Personal Finance Basics Quiz

Chapter 2: Money Management Strategy: Financial Statements and Budgeting

• This chapter covers financial statements and budgeting, key components of personal finance strategy.
• Daily spending and saving decisions are central to personal financial planning.
• Coordinating financial decisions with personal needs, goals, and circumstances is crucial.
• Maintaining detailed financial records is essential.

Chapter 2: Learning Outcomes

• LO1: Recognize relationships among financial documents and money management activities.
• LO2: Create a system for maintaining personal financial records.
• LO3: Develop a personal balance sheet and cash flow statement.
• LO4: Create and implement a budget.
• LO5: Calculate savings needed to achieve financial goals.

Planning for Successful Money Management (1)

• Daily spending and savings are central to financial planning.
• Align spending/saving decisions with your needs, goals, and personal situation.
• Maintaining accurate financial records is vital.

Planning for Successful Money Management (2)

• Spending on current needs decreases the ability to save and invest.
• Saving and investing reduces current spending choices.
• Using credit ties up future income.
• Using savings for immediate purchases results in lost interest income.

Planning for Successful Money Management (3)

• The main money management activities include:
  • Storing personal financial records and documents.
  • Creating and maintaining personal financial statements (balance sheets and cash flow statements).
  • Creating and implementing a plan for spending and saving (budgeting).

A System for Personal Financial Records (1)

• Keeping organized financial records allows for:
  • Daily business affairs.
  • Monitoring financial progress.
  • Preparing tax reports.
  • Making investment decisions.
  • Evaluating available resources

A System for Personal Financial Records (2)

• Most financial records are stored in:
  • Home files, home computer or online.
  • Safe deposit box or fireproof home safe.
  • Computer, tablet, or phone.

A System for Personal Financial Records (4)

• Financial documents to discard or shred include:
  • Small, non-tax-deductible receipts.
  • Expired warranties.
  • Quarterly investment account statements (retain annual summaries).
  • Documents no longer needed and containing personal information such as social security numbers or account numbers.

Personal Financial Statements for Measuring Financial Sustainability (1)

• Purposes of personal financial statements:
  • Summarize assets and liabilities.
  • Track cash inflows and outflows.
  • Identify financial strengths and weaknesses.
  • Measure progress toward financial goals.
  • Provide data for filing tax returns or applying for credit.

Personal Financial Statements for Measuring Financial Sustainability (2)

• A personal balance sheet:
  • Summarizes an individual or family's assets and liabilities.
  • Also called a net worth statement or statement of financial position.
  • Net worth = Total assets – Total liabilities (Example: Assets worth $14,500, liabilities of $8,000 = net worth of $6,500)

Personal Financial Statements for Measuring Financial Sustainability (3)

• Steps in creating a personal balance sheet:
  • List assets:
    • Liquid assets (cash, savings)
    • Real estate (home value)
    • Personal possessions (furniture, car)
    • Investment assets (stocks, bonds)

Personal Financial Statements for Measuring Financial Sustainability (4)

• Step 2: Determining Amount Owed (Liabilities):
  • Current liabilities (debts due within a year).
  • Long-term liabilities (debts due in more than a year).

Personal Financial Statements for Measuring Financial Sustainability (5)

• Step 3: Computing Net Worth:
  • Net worth = Assets – Liabilities
  • Assets = Liabilities + Net worth

Personal Financial Statements for Measuring Financial Sustainability (6)

• Provide examples of a sample balance sheet. (Exhibit 2-3)

Personal Financial Statements for Measuring Financial Sustainability (7)

• List and total amounts owed (Liabilities) including current debts, charge accounts, and mortgages (Exhibit 2-4).

Personal Financial Statements for Measuring Financial Sustainability (8)

• A high net worth doesn't automatically mean financial success.
• Increase net worth by:
  • Increasing savings
  • Reducing spending
  • Increasing investments and possessions
  • Reducing debt

Personal Financial Statements for Measuring Financial Sustainability (9)

• A cash flow statement:
  • Summarizes cash inflows and outflows during a period (e.g., month, year).
  • Provides data on income and expenses, useful for budgeting.
  • Formula: Total Cash Received - Cash Outflows = Cash Surplus/Deficit

Personal Financial Statements for Measuring Financial Sustainability (10)

• Steps in creating a cash flow statement:

  • Step 1: Record all the income.
  • Step 2: Record cash outflows (fixed and variable expenses).
  • Step 3: Determine net cash flow (surplus or deficit).

