MONEY MANAGEMENT




Meaning

 Money Management is the day to day financial

activities necessary for managing personal
financial resources
 Money management activities include
1. Storing and maintaining personal financial
records and documents.
 These provide written evidence of business
transactions, ownership of properties and
legal matters.
2. Creating personal financial statements i.e.
balance sheets and statements of cash inflow
and outflows.
 Financial statements enable an individual to
measure and assess his/her financial position
3. Budgeting i.e. creating and implementing a
plan for spending and saving
 Budgeting is the base for effective money
management
1. PERSONAL FINANCIAL RECORD
KEEPING AND ITS IMPORTANCE
 For a successful personal financial
management, an individual must record and
keep all financial transactions made by
him/her or his/her family
Importance
 An organized system of financial record
keeping provides a basis for
i. Handling daily business activities, such as
payment of bills
ii. Planning and measuring financial progress
iii. Completing required tax reports
iv. Making effective investment decisions
v. Determining available resources for current
and future spending
Places for keeping Financial
Records&Documents
 Personal financial records may be kept in one
of the following places.
i. Home file: used to keep records for current
needs and documents with limited value
ii. Safe deposit box: for documents and items of
higher values or
iii. a home computer
2. PERSONAL FINANCIAL STATEMENTS

 Personal financial statements that an individual

always have to create are; personal balance sheet and
personal statement of cash flows (an income and
expense statement)
Purpose of personal financial statements
 The main purpose of these personal financial
statements are to;
i. Report an individual’s current financial
position/situation
ii. Measure his/her progress towards financial goals
iii. Maintain information about financial activities
iv. Provide data for preparing tax forms or applying for
credit
2.1Personal balance sheet

 A personal balance sheet (net worth statement

or statement of financial position) refers to
financial statement that reports what an
individual or a family owns and owes i.e.
family’s assets, liabilities and netwoth
 Net worth(wealth) = value of items owned-
amounts owed
Steps in Preparation of Personal
Balance Sheet (PBS)
The aim of PBS is to find an individual’s net
worth (financial position of an individual).
Steps
1. Listing Items of Value. Items that should be
included are;
 Liquid assets(monetary assets): these
includes cash, money in checking and
savings account, tax refunds due, money
owed to you by others.
 Liquid assets are primarily used for
maintenance of living expenses, emergencies,
savings and payment of bills
 Real estate e.g. home, condominium, land etc
 Personal possessions: this includes all
personal belongings in their market value e.g.
automobiles, motorcycles, bicycles,
household furniture and appliances, jewelry,
clothing etc
 The purpose of both real estate and personal
possessions is to maintain one’s life style.
 Investment assets/capital assets: they are
tangible and intangible items acquired for
monetary benefits they provide such as
generating additional income and increasing
value.
 Investment assets include treasury bonds,
treasury bills, stocks, life insurance, real
estate investments, pension plans, retirement
plans etc
2. Determine amounts owed: Determination of
both current liabilities and long term liabilities
 Short term liabilities may include; personal
loans, credit card charges, insurance premiums,
rent due, taxes unpaid, professional services
unpaid (doctors, lawyers) etc
 Long term liabilities may include; personal loan
balance, education loan balance, home
mortgage balance, automobile installment
balance etc
 3. Computing the net worth: this is the difference
between total assets and total liabilities
 Net worth is the amount left if all assets were
sold and all debts were paid in full i.e. Net worth
is not money available for use, but an indication
of individual’s financial position at a given date
NB:
 A person may have high net worth but still have
financial difficulties.
 This happens when an individual has high assets
with low liquidity i.e. low proportion of monetary
assets to total assets.
How is individual’s net worth
increased?
By
 Increasing savings
 Reducing spending
 Increasing the value of investments and other
possessions
 Reducing amounts owed
2.2 PERSONAL STATEMET OF
CASH FLOWS
(INCOME&EXPENDITURE )
 Cash flow statement (personal income and
expenditure) is a summary of cash receipts
and payments for a given time period.
 Cash flow is the actual inflow and outflow of
cash during a given period of time.
 The aim of creating personal cash flow
statement is:
 To determine individual’s cash surplus or
deficit
 To show whether you were able to live within
your income during that period of time
Receipts/Income/Cash inflow

 Receipts/income are earnings from different

sources during a certain period of time, usually
a year.
 Receipts/income usually include; salaries or
wages, bonuses and commissions, social
security benefits, child support and alimony,
scholarships and grants, interest and dividends,
income from sale(disposition) of assets, tax
refunds, rent and any other income.
Payments/Expenses/Cash outflow

