Slide 1Planning for Successful Money ManagementOpportunity Cost and Money ManagementSlide 4Benefits of an Organized System of Financial RecordsWhat to Keep in Your Home FileWhat to Keep in a Safe Deposit BoxRecords on Personal ComputerHow Long to Keep RecordsPurpose of Personal Financial StatementsComponents of a Balance Sheet (net worth statement)Where Did Your Money Go? Components of a Cash Flow StatementRatios for Evaluating Financial ProgressPurposes of a BudgetCreating and Implementing a BudgetSlide 16Characteristics of Successful BudgetingSelecting a Budgeting SystemSaving to Achieve Financial GoalsSavings Techniques-If I don’t see it, I won’t spend itMoney Management & Achieving Financial GoalsAssignmentsOnline ResearchChapter 3Money Management Strategy: Financial Statements and BudgetingMoney Management Strategy: Financial Statements and BudgetingMcGraw-Hill/IrwinCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.Planning for Successful Money Management•Daily spending and saving decisions are the heart of financial planning.•Decisions must be coordinated with needs, goals, and personal situations.•Money management is the day-to-day financial activities needed to manage personal economic resources, while working toward long-term financial security.3-2Opportunity 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 depletes savings.•Comparison shopping can save money but takes valuable time.3-3Major Money Management ActivitiesCreating and implementing a plan forspending, and saving (budgeting).Creatingpersonalfinancialstatements(balancesheets andcash flowstatements of income and outflow).3-4Storingandmaintainingpersonalfinancialrecordsanddocuments.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.3-5What to Keep in Your Home File•Items you refer to often.Personal and employment records.Money management records. Tax records.Financial services records.Consumer purchase, auto and credit records.Housing records. Insurance records.Investment records.Estate planning and retirement records.3-6What to Keep in a Safe Deposit Box•Safe deposit box is for records that would be hard to replace.Birth, marriage and death certificates, copy of will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.3-7Records 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 performanceresults of investments.Computerized versions of wills, estate plans, and other documents.3-8How 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.3-9Purpose 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 data you can use when preparing tax forms or applying for credit.3-10Components 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.3-11Where Did Your Money Go? Components of a Cash Flow Statement•Shows inflow, outflow for 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.3-12Ratios for Evaluating Financial Progress•Debt ratio = total liabilities/net worth; compares debt to net worth; lower debt ratio is best•Current ratio – liquid assets/current liabilities; shows how well short term assets cover short term debt; higher ratio is good•Liquidity ratio = liquid assets/monthly expenses; shows # of months that living expenses can be paid; higher ratio is good•Debt payments ratio = monthly credit payments/take-home pay; try to keep ratio below 20%•Savings ratio = monthly savings/gross income; Americans tend to be poor savers; shoot for at least 10%3-13Purposes 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.3-14Creating 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.1Set financial goals.2Estimate income from all sources.3Budget amount for an emergency fund, periodic expenses and financial goals.4Budget set amounts that you are obligated to pay. These are your fixed expenses. BE SURE TO BUDGET FOR SAVINGS.3-15Creating and Implementing a Budget•Steps in the budgeting process (continued).5Estimate amounts that are to be spent for household and living expenses. These are your variable expenses.6Record actual amounts for inflows and outflows, comparing actual amounts with budgeted amounts to determine variances.Deficits and surpluses.7Review