Money Management Skills:

Financial Statements and Budgeting

Or

“We Spent How Much On What?!”

CHAPTER 2

1

Money Management, Defined

Money Management –

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

“How Come We Always Have Too Much

Month at the End of the Money!”

2

Major Money Management Activities

• Store and maintain personal financial records and documents
• Create personal financial statements
• Cash Flow Statement (income vs. expenses)
• Net Worth Statement (assets vs. liabilities)
• Create and implement a plan for spending and saving (Arrgh! Budgeting!)

3

Why Keep Financial Records?

• To help make spending decisions
• To plan future spending
• To pay bills on time
• To see changes in net worth
• To make good investment decisions
• To prepare your income tax forms
• In preparation of applying for a loan

So you know what is happening to your money!

4

What to Keep in Your Home File

• Items you refer to often
• Personal and employment records
• Tax records
• Financial services records
• Money management records
• Credit records
• Consumer purchase records
• Insurance records
• Investment records
• Housing and car records
• Estate planning and retirement records

5

What to Keep in Your Safe Deposit Box

• Safe deposit box is for records and items that would be hard to replace
• Birth, marriage and death certificates
• Citizenship and military papers
• Adoption and custody papers
• Serial numbers and photos of valuables
• CDs and account numbers
• Mortgage papers and titles
• List of insurance policy numbers
• Stock and bond certificates
• Coins and collectibles
• Copy of will

Discussion: What about just buying a home safe?

6

Other Places to Keep Records

• Automobile
• Vehicle registration (I disagree)

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• Lawyer or Executor or Both
• Original of your will & other estate documents

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• Home computer (Encrypted?)
• Current and past budgets
• Checking account records
• Wills, estate plans, investments
• Past income tax returns

7

Successful Budgets Are...

• Well planned
• Realistic
• Flexible
• Clearly communicated

• Next To Impossible!

Discussion: Does Budgeting ever work?

8

Saving is easier than Budgeting

• “Spend Less Than You Earn”
• “Live Beneath Your Means”
• “Pay Yourself First”
• “Make Love, Not Loans!”

Discussion: The “Pay Yourself 10% First” Solution

Is it reasonable?

For those of you old enough to remember (or are into vinyl music), do I sound like a broken record?

9

The Extreme Viewpoint

• Keep a small notebook with you at all times
• Record every monetary transaction you make
• No matter how small
• Update your cash flow statement constantly

Devotees of “Your Money or Your Life”

10

Personal Financial Statements

• Net Worth Statement
• “A snapshot of your financial situation”
• Assets versus Liabilities
• aka Balance Sheet
• Cash Flow Statement
• “The movie of your financial life”
• Income versus Expenses
• aka Income Statement, Budget

Let’s look at each one in detail…

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Components of a Net Worth Statement�(aka Balance Sheet)

• Assets – What You Own
• Liquid assets
• Real estate
• Personal possessions
• Investment assets
• Liabilities – What You Owe
• Current liabilities – One year or less (a.k.a. short-term)
• Long-term liabilities – Greater than one year
• Net Worth – What You Have Left Over
• Assets minus liabilities
• Insolvent means liabilities far exceed assets
• Rule of thumb: If short-term liabilities >= income …

12

Components of a Cash Flow Statement�(aka Income/Expense Statement, Budget)

• Shows inflow and outflow during a given time period – Income versus Expenses
• Record cash inflows
• Income from employment
• Savings and investment income
• Other sources
• Record cash outflows
• Fixed and variable expenses
• Net cash flow can be a surplus or a deficit
• Used as a basis for creating a spending, saving, and investment plan

Insolvency is better determined here.

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Cash Flow / Net Worth

Let’s start on those financial documents…

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