Chapter 2

honeydewscreenManagement

Nov 9, 2013 (3 years and 7 months ago)

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McGraw
-
Hill/Irwin

Copyright © 2006 The McGraw
-
Hill Companies, Inc. All rights reserved.

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Money Management Skills

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Money Management Skills

1.
Identify the main components of wise money
management

2.
Create a personal balance sheet and cash
flow statement

3.
Develop and implement a personal budget

4.
Connect money management activities with
saving for personal financial goals

Chapter Objectives

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Objective 1
: Identify the main components of wise
money management


Daily
spending
and
saving
decisions are at
the center of financial planning.


Decisions must be coordinated with your
needs, goals, and personal situations.


Money management

means the day
-
to
-
day
financial activities necessary to manage
personal economic resources, while working
toward long
-
term financial security.

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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 means savings can’t be used for
other purposes.


Comparison shopping can save money but
takes your valuable time.

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Components of Money Management

Creating

and

implementing

a plan for

spending,

and saving

(budgeting).


Creating

personal

financial

statements

(balance

sheets and

cash flow

statements

of income

and outflow).

Storing

and

maintaining

personal

financial

records

and

documents.

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Benefits of an Organized System of Financial
Records


Handling daily business affairs, including
payment of bills on time.


Planning and measuring financial progress.


Completing required tax reports.


Making effective investment 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.


Money management records.


Tax records.


Financial services records.


Credit records.


Consumer purchase and auto records.


Housing records.


Insurance records.


Investment 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.


CDs and credit and banking account numbers.


Mortgage papers and titles.


List of insurance policy numbers.


Stock and bond certificates.


Coins and other

collectibles.


Copy of will.

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Records on
Personal Computer


Home computer
.


Current and past budgets.


Summary of checks written and other banking
transactions.


Past income tax returns prepared with tax
preparation software.


Account summaries and performance

results of investments.


Computerized versions of wills,

estate plans, and other documents.


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How Long to Keep Records


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 six years.


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Objective 2
: Create a personal balance
sheet and cash flow statements

Benefits of these 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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Components of a Balance Sheet

(Net Worth statement)


Assets



List what you own.


Liquid assets.


Real estate.


Personal possessions.


Investment assets.


Liabilities

Determine what you owe


Current liabilities (< 1 year).


Long term liabilities.


Compute your net worth.


Assets minus liabilities.


Insolvent means liabilities far exceed assets.

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Ways to Increase Net Worth

1.
Increase your savings


2.
Increase the value of your investments
and other possessions


3.
Reduce amount owed

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Components of a
Cash Flow Statement:

Inflows and Outflows


Shows inflow and outflow during a given time
period
.

1.
Record Income


Net income from employment (Net Pay)


Savings and investment income.


Other sources.

2.
Record cash outflows.


Fixed and variable expenses

3.
Determine Net Cash Flow


Use this statement as a basis for creating a
spending, saving and investment plan.

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Objective 3
:

Develop and implement a Personal
Budget



Budget
: is a plan for spending in the future, such
as for the next month. A budget helps you…


Live within your income.


Spend your money wisely.


Reach your financial goals.


Prepare for financial emergencies.


Develop wise financial management habits
.

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7 Steps in the Budgeting Process



1.
Set financial goals.


2.
Estimate income from all sources.


3.
Budget amount for an emergency fund,
periodic expenses and financial goals.


4.
Budget set amounts that you are obligated
to pay. These are your fixed expenses.

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7 Steps in the Budgeting Process

5
Budget estimated amounts that are to be
spent for various household and living
expenses. These are your variable
expenses.

6
Record actual amounts for inflows and
outflows, comparing actual amounts with
budgeted amounts to determine variances.


Deficits and surpluses.

7
Review your spending and savings

patterns and evaluate whether

revisions are needed in your

savings and spending plans.

(continued)

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Characteristics of Successful Budgeting


Well planned.


Realistic.


Flexible.


Clearly communicated.

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Objective 4
: Connect money management
activities with savings for personal financial goals


Financial Statements and Budget allow you to
achieve your financial goals with


1.
Balance Sheet:

telling you where you are now


2.
Cash Flow Statement:

telling you what you
received and spent over the past month


3.
Budget:

How to plan, spend and save to

achieve financial goals


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Changes in Net Worth


Changes in Net Worth result from cash inflows
and outflows.


Outflows>Inflows


Draw from savings or borrow


Lower assets or higher liabilities


Inflows>Outflows


Put money into savings or pay off debts


Higher net worth

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Selecting a Saving Technique

1.
Write a check each payday and deposit

in a savings account


2.
Use payroll deduction to deposit a certain
amount in savings


3.
Save coins or spend less on certain items

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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.


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.