Personal Finance Chapter 3: Money Management Strategy: Financial Statement and Budgeting

Money Management

Day-to-day financial activities necessary to manage current personal economic resources while working toward long -term financial security.

Safe Deposit Box

A private storage area at a financial institution with maximum security for valuables.

What opportunity costs are associated with money management activities?

-Spending money on current living expenses reduces the amount you can use for saving and investing for long-term financial security.

-Saving and investing for the future reduce the amount you can spend now.

-Buying on credit results in payments later and reduces the amount of future income available for spending.

-Using savings for purchases results in lost interest in earnings and an inability to use savings for other purposes.

-Comparison shopping can save you money and improve the quality of your purchases but uses up something o value you cannot replace: your time.

What are the three major money management activities?

1) Storing and maintaining personal financial records and documents.

2) Creating personal financial statements (balance sheet and cash flow statements of income and outflows).

3) Creating and implementing a plan for spending and saving (budgeting).

What are the benefits of an organized system of financial records and documents?

An organized system of financial records provides a basis for:

1) handling daily business activities

2) planning and measuring financial progress

3) completing required tax reports

4) making effective investment decisions

5) determining resources for current and future spending

What suggestions would you give for creating a system of organizing and storing financial records?

I use both a home file and a computer to store financial records. I keep them organized by clearly labeling each individual file and sorting through them each year to determine what I still need and what I do not.

Balance Sheet

A financial statement that reports what an individual or a family owns and owes; also called a net worth statement.

Assets

Cash and other property with a monetary value.

Liquid Assets

Cash and items of value that can be easily converted to cash.

Real Estate

Includes a home, a condominium, vacation property, or other land that a person or family owns.

Liabilities

Amounts owed to others.

Current Liabilities

Debts that must be paid within a short time, usually less than a year.

Long-term Liabilities

Debts that are not required to be paid in full until more than a year from now.

Net Worth

The difference between total assets and total liabilities.

Insolvency

The inability to pay debts when they are due because liabilities far exceed the value of assets.

Cash Flow

The actual inflow and outflow of cash during a given time period.

Cash Flow Statement

A financial statement that summarizes cash receipts and payments for a given period.

Income

Inflows of cash to an individual or a household.

Take-Home Pay

Earnings after deductions for taxes and other items; also called disposable income.

Discretionary Income

Money left over after paying for housing, food, and other necessities.

Fixed Expenses

Payments that do not vary from month to month.

Variable Expenses

Flexible payments that change from month to month.

What are the main purposes of 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 about your financial activities.

- Provide data you can use when preparing tax forms or applying for credit.

What does a personal balance sheet tell about your financial situation?

A balance sheet reports what you own and what you owe. You prepare a personal balance sheet to determine your current financial position.

How can you use a balance sheet for personal financial planning?

A balance sheet can help you measure progress toward your financial goals. It allows you to determine where you need your money to go in order to reach your goals at the pace you want.

What information does a cash flow statement present?

A cash flow statement is a summary of cash receipts and payments for a given period of time.

Budget

A specific plan for spending income.

Budget Variance

The difference between the amount budgeted and the actual amount received or spent.

Deficit

The amount by which the actual spending exceeds planned spending.

Surplus

The amount by which actual spending is less than planning spending.

What are the main purposes of a budget?

-Live within your income

-Spend your money wisely

-Reach your financial goal

-Prepare for financial emergencies

-Develop wise financial management habits

How does a person's life situation affect goal setting and amounts allocated for carious budget categories?

Depending on if a person is single, married, or married with children, they will have very different goals (college, car, vacation, or kids college saving plans).

What are the main steps in creating a budget?

1) Set Financial Goals

2) Estimate Income

3) Budget an Emergency Find and Savings

4) Budget Foxed Expenses

5) Budget Variable Expenses

6) Record Spending Amounts

7) Review Spending and Saving Patterns

What are commonly recommended qualities for a successful budget?

-Well planned

-Realistic

-Flexible

-Clearly Communicated

What actions might you take when evaluating your budgeting program?

You might change your financial goals or change the format in which you budget.