Personal Finance Spring 2006
Chapter 2 Objectives:
Objective [1]
Identify the main components of wise money management. Successful money management requires a 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 that may be impossible to replace.
Objective [2]
Create a personal balance sheet and cash flow statement. A personal balance sheet, also known as a net worth statement, is prepared by listing all items of value (assets) and all 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.
Objective [3]
Develop and implement a personal budget. 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; and (7) review spending and saving patterns.
Objective [4]
Connect money management activities with saving for personal financial goals. 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.
Commentary
A Successful Money Management Plan
Components of Money Management
There are three major money management activities involved in a successful plan:
1. Storing and maintaining personal financial records and documents.
2. Creating personal financial statements (balance sheets, cash inflows and outflows.
3. Creating and implementing a plan for spending and saving (budgeting).
A System for Personal Financial Records
It is recommended that financial documents that you use regularly (credit card statements, work records, employment records, etc.) are kept in your home files. Documents used occasionally (mortgage papers, adoption and custody papers, etc.) be kept in a safe deposit box. Documents that are for backup purposes (previous month’s budgets, summary of checking or savings transactions, etc.) can be kept on your computer. Wherever you decide to keep your documents it’s a good idea to keep a “Financial Documents and Records” spreadsheet that tells where the documents are in case something happens to you and someone needs to find specific documents. Make sure you tell a family member or friend that you have such a document and where you keep it. This document can look something like the one below. You can revise the list to meet your needs. If you keep more than one home file write which file the documents are in. If the file is in your safe deposit box just check that column. If the document is kept somewhere else describe where the document is kept.
Financial Documents and RecordsName: / Jerry L. Basford
Item / Home File / Safe Deposit
Box / Other
(Specify)
Money Management Records
Budget, financial statements / Computer
Personal/Employment Records
Current Resume / Kitchen
Social Security Card / Garage
Educational Transcripts / Kitchen
Birth, marriage, divorce certificates / a
Citizenship, military papers / a
Adoption, custody papers / a
Tax Records / Garage
Financial Service/Consumer Credit Records
Unused, cancelled checks / Garage
Savings, passbook statements / Kitchen
Savings certificates / Kitchen
Credit card information, statements / Garage
Credit contracts / Kitchen
Consumer Purchases, Housing, and Automobile Records
Warranties, receipts / Kitchen
Owner's manual / Garage
Lease or mortgage papers, title, deed, property tax information
Automobile title / a
Auto registration / Automobile
Auto service record / Automobile
Insurance Records
Insurance policy / Kitchen
Home inventory / a
Medical information (medical history) / Kitchen
Investment Records
Broker statements / Kitchen
Dividend reports / Kitchen
Stock/bond certificates / Kitchen
Rare coins, stamps, and collectibles / a
Estate Planning and Retirement
Will / a
Pension, social security information / a
Personal Financial Statement
There are three important financial statements: The Balance Sheet, the Cash Flow Statement of Income and Outflow (often called an Income Statement), and a Budget. These three documents describe your financial position at three different times:
Cash Flow Statement / Balance Sheet / BudgetPast / Present / Future
Each of these statements are made up of three parts. The Cash Flow Statement and the Budget are made up of cash received (revenues), cash outflows during the period (expenses) and cash surplus or deficit (net income or net loss). The mathematical formula of how this statement works is:
Revenues – Expenses = Net income/(Net loss)
The difference between the Cash Flow Statement and the Budget is that the Cash Flow Statement is a reconciliation of how much money you have received, how much money you have spent, and what remains. The Budget describes how much money you believe you will make, how much you estimate you will spend and your anticipated balance.
The Balance Sheet is made up of assets, liabilities, and net worth. Assets are the things you own (house, car, stereo, etc.). Liabilities are what you owe (mortgage, car payment, etc.). Net worth is the difference between your assets and liabilities. The mathematic formula for this statement is:
Assets – Liabilities = Net Worth
Summary
Organizing financial documents so they are accessible is a prerequisite for successful financial management. Financial statements help an individual plan spending as well as determine how money has been used and what their financial condition is.
Chapter 2 Key Terms
Assets (39) – anything that has monetary value that is owned by an individual. Things you own.
Budget (45) – an estimate of revenues and expenses for a specific period.
Budget Variance (47) – the difference between the amount budgeted and the actual amount earned or spent.
Cash Flow Statement (41) – a summary of cash receipts and payments for a given payment, usually a month or a year. Also called an Income and Expense Statement.
Deficit (47) – an excess of expenses over revenues
Discretionary Income (42) – money left over after paying for housing, food, debt payments, and other necessities
Fixed Expenses (43) – payments that do not vary from month to month.
Income and Expense Statement (41) – see Cash Flow Statement.
Insolvency (41) – inability to pay debts when they are due.
Liabilities (40) – claim on the assets of an individual. Things you owe.
Liquid Assets (39) - cash and items of value that can easily be converted to cash
Net Worth (41) – the difference between your total assets and total liabilities.
Surplus (47) – excess of revenues over expenses.
Variable Expenses (44) – flexible expenses that change from month to month.
Chapter Review
When you have completed your work for a specific chapter, there is a chapter review. Each chapter exam has 20 true/false and multiple-choice questions. Each question counts one (1) point. Chapter review questions are based on information in the Focus on Personal Finance textbook.
You can access a chapter review at www.sa.utah.edu/dlpersonalfinance, clicking on the “HOMEWORK” tab and selecting the chapter review for the chapter you are completing.
Before taking the chapter exam, consider five factors.
1. Have you completed the following learning activities for this chapter
A. Read the Chapter
B. Read the Chapter Summary
C. Reviewed the Vocabulary
2. You may use your text and notes while you take complete the review.
3. Once you have finished answering all 20 questions and submit your test, you will be sent your grade within 48 hours.
If you would like to discuss your test score or your grades for the course, please phone me at (801) 581-3435. You may also e-mail me at
5