1. Chapter 3
Money Management
Strategy: Financial
Statements and
Budgeting
McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Planning for Successful
Money Management
• Daily spending and saving decisions are
the heart of financial planning.
• Decisions must be coordinated with
needs, goals, and personal situations.
• Money management is the day-to-day
financial activities needed to manage
personal economic resources, while
working toward long-term financial
security.
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3. Opportunity Cost and
Money Management
• Spending money on current living
expenses reduces the amount you can
save and invest.
• Saving and investing for the future reduces
the amount you can spend now.
• Buying on credit ties up future income.
• Using savings for purchases results in lost
interest and depletes savings.
• Comparison shopping can save money but
takes valuable time.
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4. Major Money Management Activities
Storing Creating Creating and
and personal implementing
maintaining financial a plan for
personal statements spending,
financial (balance and saving
(budgeting).
records sheets and
and cash flow
documents. statements
of income
and
outflow).
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5. Benefits of an Organized System of
Financial Records
• Handling daily business affairs,
including payment of bills on time.
• Planning and measuring financial
progress.
• Completing required tax reports.
• Making effective investment decisions.
• Determining available resources for
current and future buying.
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6. What to Keep in Your Home File
• Items you refer to often.
 Personal and employment records.
 Money management records.
 Tax records.
 Financial services records.
 Consumer purchase, auto and credit records.
 Housing records.
 Insurance records.
 Investment records.
 Estate planning and retirement records.
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7. What to Keep in a Safe Deposit Box
• Safe deposit box is for records that would
be hard to replace.
 Birth, marriage and death certificates, copy of will
 Citizenship and military papers.
 Adoption and custody papers.
 Serial numbers and photos of valuables.
 CDs and credit and banking account numbers.
 Mortgage papers and titles.
 List of insurance policy numbers.
 Stock and bond certificates.
 Coins and other collectibles.
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8. Records on Personal Computer
• Home computer.
 Current and past budgets.
 Summary of checks written and other
banking transactions.
 Past income tax returns prepared with tax
preparation software.
 Account summaries and performance
results of investments.
 Computerized versions of wills,
estate plans, and other documents.
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9. How Long to Keep Records
• Birth certificates, wills, and Social
Security information should be kept
indefinitely.
• Keep records on personal property and
investments as long as you own them.
• Keep documents related to the purchase
and sale of real estate indefinitely.
• Copies of tax returns and supporting
data should be kept six years.
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10. Purpose of Personal
Financial Statements
• Report your current financial position in
relation to the value of the items you own
and the amounts you owe.
• Measure your progress toward your
financial goals.
• Maintain information on your financial
activities.
• Provide data you can use when preparing
tax forms or applying for credit.
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11. Components of a Balance Sheet
(net worth statement)
• Assets - what you own.
 Liquid assets.
 Real estate.
 Personal possessions.
 Investment assets.
• Liabilities - what you owe
 Current liabilities (< 1 year).
 Long term liabilities.
• Compute your net worth.
 Assets minus liabilities.
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12. Where Did Your Money Go? Components
of a Cash Flow Statement
• Shows inflow, outflow for a given time
period.
 Record inflow.
• Net 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.
• Use this statement as a basis for creating
a spending, saving and investment plan.
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13. Ratios for Evaluating Financial
Progress
• Debt ratio = total liabilities/net worth; compares
debt to net worth; lower debt ratio is best
• Current ratio – liquid assets/current liabilities;
shows how well short term assets cover short
term debt; higher ratio is good
• Liquidity ratio = liquid assets/monthly expenses;
shows # of months that living expenses can be
paid; higher ratio is good
• Debt payments ratio = monthly credit
payments/take-home pay; try to keep ratio below
20%
• Savings ratio = monthly savings/gross income;
Americans tend to be poor savers; shoot for at
least 10%
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14. Purposes of a Budget
• In contrast to cash flow, which was a
record of how you spent money in a past
time period, a budget is a plan for
spending in the future, such as for the
next month. A budget helps you…
 Live within your income.
 Spend your money wisely.
 Reach your financial goals.
 Prepare for financial emergencies.
 Develop wise financial management habits.
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15. Creating and Implementing a Budget
• Assessing your current situation.
 Measure your current financial position.
 Determine your needs, values and life
situation.
• Steps in the budgeting process.
1 Set financial goals.
2 Estimate income from all sources.
3 Budget amount for an emergency fund,
periodic expenses and financial goals.
4 Budget set amounts that you are obligated to
pay. These are your fixed expenses. BE
SURE TO BUDGET FOR SAVINGS. 3-15

16. Creating and Implementing a Budget
• Steps in the budgeting process
(continued).
5 Estimate amounts that are to be spent for
household and living expenses. These are
your variable expenses.
6 Record actual amounts for inflows and
outflows, comparing actual amounts with
budgeted amounts to determine variances.
 Deficits and surpluses.
7 Review your spending and savings
patterns and evaluate whether
revisions are needed in your
savings and spending plans. 3-16

17. Characteristics of Successful Budgeting
• Well planned.
• Realistic.
• Flexible.
• Clearly communicated.
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18. Selecting a Budgeting System
1) Mental budget – it is all in your head
2) Physical budget-use envelopes for
your expenses such as food, rent.
3) Written budget – use spreadsheets
4) Computerized budget – use
software such as Quicken
(www.quicken.com)
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19. Saving to Achieve Financial Goals
• Common reasoning for saving include…
 To set aside money for irregular and
unexpected expenses.
 To pay for the replacement of expensive items,
such as cars or a down payment on a house.
 To buy special items like recreational
equipment or to pay for a vacation.
 To provide for long-term expenses such as
retirement or the education of children.
 To earn income from the interest on savings for
use in paying living expenses.
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20. Savings Techniques-If I don’t see it, I
won’t spend it
• Payroll deductions into saving accounts
• Automatic payments from checking into
savings accounts or mutual funds
• Saving regularly in 401(k) plans
• Also save coins, make periodic deposits
• Write a check each payday as a % of
income and deposit into savings
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21. Money Management & Achieving
Financial Goals
• Balance Sheet reports current financial
position
• Cash Flow Statement shows cash you
have received and spent in the past
• Budget helps you to spend and save to
achieve financial goals
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