Chapter 03

Money Management Strategy:

Financial Statements
And
Budgeting

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Chapter 3
Learning Objectives

LO3-1 Recognize relationships among financial

documents and money management
activities.
LO3-2 Develop a personal balance sheet and
cash flow statement.
LO3-3 Create and implement a budget.
LO3-4 Relate money management and savings
activities to achieve financial goals.

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Successful Money Management
Learning Objective 3-1:
Recognize relationships among financial
documents and money management
activities.

• Daily spending and saving decisions are the

center of financial planning

• Decisions must be coordinated with needs,

goals, and personal situations

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 Successful Money Management
• MONEY MANAGEMENT is the day-to-day
financial activities needed to manage personal
economic resources, while working toward
long-term financial security

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 Successful Money Management
• OPPORTUNITY COST AND MONEY
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

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Successful Money Management

• COMPONENTS OF MONEY MANAGEMENT

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 Successful Money Management
• A PERSONAL FINANCIAL RECORDS SYSTEM
– Benefits of an Organized System of Financial
Records
o Handling daily business affairs, including
payment of bills on time
o Planning and measuring financial progress
o Completing required tax reports
o Making effective investment decisions
o Determining available resources for current
and future spending

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Successful Money Management
– Items in Your Home File
o Personal and employment records
o Money management records
o Tax records
o Financial services records
o Credit records
o Consumer purchase & auto records
o Housing records
o Insurance records
o Investment records
o Estate planning and retirement records
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Successful Money Management
– Items in the safe deposit box
o Records that would be difficult-to-replace
o Birth, marriage and death certificates,
copy of will
o Citizenship and military papers
o Adoption and custody papers
o Serial numbers and photos of valuables
o CDs and credit and banking account
numbers
o Mortgage papers and titles
o List of insurance policies
o Annual stock investment statements
o Rare coins and stamps
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Successful Money Management
– Records on your personal computer
o Current and past budgets
o Summary of checks written and
other banking transactions
o Past income tax returns prepared
with tax preparation software
o Account summaries and
performance results of
investments
o Computerized versions of wills,
estate plans, and other documents

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Successful Money Management
– How long should records be kept?
o Birth certificates, wills, and Social Security
information should be kept permanently
o Keep records on personal property and
investments as long as you own them
o Keep documents related to the purchase
and sale of real estate indefinitely
o Copies of tax returns and supporting data
should be kept seven years

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 Personal Financial Statements
Learning Objective 3-2:
Develop a personal balance sheet and cash flow
statement.
• PURPOSE OF PERSONAL FINANCIAL
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
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 Personal Financial Statements
• BALANCE SHEET: WHERE ARE YOU NOW?
– Also called the Net Worth Statement or
Statement of Financial Position
– Preparation of Balance Sheet requires using three
Steps
– STEP 1: LIST ITEMS OF VALUE
o Assets - what you own
 Liquid assets
 Real estate
 Personal possessions
 Investment assets

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 Personal Financial Statements
– STEP 2: DETERMINE AMOUNTS OWED
o Liabilities - what you owe
 Current liabilities (< 1 year)
 Long-term liabilities

– STEP 3: COMPUTE NET WORTH

o Net Worth = Assets – Liabilities
o Assets = Liabilities + Net Worth
o Insolvency is the inability to pay debts when they
are due

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Personal Financial Statements
o Net Worth is an indication of the financial position
at any given date

o Ways to increase Net Worth

 Increasing your savings
 Reducing spending
 Increasing the value of investments and other
possessions
 Reducing the amounts you owe
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 Personal Financial Statements

• THE CASH FLOW STATEMENT

– Cash Flow is the actual inflow and outflow for a

given time period

– The Cash Flow statement is also called

Personal Income and Expenditure Statement

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Personal Financial Statements
– Preparation of The Cash Flow Statement requires
using three Steps
– STEP 1: RECORD INCOME
o Wages, salaries, and commissions
o Self-employment business income
o Savings and investment income
o Gifts, grants, and scholarships
o Government payments, such as Social Security,
public assistance, and unemployment benefits
o Amounts received from pension and retirement
programs
o Alimony and child support payments

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Personal Financial Statements

– STEP 2: RECORD CASH OUTFLOWS

o Fixed Expenses
o Variable expenses
– STEP 3: DETERMINE NET CASH FLOWS
o The difference between income and
outflows can either be positive (surplus) or
negative (deficit)
o Cash flow statement provides the
foundation for preparing and implementing
a spending, saving, and investment plan

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 Budgeting for
Skilled Money Management
Learning Objective 3-3:
Create and implement a budget.
• A budget is a spending plan
• The main purposes of a budget are to help
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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 Budgeting for
Skilled Money Management

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 Budgeting for
Skilled Money Management
• THE BUDGETING PROCESS
– Step 1: Set Financial Goals
– Step 2: Estimate Income
– Step 3: Budget An Emergency Fund
and Savings
– Step 4: Budget Fixed Expenses
– Step 5: Budget Variable Expenses
– Step 6: Record Spending Amounts
– Step 7: Review Spending and
Saving Patterns
– Step 8: Revise Your Goals and
Budget Allocations
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 Budgeting for
Skilled Money Management
• CHARACTERISTICS OF SUCCESSFUL
BUDGETING

– Well planned
– Realistic
– Flexible
– Clearly communicated

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 Budgeting for
Skilled Money Management
• TYPES OF BUDGETING SYSTEMS
Which one works for you?
– Mental budget: it is all in your head
– Physical budget: use envelopes for your expenses
such as food, rent, etc.
– Written budget: use spreadsheets
– Computerized budgeting system: use software
such as Quicken (http://www.quicken.com/)
– Online budget: (http://www.mint.com/)
– Budget App: using your phone to track expenses

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 Money Management and
Achieving Financial Goals
Learning Objective 3-4:
Relate money management and savings activities to
achieve financial goals.
•IDENTIFYING SAVING GOALS
– To create an emergency fund for irregular and
unexpected expenses
– To pay for the replacement of expensive items,
such as 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 3-24
 Money Management and
Achieving Financial Goals
• SELECTING A SAVING TECHNIQUE

– Payroll deductions into savings accounts

– Automatic payments from checking into savings
accounts or mutual funds
– Saving regularly in 401(k) plans
– Also save coins, make periodic deposits
– Write a check each payday as a % of income and
deposit into savings

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 Money Management and
Achieving Financial Goals
• CALCULATE SAVINGS AMOUNTS

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