Chapter 2: Money Management skills

Steps to Financial Literacy

• Improved Cash Flow:

  1. Plan a system to monitor cash inflows (income) and outflows (spending).

     • App: Spending Tracker

  2. Identify fixed expenses and seek actions to control/reduce variable expenses.

  3. Spend according to your plan to avoid negative cash flow and debt problems.

Importance of Improved Cash Flow

• Ability to pay bills on time is vital for financial success.

• Positive monthly cash flow:

  • Allows for setting aside funds for the future.

  • Helps avoid financial difficulties.

• Track spending to identify expenses that can be cut or consider increasing income.

• Use tools like the Personal Finance Road Map and Dashboard to monitor cash flow progress.

• Cash flow is the actual inflow and outflow of cash during a given time period.

• Cash flow statement (that is, personal income and expenditure statement) summarizes cash receipts and payments for a given period.

• Checks written, cash withdrawals, and debit card payments are your outflows, as well as rent, food and loans

• Step 1 – Record income Income is the inflow of cash to an individual or household.
  • Take-home pay, or net pay, is earnings after deductions for taxes and other items; also
  called disposable income.
  • Discretionary income is money left over after paying for housing, food, and other
  necessities.
  Main source of income is usually money received from a job.
  • Other income sources include commissions, self-employment income, interest,
  dividends, gifts, grants, scholarships, government payments, pensions, retirement
  income, alimony, and child support.
  Step 2 – Record cash outflows
  • Fixed expenses and variable expenses.
  Step 3 – Determine new cash flow
  • Use this statement as a foundation for preparing and implementing a
  spending, saving, and investment plan.

• Total cash received during the time period - Cash outflows during the time period = Cash surplus or deficit

Personal Financial Plan Sheets

1. Financial Documents and Records

2. Creating a Personal Balance Sheet

3. Creating a Personal Cash Flow Statement

4. Developing a Personal Budget

A Successful Money Management Plan

• Daily spending and saving decisions are foundational for successful money management.

• Financial activities should involve:

  1. Track spending.

  2. Set goals.

  3. Create a budget.

• Coordinate tasks with needs, goals, and personal situation.

• Maintaining financial records and planning spending is essential for successful personal financial management.

• Money management refers to day-to-day activities necessary to manage current personal economic resources while working toward long-term financial security.

Components of Money Management

• Three interrelated money management activities:

  1. Financial Documents: Storing and maintaining personal financial records.

  2. Financial Statements: Preparing Balance Sheet and Cash Flow Statement regularly.

Budgeting: Creating and implementing a plan for spending and saving.

Importance of Personal Financial Records

• Personal financial records track resource allocation, providing proofs of transactions and ownership, aiding in legal matters.

• Types of Financial Documents:

  • Receipts, credit statements, insurance policies, tax forms.

• Records help in:

  1. Daily business activities management, like bill payments.

  2. Planning and measuring financial progress.

  3. Completing tax filings.

  4. Making informed investment decisions.

  5. Assessing resources for current/future spending.

System for Organizing Financial Records

• Most documents stored in:

  • Home file

  • Safe deposit box

  • Computer or online systems.

• Home files should kept for current needs, while valuable items and important documents should be secured in a safe deposit box for maximum security.

• Record Retention Guidelines:

  • Should be kept Permanently: Birth certificates, wills, and Social Security data.

  • Investment records: Keep as long as you own the investments.

  • Federal tax documents: Keep for three years; generally up to six years if issues arise during audits.

  • Real estate sale/purchase documents: Keep indefinitely.

Categories of Financial Records

• Regularly shred outdated documents containing personal information.

• Such as receipts for small, non tax-deductible purchases and Expired warranties.

• Quarterly investment account statements (keep annually summary statements)

• Document that you no longer need with personal information such as your Social security or account numbers should be shredded to prevent identity theft and ensure your privacy is protected.

• Computer Recycle Bin- Empty the bin on a regularly basis. Make sure personal data files are completely erased.

Addressing Ownership Document Issues

• If vital ownership documents cannot be located, leverage a combination of physical and digital storage to create an accessibility system. AI may recommend optimal document organization methodologies.

Life Event: Living Independently

• Common Pitfalls: Poor spending records leading to financial stress.

