time period
Cash surplus or deficit
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Components of a Cash Flow Statement

• Shows inflow and outflow during a given time
  period.
• Record income.
• Income from employment.
• Savings and investment income.
• Other sources.
• Record cash outflows.
• Fixed and variable expenses.
• Net cash flow can be a surplus or a deficit.
• Used as a basis for creating a spending, saving
  and investment plan.

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Learning Objective 4

• Create and implement a budget.

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Creating and Implementing a Budget

• Budget A specific plan for spending income
• Purpose
• Live within your budget
• Spend your money wisely
• Reach your financial goals
• Prepare for financial emergencies
• Develop wise financial management habits

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The Budgeting Process

• Step 1 Setting Financial Goals
• plans for future activities that require you to
  plan your spending and investing
• Should be realistic stated in specific,
  measurable terms have a definite time frame
  imply type of action to be taken

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The Budgeting Process (cont)

• Step 2 Estimating Income
• Estimate available money for given period of time
  usually one month
• Based on number of times income received each
  month, spending should be planned accordingly
• Difficult if your earnings vary by season or
  income is irregular

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The Budgeting Process (cont)

• Step 3 Budgeting Emergency Fund and Savings
• Recommend 3-6 months of living expenses be
  established
• Step 4 Budgeting Fixed Expenses
• Will depend on your current needs and plans for
  the future
• Step 5 Budgeting Variable Expenses
• Will fluctuate by household situation, time of
  year, health, economic conditions, etc.

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The Budgeting Process (cont)

• Step 6 Recording Spending Amounts
• Record actual income and expenses
• Budget Variance difference between amount
  budgeted the actual amount received or spent
• Deficit actual spending exceeds planned
  spending
• Surplus actual spending less than planned
  spending

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The Budgeting Process (cont)

• Step 7 Reviewing Spending and Saving Patterns
• Review your financial progress
• Revise your goals and budget allocations

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Successful Budgets Are...

• Well planned.
• Realistic.
• Flexible.
• Clearly communicated.

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Learning Objective 5

• Calculate savings needed to achieve financial
  goals.

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Saving to Achieve Financial Goals

• Common reasoning for saving include
• To set aside money for irregular and unexpected
  expenses.
• To pay for the replacement of expensive items,
  such as appliances, cars or a down payment on a
  house.
• Save to buy special items or pay for a vacation.
• Put aside money to long-term expenses such as
  retirement or children's education.
• To earn income from the interest on savings for
  use in paying living expenses.

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Selecting a Saving Technique

• Should make regular periodic savings deposits
• Can be a percentage of income (5-10) or specific
  dollar amount
• Write a cheque each payday and deposit into a
  special savings account at another financial
  institution
• Payroll deduction
• Direct deposit
• Saving coins at end of each day

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Suggestions for Dual-Income Households

• Pooled Income incomes combined and bills paid
  from pool
• Sharing the Bills each responsible for
  predetermined bills
• 50/50 each contribute equally to pool
• Proportionate Contribution each contribute
  percentage of his/her income

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