FINALS BUSINESS FINANCE

Money Management Philosophies

  • Group 7

Money Management

  • Definition: The process of budgeting, saving, investing, spending, or overseeing the cash usage of an individual or group.

Importance of Money Management

  • Having a healthy money philosophy leads to:

    • Healthier approach to earning money

    • Mindful giving practices

    • Responsible spending habits

Advantages and Disadvantages of Money Management

Advantages

  • Make informed decisions

  • Better resource allocation

  • Help you reach financial goals

Disadvantages

  • Feeling constrained by budget

  • Inability to foresee future financial needs

Risk Factors

  • Definition: Situational uncertainty regarding future outcomes that may result in financial losses.

Credit Risk

  • Definition: The probability that a counterparty will default on financial obligations, impacting transactions.

Economic Risk

  • Definition: Risks of financial loss due to unforeseen changes in the economy (e.g., economic downturns).

Philosophical Bias in Money Management

  • Subjective beliefs can distort financial decision-making.

Common Money Philosophies

Money Avoidance

  • Belief that money is the root of evil, leads to views of wealthy individuals as greedy.

  • Tends to avoid spending even on essential purchases.

Money Worship

  • Belief that money solves all problems and is the source of happiness and power.

Money Status

  • Belief that self-worth equals net worth; individuals assess success based on financial status.

Money Vigilance

  • Individuals are anxious and cautious regarding their money management practices.

Dave Ramsey's "Envelope System"

Overview

  • Method involving budgeting cash allowance for each category of spending.

  • Only spend what is allotted in cash envelopes to maintain discipline.

Steps to Implement Envelope System

  1. Make a budget: Identify budget lines needing cash envelopes.

  2. Label and stuff envelopes: Prepare envelopes for each category.

  3. Spend only what's in envelopes: Restrict spending to cash available in the envelopes.

Example of Envelope System: Ashley

  • Monthly salary: $15,000

  • Example budget allocation using the envelope system.

Alexa Von Tobel's "50/20/30 System"

Overview

  • Budgeting method that allocates income into three categories:

    • 50% for essentials (e.g., food and transportation)

    • 20% for savings

    • 30% for discretionary expenses (e.g., entertainment)

Background on Alexa von Tobel

  • Founder and CEO of LearnVest.com, aimed at helping individuals manage their finances more effectively.

Example of 50/20/30 System: Angel

  • Monthly salary: ₱20,000

  • Budget breakdown:

    • Essentials: ₱10,000

    • Savings: ₱4,000

    • Other Expenses: ₱6,000

Peter Dunn's "Ideal Budget"

Overview

  • Proposal for budgeting using percentages for various expense categories.

Background on Peter Dunn

  • American financial author and radio personality who promotes effective money management strategies.

Example of Ideal Budget: Betty

  • Monthly income: ₽50,000

  • Budget allocation based on percentage:

    • Housing: 25% - ₽12,500

    • Transportation: 15% - ₽7,500

    • Savings: 10% - ₽5,000

    • Miscellaneous expenses totaling to budgeted amount.

Comparative Analysis of Budgeting Techniques

  • Differences between methodologies:

    • Ramsey’s emphasizes cash management;

    • Von Tobel highlights percentage allocation;

    • Dunn presents a customizable framework for budgeting.

  • Similarities: All techniques stress the importance of categorizing expenses and prioritizing savings.

Time Value of Money (TVM)

Overview

  • Concept indicating that money today is worth more than the same amount in the future due to earning potential.

Objectives of TVM Understanding

  1. To grasp the TVM concept.

  2. To calculate present value/future value of cash flows.

  3. To apply TVM to solve real-life financial challenges.

Reasons Behind TVM Concept

  • Investment: Money today can generate additional funds.

  • Inflation: Increased prices can reduce future cash value.

  • Risk: Interest charged due to loan risks diminishes real money value.

TVM Formula

  • Future Value (FV): FV = PV [1 + (i/n)]^[n(t)]

  • Present Value (PV): PV = FV [1 + (i/n)]^[n(t)]

Example of TVM Calculation

  • Given parameters: PV = 10,000, i = 10%, t = 10 years.

  • Test case scenarios with different compounding periods.

Conclusion on TVM

  • TVM is essential for estimating future value investments and guiding financial decisions.

Recommendations

  • Always factor in TVM when considering investments in equity, bonds, and other financial instruments.

Acknowledgments

  • Group 7:

    • Irish Naycee T. Perez

    • Daniella Delmendo

    • Hasren Omar

  • Thank you for your attention!