Money Management

Chapter 16

Managing Your Money

• Basic Economic Problem: Limited Resources/Unlimited Wants

• Net Income/Take-Home Pay: The money you receive from work after all taxes & other payroll deductions have been subtracted.

• Money Management: The day-to-day financial activities associated with using limited income to satisfy your unlimited needs & wants.

• Money management involves getting the most for your money through careful planning, saving, and spending.

• It involves creating and using a plan for spending.

Setting Your Goals

• Set attainable financial goals: both short-term and long-term

• Goals are personal--they are not the same for everyone

• Goals are affected by age, family situations, interests/hobbies & values.

Car, College, House, Vacation,Retirement

Making Economic Decisions

• Paying for Basic Needs: Needs are necessary for survival--food, clothing, shelter…

• Save for Future Expenses: Develop a savings program

• Spending Discretionary Income: The money remaining after you have taken care of your needs & future expenses. (entertainment, travel, pleasure items, hobby supplies)

Balance Sheet: A financial statement which reports what a family owns & owes

• Assets: Items of value you own--examples:

• Liabilities: Amounts owed to others--examples:

• Owner’s Equity: Net Worth the difference between your assets & liabilities

• Place the Asset info on the left side of a giant T.

• Place the Liability info on the upper right side of the giant T

• Owner’s Equity is placed on the right side underneath the Liability section.

Assets: Car, Furniture, House, CD’s, Ipod, Clothes

Liabilities: Car Loan, House Payment, Credit Cards

Owner’s Equity (Net Worth)

p. 399-Figure 16-1

Cash Flow Statement: Reports net wages & other income along with spending

for a given time period.• Net Income (take-home

pay): the amount of income received after taxes:

• Expenditures (cash outflows): All of the amounts spent during the time period. (Grocery bill, gas, rent, entertainment, utilities, etc.)

• Cash Incomes are listed first. Record net income and any other sources of income (interest on savings/investments)

• Record all cash outflows. (subtract all expenditures)

• The remaining value is called net cash flow--if there is a positive balance, this is added to your Net Worth; if there is a negative balance, you may have to borrow from savings or used credit to make ends meet.

Live within your Income Achieve your financial goals Buy Wisely Avoid Credit Problems Plan for Financial

Emergencies Develop Good Money

Management Skills

• THE BUDGET PROCESS

1. Set Financial Goals

2. Plan Budget Categories

3. Maintain Financial Records

4. Evaluate Your Budget

16-2 Budget: A plan for saving and wise spending.

A budget will help you to

• Fixed Expenses: Costs that occur on a regular basis and are for the same amount each time.

• Allowance: The amount of money you PLAN to use for a certain budget category. (generally there are 8 budget categories--p. 404-405)

• Variable Expenses: Living costs that differ each time and are not easy to estimate.

• Budget Variance: The difference between what you actual spent on the budget categories and what you allowed. The balance may be either positive or negative.

Budget Terms:

SUCCESSFUL BUDGETING

Must be Realistic

Should be Flexible

Should be Evaluated Regularly

Must be Well Planned and Clearly Communicated

Should have a Simple Format

16-3 DEVELOPING A FINANCIAL PLAN

• A financial plan is a report that summarizes your current financial condition, acknowledges your financial needs, and sets direction for your future financial activities.

• Financial planning includes evaluating one’s financial position, setting financial goals, and guiding activities and resources toward reaching those goals.

• Financial planning offers several specific advantages:

Your financial uncertainties will be reduced.

You will gain more control of your financial activities.

Your family and household members will know more about your financial situation in case they need to assume control of your finances.

Earning, spending, protecting and saving your resources will be more systematic.

The Financial Planning Process

The Financial Planning Process

Analyze your currentfinancial condition.

Make financialstatements.

Develop financialgoals that are

responsive to yourvision.

Create yourfinancial plan.

Set your budget.

Implement the plan.Record expenses

as they occur--followyour savings goals.

Revise yourfinancial planas needed.

Balance Sheet & Cash Flow Statement

Keep track of all important papers: bills, statements, personal info—see 16-5 p. 411. Needs are

different at each stage of life.

*Create a Financial Inventory

*Personal Financial Filing System

*Know your Financial Life Cycle

Financial Planning

• Consider Using a Financial Planner: A professional who can help you—accountants, lawyers, insurance agents, investment firms.

• Options to Consider During Financial Planning:

1. Insure Your Income: disability and unemployment (p. 412)

2. Plan for Future Income: Social Security, Pensions, Retirement Accounts (IRA, 401K’s), Annuities (p. 413)

3. Evaluating/Revising your Financial Goals—Estate Planning/Saving (p.414)