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Chapter 3

Money Management Strategy: Financial Statements and Budgeting

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Personal Finance 7eKapoor Dlabay Hughes

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Planning for Successful 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 andMoney 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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Major Money Management Activities

Creatingand

implementinga plan forspending, and saving (budgeting).

Creatingpersonalfinancial

statements(balance

sheets andcash flow

statements of income

and outflow).3-4

Storingand

maintainingpersonalfinancialrecords

anddocuments.

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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. 3-6

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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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Purpose of PersonalFinancial 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 - what you own.

Liquid assets. Real estate. Personal possessions. Investment assets.

Liabilities - what you owe Current liabilities (< 1 year). Long term liabilities.

Compute your net worth. Assets minus liabilities. Insolvent means liabilities far exceed assets. 3-11

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Where Did Your Money Go? Components of a Cash Flow Statement Shows inflow and outflow during a given time

period. Record inflow.

Net 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.

Use this statement as a basis for creating a spending, saving and investment plan. 3-12

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Purposes of a Budget

In contrast to cash flow which was a record of how you spent money in a past time period, a 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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Creating and Implementing a Budget

Assessing your current situation. Measure your current financial position. Determine your needs, values and life situation.

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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Creating and Implementing a Budget Steps in the budgeting process (continued).

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.

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Characteristics of Successful Budgeting

Well planned. Realistic. Flexible. Clearly communicated.

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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.

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