Chapter2MoneyManagementSkillsCopyright

?2010byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/IrwinMoneyManagementSkills

ChapterObjectivesIdentifythemaincomponentsofwise moneymanagementCreateapersonalbalancesheetand cashflowstatementDevelopandimplementapersonal budgetConnectmoneymanagementactivities withsavingforpersonalfinancial goals2-2Objective1

IdentifytheMainComponentsof

WiseMoneyManagementMoneymanagement=day-to-dayfinancialactivitiesnecessarytomanagecurrentpersonaleconomicresources,whileworkingtowardlong-termfinancialsecurityDailyspendingandsavingdecisions=centraltofinancialplanningMustbecoordinatedwithneeds,goals,andpersonalsituations2-3ComponentsofMoneyManagement2-4MoneyManagementTroubles&DebtGettingoutofdebt:EvaluateyourcreditsituationTrackyourspendingPlantomakepaymentsontimeConsiderotherincomesourcesIfappropriate,seekassistance2-5AnOrganizedPersonalFinancialRecordsSystemProvidesabasisfor:Handlingdailybusinessaffairs,suchasbill payingPlanningandmeasuringfinancial progressCompletingrequiredtaxreportsMakingeffectiveinvestmentdecisionsDeterminingavailableresourcesforcurrentandfuturebuying2-6RecordsinYourHomeFileItemsyourefertooftenPersonalandemploymentrecordsMoneymanagementrecordsTaxrecordsFinancialservicesrecordsCreditrecordsConsumerpurchaseandautorecordsHousingrecordsInsurancerecordsInvestmentrecordsEstateplanningandretirementrecords2-7WhattoKeepinaSafeDepositBoxRecordsanditemsthatwouldbehardtoreplace:Birth,marriageanddeathcertificatesListofchecking,savingsandfinancialinstitutionaccountnumbersCitizenshipandmilitarypapersAdoptionandcustodypapersSerialnumbersandphotosofvaluablesCDsandcreditandbankingaccountnumbersMortgagepapersandtitlesListofinsurancepolicynumbersStockandbondcertificatesCoinsandother

collectiblesCopyofwill2-8RecordsonYourPersonalComputer*CurrentandpastbudgetsSummaryofcheckswrittenandotherbankingtransactionsPastincometaxreturnspreparedwithtaxpreparationsoftwareAccountsummariesandinvestmentperformanceresultsComputerizedversionsofwills,

estateplans,andotherdocuments*Keepabackup!2-9HowLongtoKeepRecordsRecordsRetentionPeriodBirthcertificates,willsandsocialsecurityinformationIndefinitelyPersonalpropertyandinvestmentsAslongasyouownthemDocumentsre:purchaseandsaleofrealestateIndefinitelyCopiesoftaxreturnsandsupportingdata7yearsminimum10yearsbetter2-10Objective2

CreateaPersonalBalanceSheet

andCashFlowStatementBenefitsRecapyourcurrentfinancialpositioninrelationtothevalueofitemsyouownandamountsyouoweMeasureprogresstowardfinancialgoalsMaintaininformationonfinancialactivitiesProvideinformationforpreparingtaxformsorapplyingforcredit2-11BalanceSheetAfinancialstatementthatreportswhatanindividualorfamilyownsandowesasofaspecificdate:Alsocalled:Networth

statement

StatementoffinancialpositionItemsofValue(whatyouown)-Amountsowed(whatyouowe)NetWorth(yourwealth)=2-12ComponentsofaBalanceSheetStep1–ListitemsofvalueLiquidassetsRealestatePersonalpossessionsInvestmentassetsStep2–DetermineamountsowedCurrentliabilities(<1year)LongtermliabilitiesStep3-Computeyournetworth.2-13NetWorthAssets-Liabilities=NetWorthMeasurementofcurrentfinancialpositionNetworth≠cashavailableInsolvency:InabilitytopaydebtswhendueLiabilitiesfarexceedassets2-14SampleBalanceSheet2-15WaystoIncreaseNetWorthIncreaseyoursavingsReducespendingIncreasethevalueofinvestmentsandotherpossessionsReduceamountsowed2-16EvaluatingFinancialProgress

Ratios2-17TheCashFlowStatement

InflowsandOutflowsCashflowstatement=personalincomeandexpenditurestatementSummaryofcashreceiptsandpaymentsforagivenperiodTotalcashreceivedduringthetimeperiod-CashoutlaysduringthetimeperiodCashsurplusordeficit=2-18TheCashFlowStatement

InflowsandOutflowsStep1-RecordIncomeNetincomefromemployment(NetPay)SavingsandinvestmentincomeOthersourcesStep2-RecordcashoutflowsFixedandvariableexpensesStep3-DetermineNetCashFlowUsethisstatementasabasisforcreatingaspending,savingandinvestmentplan2-19SampleCashFlowStatement2-20Objective3

DevelopandImplementaPersonalBudget

Budget=spendingplanHelpsyou:LivewithinyourincomeSpendmoneywiselyReachfinancialgoalsPrepareforfinancialemergenciesDevelopwisefinancialmanagementhabits2-21The7StepsinBudgetingProcessSetfinancialgoalsEstimateincomefromallsourcesBudgetanEmergencyFundandSavingsBudgetFixedExpensesBudgetVariableExpensesRecordSpendingAmountsReviewSpendingandSavingPatternsReviewfinancialprogressRevisegoalsandbudgetallocations2-222-23TypicalBudgetAllocations2-24CharacteristicsofaSuccessfulBudgetWellplannedRealisticFlexibleClearlycommunicated2-25BudgetingSystemsMentalbudgetAppropriateiffinancialresourcesandresponsibilitiesarelimitedPhysicalBudgetEnvelopes,foldersorcontainersWrittenBudgetOnnotebookpaperComputerizedBudgetSpreadsheetorspecializedsoftware2-26Objective4

ConnectMoneyManagementActivitieswithSavingsforPersonalFinancialGoalsYourBalanceSheet:SnapshotofwhereyouarenowYourCashFlowStatement:WhatyoureceivedandspentoveraspecificperiodYourBudget:

Planningspendingandsavingtoachievefinancialgoals2-27ChangesinNetWorthChangesinNetWorthresultfromcashinflowsandout