• Actions to Succeed:

  1. Record spending with an app or written journal.

  2. Avoid credit cards or pay off balances monthly.

  3. Cut unnecessary expenses and build emergency savings.

  4. Seek additional income through side jobs or selling items.

Organizing Electronic Financial Records

• When storing electronic documents in the cloud:

  • Download local copies of important statements.

  • Create backups via external media or online services.

  • Ensure strong passwords and encrypt sensitive data.

Money Management Strategies

• Cutting Back Expenses:

  • Important during the pandemic.

  • Adjust tax withholding, cut insurance costs, make wiser food choices, minimize restaurant dining.

  • Avoid online shopping, reduce energy use, select cheaper phone plans, cancel unnecessary subscriptions.

  • Clearly differentiate between essentials (needs) and luxury items (wants) to enhance savings.

Reviewing Spending and Savings Patterns

• Ongoing Budgeting Process:

  • Regular reviews and adjustments of the spending plan are necessary.

• Financial Progress Review:

  • Assess cash in bank accounts and bill payment statuses.

  • Track spending vs. budget through annual summaries for each month.

• Revising Goals and Allocations:

  • Identify overspending areas (commonly entertainment and dining).

  • Consider budget adjustments such as opting for less expensive brands and reducing subscriptions.

Successful Budgeting Principles

• Key Features of a Successful Budget:

  • Well Planned: Involves time and agrees with all stakeholders.

  • Realistic: Focus on enjoyable yet effective budgeting.

  • Flexible: Can adapt to unexpected changes in income or expenses.

  • Clearly Communicated: All household members should understand and agree to the plan.

• Tracking Financial Health:

  • Monitor monthly income, expenses, cash flow, emergency funds, debts, and credit scores.

Budgeting Systems

• Types of Budgeting Systems:

  • Mental Budget: Simple but risky for comprehensive management.

  • Physical Budget: Use of envelopes or folders for separate expenses (cash stuffing).

  • Written Budget: Documented in notebooks or accounting papers.

  • Digital Budget: Created via spreadsheets or budgeting apps (free to charge).

• Choosing a System: The chosen system impacts financial control and goals attainment.

Other Financial Considerations

• Savings Techniques:

  • Use payroll deductions, automate savings, and prioritize savings in spending.

• Establish Specific Goals:

  • Track progress and visualize results.

  • Obtain support from others for motivation.

Calculating Savings Amounts

• Utilize time value of money calculations for financial goals.

Practice Quiz and Self-Test Questions

• Importance of budgeting, relevance of financial situations in goal setting, and identification of fixed vs. variable expenses.

Personal Financial Statements

• Tools for Achieving Financial Goals:

  • Balance sheets, cash flow statements, and budgets to plan spending and saving effectively.

  • Importance of tracking inflow and outflow for financial assessment.

Key Terms and Formulas

• Deficit: When expenditures exceed income.

• Surplus: When income exceeds expenditures.

• Net Worth: Assets minus liabilities.

A Money Management SWOT Analysis

Financial Literacy in Practice

• SWOT (strengths, weaknesses, opportunities, threats) analysis, a planning tool used by companies, can also help with money management and budgeting activities.

Developing a Personal Budget

• Purpose: Compare projected and actual spending for a one- to three-month period.

• Activities: Estimate projected spending via cash flow statements; maintain records for actual spending.

• Suggested Websites: www.betterbudgeting.com, www.asec.org, www.mymoney.gov

Career Strategy Development

Income and Expenses

• Income Sources: Salary and other income.

• Expense Categories:

  • Fixed Expenses: Mortgage/rent, property taxes, insurance, loan payments.

  • Variable Expenses: Food, utilities, entertainment, personal care, etc.

• Total Budget: Track budgeted vs. actual amounts and calculate variances.

Evaluating Your Budget

• Assess if budgeting aligns with financial goals.

• Determine appropriate adjustments based on current life situations.

Career Planning Process

1. Personal Assessment: Identify interests, values, talents, and abilities.

2. Employment Market Analysis: Evaluate influences on job opportunities (geographic, economic).

3. Application Process: Prepare resumes and cover letters.

4. Interview Process: Develop interviewing skills and background knowledge on companies.

5. Employment Acceptance: Assess salary, benefits, and company culture.

6. Career Development: Create plans for skill enhancement and relationship building.

Skills for Career Success

• Technical Skills: Specialized knowledge in areas like IT, healthcare.

