Money Management Strategy

Money Management Strategy

Money Management Strategy

Chapter 3

Organizing PersonalFinancial Records

Organizing PersonalFinancial Records

What You’ll 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 It’s Important

Organizing your personal financial

records can help you make informed

decisions about your spending.

Money ManagementMoney 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 recordsPreparing personal financial statementsCreating a budget

Personal Financial Documents Personal 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

Where to Keep Documents Where to Keep Documents

Home Files1. Use for documents that are fairly easy to

replace2. Advantages

• Easy to set up• Easy to use and access• Inexpensive

3. Disadvantages• Vulnerable to damage


Safe-Deposit Boxes1. Use for documents that are hard to replace2. Advantages

• Safe from damage• Separate from other documents • Access is limited• Contents usually insured

3. Disadvantages• Harder to access• Costs money (about $100 year)


Computer Files1. Use for documents that are easy to keep

electronically or that are useful in planning

2. Advantages• Automatic calculation of amounts• Usually has tool to help in tracking and planning

3. Disadvantages• Data can be lost

Check Your UnderstandingCheck Your Understanding

• Complete Worksheet Packet page 4

• Known these termsmoney managementsafe-deposit box

Personal Financial Statements

Personal Financial Statements

What You’ll Learn• How to develop a

personal balance sheet and cash flow statement

• How to analyze your personal financial situation


Personal financial statements can give you an idea of where

you’re headed financially and where

you are now in relation to your financial goals.

Personal Financial Documents

Personal 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 owemeasure your progress toward your financial goals track your financial activitiesorganize information that you can use when you

file your return or apply for credit

Balance SheetBalance 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

Creating the Balance SheetCreating the Balance Sheet

1. Determine Your Assets

2. Determine Your Liabilities

3. Calculate Your Net Worth

4. Evaluate Your Financial Situation

AssetsAssets

• 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

LiabilitiesLiabilities

• Liabilities are debts that you owe

• Liabilities include only those items that you will owe for longer than a month

• CategoriesCurrent liabilities – short-term debts that

have to be paid within one yearLong-Term liabilities – debts that don’t

have to be fully paid for at least one year

Net WorthNet Worth

The formula to calculate net worth is:

ASSETS – LIABILITIES = NET WORTH

Example: What is Janine’s 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

More on Net WorthMore 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

doesn’t mean you will always have an easy time paying your bills especially if you have few liquid assets

Evaluate Your Financial Situation

Evaluate Your Financial Situation

• Use the balance sheet to track your financial progress

• Update your balance sheet every month noting the change in net worthIncreasing – keep doing what you’re doingDecreasing – changes are in orderStaying the Same – you may want to make

some changes


• Complete Worksheet Packet page 9

• Known these termspersonal financial statementsbalance sheetnet worthassetsliquid assetsreal estatepersonal possessions

investment assets market valueliabilities current liabilitylong-term liabilityinsolvency

Cash Flow StatementCash 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

Creating the Cash Flow Statement

Creating the Cash Flow Statement

1. Determine Your Cash Inflows

2. Determine Your Cash Outflows

3. Determine Your Net Cash Flow

Cash InflowsCash Inflows

• Your cash inflows represent your income

• Sources of incomeTake-home pay or net payGiftsBank account interestGains on investmentsSale of assets

Cash OutflowsCash Outflows

• Your cash outflows represent your expenses

• Types of ExpensesFixed expenses – expenses that remain

more or less the same every monthVariable expenses – expenses that

change from month to month

Net Cash FlowNet Cash Flow

The formula to calculate net cash flow is:

INCOME - EXPENSES = NET CASH FLOW

Example: What is Jason’s 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

More on Cash FlowMore 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 person’s incomeDiscretionary 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

Putting It TogetherPutting It Together

• When your cash flow changes, so does your net worthA negative cash flow will decrease your net

worthA positive cash flow will increase your net

worth

• You can also use financial ratios to analyze your financial position – see worksheet packet page 7.


• Use your Personal Spending Record to prepare your own Cash Flow Statement.

• Worksheet packet pages 8, 10, 10A, 10B

• Terms to knowpersonal spending record cash flowcash inflowscash outflowsfixed expensevariable expenseincome

take-home paydiscretionary income surplusdeficitpositive cash flownegative cash flowincome statement

BudgetingBudgeting

What You’ll Learn• How to create a

budget that is practical for you

• How to achieve your financial goals by increasing your savings


Following a practical budget can help you

achieve your financial goals and develop

wise financial habits.

What is a Budget?What 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.

Steps in BudgetingSteps in Budgeting

1. Set financial goals

2. Estimate your income

3. Budget for the unexpected

4. Budget for expenses

5. Record what you spend

6. Review spending and savings patterns

Set Financial GoalsSet Financial Goals

I think we’ve said and done enough on this topic!

Estimate Your IncomeEstimate 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

Budget for the UnexpectedBudget 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.

Budget for ExpensesBudget for Expenses

• Fixed Expenses simply record the amountsPay Yourself First (PYF) – try payroll deduction

• Variable Expensesmake your best guess based on previous monthswhen 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.htm

asks friends and relatives what they spend

Record What You SpendRecord 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

Review PatternsReview Patterns

• Your budget should be reviewed each monthDeficits – cut expenses/increase incomeSurplus – consider placing more in savings

for long-term goal

Budgeting TipsBudgeting Tips

• Plan carefullyestimates should be based on some datacover all expenses

• Be practical• Be flexible• Write your budget down• Be able to access your budget data

easily


• Worksheet packet page 12A, 13, 12B

• Terms to knowUnited Wayretirement planbudgetConsumer Price Indexbudget variancecost/benefit analysispay stubpayroll deduction Occupational privilege tax

taxesfederal income taxstate income taxSocial Security taxMedicare taxFICAUnemployment taxgross paynet paypay yourself first

Form W-4Form W-4

Tells your employer how much to withhold from your paycheck for taxes.

Form W-2Form W-2

Shows the income you earned from the employer and the amount withheld for taxes.


• Worksheet packet pages 14-16; Unit 3 Puzzle, Scrambled Words

• Terms to knowForm W-2Form W-4Allowance