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Chapter 3 Money Management Strategy 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

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organizing personal financial 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.

Organizing PersonalFinancial Records
money management
Money 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 records
    • Preparing personal financial statements
    • Creating 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 Files

  • Use for documents that are fairly easy to replace
  • Advantages
    • Easy to set up
    • Easy to use and access
    • Inexpensive
  • Disadvantages
    • Vulnerable to damage
where to keep documents6
Where to Keep Documents

Safe-Deposit Boxes

  • Use for documents that are hard to replace
  • Advantages
    • Safe from damage
    • Separate from other documents
    • Access is limited
    • Contents usually insured
  • Disadvantages
    • Harder to access
    • Costs money (about $100 year)
where to keep documents7
Where to Keep Documents

Computer Files

  • Use for documents that are easy to keep electronically or that are useful in planning
  • Advantages
    • Automatic calculation of amounts
    • Usually has tool to help in tracking and planning
  • Disadvantages
    • Data can be lost
check your understanding
Check Your Understanding
  • Complete Worksheet Packet page 4
  • Known these terms
    • money management
    • safe-deposit box
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

Why It’s Important

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 Statements
personal financial documents10
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 owe
    • measure your progress toward your financial goals
    • track your financial activities
    • organize information that you can use when you file your return or apply for credit
balance sheet
Balance 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 sheet
Creating the Balance Sheet
  • Determine Your Assets
  • Determine Your Liabilities
  • Calculate Your Net Worth
  • Evaluate Your Financial Situation
  • 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
  • Liabilities are debts that you owe
  • Liabilities include only those items that you will owe for longer than a month
  • Categories
    • Current liabilities – short-term debts that have to be paid within one year
    • Long-Term liabilities – debts that don’t have to be fully paid for at least one year
net worth
Net Worth

The formula to calculate net worth is:


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 worth
More 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 worth
    • Increasing – keep doing what you’re doing
    • Decreasing – changes are in order
    • Staying the Same – you may want to make some changes
check your understanding18
Check Your Understanding
  • Complete Worksheet Packet page 9
  • Known these terms
  • personal financial statements
  • balance sheet
  • net worth
  • assets
  • liquid assets
  • real estate
  • personal possessions
  • investment assets
  • market value
  • liabilities
  • current liability
  • long-term liability
  • insolvency
cash flow statement
Cash 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
  • Determine Your Cash Inflows
  • Determine Your Cash Outflows
  • Determine Your Net Cash Flow
cash inflows
Cash Inflows
  • Your cash inflows represent your income
  • Sources of income
    • Take-home pay or net pay
    • Gifts
    • Bank account interest
    • Gains on investments
    • Sale of assets
cash outflows
Cash Outflows
  • Your cash outflows represent your expenses
  • Types of Expenses
    • Fixed expenses – expenses that remain more or less the same every month
    • Variable expenses – expenses that change from month to month
net cash flow
Net Cash Flow

The formula to calculate net cash flow is:


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 flow
More 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 income
    • Discretionary 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 together
Putting It Together
  • When your cash flow changes, so does your net worth
    • A negative cash flow will decrease your net worth
    • A positive cash flow will increase your net worth
  • You can also use financial ratios to analyze your financial position – see worksheet packet page 7.
check your understanding26
Check Your Understanding
  • Use your Personal Spending Record to prepare your own Cash Flow Statement.
  • Worksheet packet pages 8, 10, 10A, 10B
  • Terms to know
  • personal spending record
  • cash flow
  • cash inflows
  • cash outflows
  • fixed expense
  • variable expense
  • income
  • take-home pay
  • discretionary income
  • surplus
  • deficit
  • positive cash flow
  • negative cash flow
  • income statement
What You’ll Learn

How to create a budget that is practical for you

How to achieve your financial goals by increasing your savings

Why It’s Important

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 budgeting
Steps in Budgeting
  • Set financial goals
  • Estimate your income
  • Budget for the unexpected
  • Budget for expenses
  • Record what you spend
  • Review spending and savings patterns
set financial goals
Set Financial Goals

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

estimate your income
Estimate 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 unexpected
Budget 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 expenses
Budget for Expenses
  • Fixed Expenses
    • simply record the amounts
    • Pay Yourself First (PYF) – try payroll deduction
  • Variable Expenses
    • make your best guess based on previous months
    • when in doubt, guess high!
    • use guidelines about expenses published by financial experts
    • asks friends and relatives what they spend
record what you spend
Record 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 patterns
Review Patterns
  • Your budget should be reviewed each month
    • Deficits – cut expenses/increase income
    • Surplus – consider placing more in savings for long-term goal
budgeting tips
Budgeting Tips
  • Plan carefully
    • estimates should be based on some data
    • cover all expenses
  • Be practical
  • Be flexible
  • Write your budget down
  • Be able to access your budget data easily
check your understanding37
Check Your Understanding
  • Worksheet packet page 12A, 13, 12B
  • Terms to know
  • taxes
  • federal income tax
  • state income tax
  • Social Security tax
  • Medicare tax
  • FICA
  • Unemployment tax
  • gross pay
  • net pay
  • pay yourself first
  • United Way
  • retirement plan
  • budget
  • Consumer Price Index
  • budget variance
  • cost/benefit analysis
  • pay stub
  • payroll deduction
  • Occupational privilege tax
form w 4
Form W-4

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

form w 2
Form W-2

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

check your understanding40
Check Your Understanding
  • Worksheet packet pages 14-16; Unit 3 Puzzle, Scrambled Words
  • Terms to know
    • Form W-2
    • Form W-4
    • Allowance