Chapter 3

Money Management Strategy: Financial Statements and Budgeting

• Planning for successful money management

o Make wise decisions daily
o Coordinate decisions with needs and goals
• Opportunity cost and money management
o Spending reduces savings potential while saving reduces amounts available
for spending
o Credit use ties up future income
o Using savings for purchases depletes savings
o Comparison shopping spends time but saves money
• Money management components
o Storing and maintaining personal financial records and documents
o Creating personal financial statements
o Creating a plan for spending and saving – budget
• Financial records system
o Facilitates handling financial affairs
o Promotes timely bill paying
o Provides benchmarks for success
o Records are available at tax time
o Improves financial decisions
o Provides a clear record of resources available
• Items to file at home
o Personal and employment records
o Money management records
o Tax records
o Financial services statements
o Consumer purchase records
o Housing records
o Insurance records
o Investment records
o Estate and retirement planning records
• Items for safe deposit box
o Birth, marriage and death certificates
o Copy of will
o Citizenship papers and military records
o Adoption and custody
o Household inventory information
o Mortgage papers
o Deeds and titles to property
o Stock and bond certificates
o Coins and other collectibles

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 • Computer records
o Current and past budgets
o Summary of banking transactions
o Past tax returns prepared electronically
o Investment and bank statements sent electronically
o Computerized versions of wills, estate plans, or other documents
o Back up computer
• Record retention
o Keep indefinitely
 Birth, marriage and death certificates
 Wills
 Social security information
 Documents related to the purchase or sale of real estate
o Keep personal property records as long as you own the property
o Keep tax returns indefinitely and supporting records for 6 years
• 3 components of successful planning
o specified values
o explicitly stated financial goals
o consistent financial strategies
• Balance sheet or statement of net worth- a financial statement that describes an
individual’s or family’s financial condition at a point in time showing assets,
liabilities, and net worth
• Balance sheet components
o Assets
 Monetary
 Tangible
 Investment
o Liabilities
 Short-term
 Long-term
o Net worth
• Income and expense statement or cash flow statement- a financial statement that lists
and summarizes income and expense transactions that have taken place over a
specific period of time (year or month)
• Income/expense statement
o Income
o Expenses
 Fixed
 Variable
o Surplus or (loss)
• The budgeting process
o Assessing current situation
o Planning financial direction

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 1. setting goals
2. estimating income
3. budgeting emergency fund and savings
4. budgeting fixed expenses
5. budgeting variable expenses
o implementing the budget
o recording amounts spent
o evaluating the budget
o reviewing spending and savings patterns
• Characteristics of successful budgeting
o Well-planned
o Realistic
o Flexible
o Clearly communicated
• Selecting a budget system
o Mental budget
o Physical budget
o Written budget
o Computerized budget
o Online budget
o Budgeting app for smart phone
• Debt ratio= total liabilities/net worth
• Current ratio = liquid assets/current liabilities
• Liquidity ratio = liquid(monetary) assets/monthly expenses
• Debt payment ratio = monthly non-mortgage debt/take home pay
• Savings ratio = amount saved monthly/gross monthly income
• Identifying savings goals
o Irregular and unexpected expenses
o Replacement of expensive items
o Special items
o Long-term expenses
o To earn income from interest
• Savings techniques
o Always pay your self first
o Payroll deductions into savings accounts
o Automatic payments from checking into savings accounts or mutual funds
o Saving regularly in 401k plans
o Saving coins and making periodic deposits
o Write a check each payday as a % of income and deposit into savings

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