• Example data of a cash flow statement (Exhibit 2-5).

Personal Financial Statements for Measuring Financial Sustainability (11)

• Example data of a cash flow statement depicting income and expenses.

Personal Financial Statements for Measuring Financial Sustainability (12)

• Step 2: List and record the different expense categories to track the outflow of funds.
• Step 3: Subtract total outflows from total inflows to arrive at net cash flow (surplus or deficit).

Personal Financial Statements for Measuring Financial Sustainability (13)

• Analyzing your current financial situation:
  • Completing a personal balance sheet and cash flow statement provides a basis for future comparisons.

Personal Financial Statements for Measuring Financial Sustainability (14)

• Analyzing Your Current Financial Situation:
  • Steps for better Balance Sheet analysis:
    • Measuring financial progress toward your goals
    • Identifying how assets are distributed among categories
    • Calculating your current asset allocation

Personal Financial Statements for Measuring Financial Sustainability (15)

• Analyzing Your Current Financial Situation:
  • Identifying the tax efficiency of your investment strategy
  • Identifying assets that may be subject to loss, theft, damage, or destruction.
  • Summarizing the extent and nature of indebtedness

Personal Financial Statements for Measuring Financial Sustainability (16)

• Compiling Cash Flow Statements: Analysis of cash flow statement allows for identifying income sources, evaluating overspending, and understanding spending and saving patterns.

Personal Financial Statements for Measuring Financial Sustainability (17)

• Financial Ratios in Interpretation:
  • Debt ratio: relationship between liabilities and net worth.
  • Current ratio: relationship between liquid assets and current liabilities.
  • Liquidity Ratio: relationship between liquid assets and monthly expenses.

Personal Financial Statements for Measuring Financial Sustainability (18)

• Financial Ratios in Interpretation:
  • Debt Payments Ratio: how much debt payments consume take-home pay.
  • Savings ratio: percentage of income directed towards savings.

Budgeting: A Money Management Skill (1)

• A budget is a spending plan for income.
• Budgeting purposes:
  • Spend less than income.
  • Understand cash flow.
  • Prioritize and achieve financial goals.
  • Prepare an emergency fund.
  • Develop good financial habits.

Budgeting: A Money Management Skill (2)

• Budget is a plan to spend income for a specific lifestyle, influenced by career, family, and values.

Budgeting: A Money Management Skill (3)

• Steps in creating and implementing a budget:
  • Setting financial goals.
  • Estimating income.
  • Budgeting emergencies and savings
  • Budgeting fixed expenses
  • Budgeting variable expenses
  • Recording spending amounts.
  • Reviewing spending and saving patterns

Budgeting: A Money Management Skill (4)

• Provide example data: Aponi's Monthly Budget.

Budgeting: A Money Management Skill (5)

• A successful budget:
  • Well planned
  • Realistic
  • Flexible
  • Clearly communicated

Money Management to Achieve Financial Goals (1)

• Reasons for saving:
  • Unexpected expenses.
  • Earning interest from savings.
  • Replacing expensive items.
  • Buying special items
  • Providing for long-term expenses

Money Management to Achieve Financial Goals (2)

• Saving Techniques:
  • Regular periodic savings deposits.
  • Percentage of income (5-10%).
  • Specific dollar amount.
  • "Pay yourself first."

Money Management to Achieve Financial Goals (3)

• Provide examples of saving strategies and their impact (Exhibit 2-9)

Money Management to Achieve Financial Goals (4)

• Dual-income households:
  • Pooled income.
  • Shared expenses.
  • 50/50 contributions.
  • Proportionate contributions

Summary LO1, LO2, LO3, LO4, LO5

• Concise summaries of learning objectives. Emphasize relationships between financial documents and money management activities, establishing personal financial records, developing balance sheets and cash flow statements, creating and implementing budgets, and calculating savings for financial goals.