Transcript CHAPTER 2 Money Management Skills: Financial Statements and Budgeting Or “We Spent How Much On What?!”

CHAPTER 2
Money Management Skills:
Financial Statements and Budgeting
Or
“We Spent How Much On What?!”
1
Money Management, Defined
Money Management –
 Day-to-day financial activities necessary to
manage current personal economic resources
while working toward long-term financial security
“How Come We Always Have Too Much
Month at the End of the Money!”
2
Major Money Management Activities
 Store and maintain personal financial
records and documents
 Create personal financial statements
 Cash Flow Statement (income vs. expenses)
 Net Worth Statement (assets vs. liabilities)
 Create and implement a plan for spending
and saving (Arrgh! Budgeting!)
3
4
Why Keep Financial Records?
 To help make spending decisions
 To plan future spending
 To pay bills on time
 To see changes in net worth
 To make good investment decisions
 To prepare your income tax forms
 In preparation of applying for a loan
So you know what is happening to your money!
5
What to Keep in Your Home File

Items you refer to often










Personal and employment records
Tax records
Financial services records
Money management records
Credit records
Consumer purchase records
Insurance records
Investment records
Housing and car records
Estate planning and retirement records
What to Keep in Your 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 account numbers
Discussion:
Mortgage papers and titles
What about
List of insurance policy numbers
just buying a
Stock and bond certificates
home safe?
Coins and collectibles
Copy of will
6
Other Places to Keep Records
 Automobile


Vehicle registration
(I disagree)
Lawyer or Executor or Both
 Original of your will & other estate documents
 Home computer




Current and past budgets
Checking account records
Wills, estate plans, investments
Past income tax returns
(Encrypted?)
www.pgp.com
7
Successful Budgets Are...
Well planned
Realistic
Flexible
Clearly communicated
Next To Impossible!
Discussion: Does Budgeting ever work?
8
Saving is easier than Budgeting
“Spend Less Than You Earn”
“Live Beneath Your Means”
“Pay Yourself First”
“Make Love, Not Loans!”
For those of you old enough to remember (or are into
vinyl music), do I sound like a broken record?
Discussion: The “Pay Yourself 10% First” Solution
Is it reasonable?
9
The Extreme Viewpoint
 Keep a small notebook with you at all
times
 Record every monetary transaction you
make
 No matter how small
 Update your cash flow statement
constantly
Devotees of “Your Money or Your Life”
www.simplelivingforums.net
Did anyone check out their forums?
10
Personal Financial Statements
 Net Worth Statement
 “A snapshot of your financial situation”
 Assets versus Liabilities
 a.k.a. Balance Sheet
 Cash Flow Statement
 “The movie of your financial life”
 Income versus Expenses
 a.k.a. Income Statement, Budget
Let’s look at each one in detail…
11
Components of a Net Worth Statement
(a.k.a. Balance Sheet)
 Assets – What You Own
 Liquid assets
 Real estate
 Personal possessions
 Investment assets
 Liabilities – What You Owe
 Current liabilities – One year or less (a.k.a. short-term)
 Long-term liabilities – Greater than one year
 Net Worth – What You Have Left Over
 Assets minus liabilities
 Insolvent means liabilities far exceed assets

Rule of thumb: If short-term liabilities >= income …
12
Components of a Cash Flow Statement
(a.k.a. Income/Expense Statement, Budget)
 Shows inflow and outflow during a given
time period – Income versus Expenses
 Record cash inflows
 Income from employment
 Savings and investment income
 Other sources

Record cash outflows
Insolvency is
better determined
here.
 Fixed and variable expenses
 Net cash flow can be a surplus or a deficit

Used as a basis for creating a spending,
saving, and investment plan
13
14
Cash Flow / Net Worth
Let’s start on those financial
documents…