 Payments/expenses represents all expenditures

made during the period. They are categorized
according to whether they are fixed or variable
 Variable expenses: these are cash outflows of
which its payment varies over time and an
individual has considerable control over them.
 Variable expenses/payments usually include;
food clothing, utilities, transportation, child care,
medical expenses, entertainment, vacations,
contributions, credit card payments etc
 Fixed Expenses: are usually paid in the same
amount during each time period and they are
often contractual
 Usually include; automobile installments, rent,
mortgage payments, taxes, pension
contributions, installment loan payments for
furniture and appliances, savings etc
 Cash surplus or deficit (Net Cash Flow) =
cash inflow/income-cash outflow/expenses
3. BUDGETING

 BUDGET: is a specific plan for spending

income. It is a document or set of documents
used to record both projected and actual
income and expenditures over a period of time.
 A budget/spending plan is necessary for
effective financial planning
Purposes of a budget

 The purposes of budget are to;

Help an individual,
i. live within his/her income
ii. Spend money wisely
iii. Reach his/her financial goals
iv. Prepare for emergencies
v. Develop wise financial management habits
BUDGETING

 Budgeting is the process of projecting,

organizing, monitoring and controlling future
income and expenditures
 Expenditures here include; cash purchase,
credit purchases and savings.
 Financial statements and budgets are some of
the tools of financial planning.
CHARACTERISTICS OF A
SUCCESSFUL BUDGET
 A budget will only work if you follow it.
Successful budgets are commonly viewed as
1. Well planned.
2. Realistic. Plan to spend according to your
income. A budget is designed not to prevent
an individual from enjoying life but help
him/her achieve what he/she want most
3. Flexible.
4. Clearly communicated. The budget should be
written and available to all household
members
PHASES IN THE BUDGETING
PROCESS
1. Goal setting phase (already discussed)
2. Organization phase.
Under this phase an individual have to;
 Select appropriate recordkeeping format. An
individual can set his/her own record keeping
format of sources of income, amount earned
and spent or can purchase forms that satisfy
his/her needs.
The primary objective of record keeping lies in
providing detailed information about what
happened financially during any given time
period.
 Select basis of budgeting i.e. cash basis
budgeting or accrual basis budgeting
NB: Cash basis budgeting recognizes earnings and
expenditure when actually received or paid while
Accrual basis recognizes earnings and
expenditure when earned or incurred.
 Decide which budget classification is
appropriate for him/her. The two broad
budgeting classifications are income(money
earned/received) and expenditures(money spent)
 Select appropriate time periods e.g. a month,
quarter a year, semi annual or annually
3. Decision making phase.
 This phase focuses on the decisions about
the sources of funds as well as their
destination i.e. where fund is obtained and
where is allocated
 An individual have to make realistic estimates
for income and expenditure and revise
estimates regularly to resolve conflicting
needs and wants
4. Implementation phase of budgeting
 This phase bring about putting a budget
into effect.
 Specifically a person records income
earned and expenditures made during a
budgeting period, manage cash flow
problems, determine totals for the time
period , and prepare financial statements
5. Control phase of budgeting
 In the control phase of budgeting, family
or an individual uses various methods and
techniques (budget control measures) to
keep income and expenditure within
planned range.
 The control phase occurs simultaneously
with the implementation phase because
the best time to control spending is during
the budget period
Budget Control Measures: Individuals can use
the following methods to keep income and
expenditures within a planned range
 Use checking account instead of cash: if a
person uses cash frequently instead of
checks may have trouble in tracking amount
he/she spent or may have to retain many
receipts and write the purpose of each
expense on the back of the receipt
ii. Employ credit control sheet. This is the form which
helps a person monitor credit use, amounts owed
and parties to whom debts are owed.
iii. Justify exceptions. Exceptions occur when budget
estimates differ from actual expenditures, with the
discrepancies taking the form of over expenditures.
A person have to justify reason for the discrepancies
iv. Use the envelope system. An envelope is a budget
control measure where by amounts of money equal
to the budget estimate expenditure are placed into
envelopes for a purpose of strict budgetary control.
Write the budget classification name and budget
amount on the outside of each envelope
v. Employ subordinate budgets: a subordinate
budget is a detailed listing of planned expenses
within a single budgeting classification. For
example an estimate of Tsh 1,200,000 for week
vacation could be supported by subordinate
budget as Hotel Tsh. 700, 000; Restaurants
300,000 and Entertainment 200,000.
Without a subordinate budget to guide
expenditures, the Tsh 1.2M might last for few
days because of overspending.
6. Evaluation phase of budgeting
 Evaluation phase provides feedback for
reexamining short term goals and, if necessary,
for reclarifying long term goals.
 An individual financial values may be
reaffirmed or reorganized to fit one’s needs
 Although evaluation is an ongoing process, a
formal evaluation phase should occur at the
end of each budgeting process