• General Skills: Soft skills like communication, teamwork, and adaptability.

Effective Resume Preparation

• Key Components:

  • Personal data & Career profile

  • Education highlights

  • Experience listing with action verbs

  • Related information (awards, skills)

• Action Verbs: Use terms like "achieved," "developed," "coordinated" for impact.

Interview Preparation

• Research Company: Understand operations, culture, and competitive landscape.

• Practice Common Questions: Prepare to explain qualifications and respond to situational questions.

• Dress Appropriately: Professional attire recommended; maintain good body language.

Job Offer Analysis

• Factors to Compare:

  • Salary and benefits

  • Work environment and company culture

Self-Employment and Entrepreneurship

• Business Start-up Principles:

  • Develop a viable product/service idea.

  • Conduct market research.

  • Build a competent team.

  • Focus on customer satisfaction and feedback.

Caution about Job Offers

• Beware of fraudulent job opportunities, such as unsolicited offers for fees or requiring sensitive information.

• Continuously adapt to changing job markets through ongoing education and networking.

• Utilize resources available through career development offices and online platforms.

Your Personal Balance Sheet

The starting point

• a balance sheet (that is a net worth statement or statement of financial position) is a financial statement that reports what an individual family owns and owes.

Items of value (that you own) - Amount owed (what you owe) = Net worth (your wealth)

Step 1 – List items of value
• Liquid assets are cash and items of value that can easily be
converted to cash.
• Real estate.
• Personal possessions.
• Investment assets.
Step 2 – Determine amounts owed
• Current liabilities are debts that must be paid within a short time, usually less than a year.
• Long-term liabilities are debts that you do not have to pay in full until
more than a year from now.
Step 3 - Compute your net worth
• Net worth is the difference between total assets and total liabilities

Computing Net Worth
Assets − Liabilities = Net Worth
Assets = Liabilities + Net worth
• Example: If a household has $193,000 of assets
and liabilities of $88,000, the net worth would be $105,000 ($193,000 minus $88,000)
• Insolvency is the inability to pay debts when they are due because liabilities exceed the value of assets.

Methods to Increase Net Worth
You can increase your net worth by:
• Increasing your savings;
• Reducing spending;
• Increasing the value of investments;
• Reducing amounts owed.
Remember, your net worth is not money available to use but an indication of your financial position on a given date.

LO 2.4: Money Management and Achieving Financial Goals

Personal financial statements and a budget are the foundation for achieving financial goals with the following:
1. Your balance sheet: reporting your financial position –where you are now.
2. Your cash flow statement: telling you what you received and spent over the past month.
3. Your budget: plan for spending and saving to achieve financial goals.

Changes in net worth result from cash inflows and outflows.
• In periods where outflows exceed inflows, you must draw on savings or borrow.
• When inflows exceed outflows, putting money into savings or paying off debts results in a higher net worth.

For many years, the U.S. ranks low for the average household savings rate. To expand your savings:
1. Use payroll deduction or an app to automatically deposit funds into a separate savings account.
2. Regularly save 5 to 10 percent in your income, or a specific dollar amount.
3. Take advantage of employer matching retirement fund contributions.
• Examples: bring lunch to work and avoid expensive coffee/snacks.

To achieve your financial objectives, convert savings goals into specific amounts.

Chapter Review:

Successful money management requires coordination of personal financial records, personal financial statements, and budgeting activities.
An organized system of financial records and documents should provide ease of access as well as security for financial documents.

A personal balance sheet, also known as a net worth statement, is prepared by listing all items of value (assets) and amounts owed to others (liabilities).
• The difference between your total assets and your
total liabilities is your net worth. A cash flow statement, also called a personal income and expenditure statement, is a summary of cash receipts and payments for a given period, such as a month or a year.

The budgeting process consists of seven steps:
1. Set financial goals;
2. Estimate income;
3. Budget an emergency fund and savings;
4. Budget fixed expenses;
5. Budget variable expenses;
6. Record spending amounts;
7. Review spending and saving patterns.

The relationship among the personal balance sheet, cash flow statement, and budget provides the basis for achieving long-term financial security.
• Future value and present value calculations may be used to compute the increased value of savings for achieving financial goals.