Chapter 2 Personal Money Management Skills - Student

7/28/2021
Chapter 2
PERSONAL MONEY MANAGEMENT SKILLS
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Key contents
LO2.1 Identify the main components of wise money

management
LO2.2 Create a personal balance sheet and cash flow
statement
LO2.3 Develop and implement a personal budget
LO2.4 Connect money management activities with saving for
personal financial goals
2-2
1
7/28/2021
Kakeibo method of planning your income-

expenditure (budgeting and savings)
https://www.youtube.com/watch?v=Re4sv-vIGIY
What do you learn from this method?
Johnny Depp – How has his money management?

What are your lessons learnt from him?
https://www.youtube.com/watch?v=mtiKW3qxnjE
2
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Is lottery winning helpful? Why?
Lottery Curse Victims: 7 People Who Won Big & Lost Everything
https://www.thebalanceeveryday.com/lottery-curse-victims-896653
Curse of the lottery: Why winning the Mega Millions could kill you
https://www.abc15.com/news/state/curse-of-the-lottery-why-winning-the-mega-millions-could-
kill-you
Successful cases: 12 lottery winners who did a fantastic job managing their finances
https://www.bankrate.com/personal-finance/smart-money/lottery-winners-who-successfully-
managed-finances/
LO2.1 Identify the Main Components of Wise Money Management
Money management = day-to-day financial activities necessary to

manage current personal economic resources, while working toward long-
term financial security
Daily spending and saving decisions are central to financial planning
◦ Must be coordinated with needs, goals, and personal situations
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Components of Money Management
2-7
A System for Personal Financial Records
Provides a basis for:

◦ Handling daily business affairs, such as bill paying
◦ 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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Records in Your Home File
Items you refer to often

◦ Personal and employment records
◦ Money management records
◦ Tax records
◦ Financial services records
◦ Credit records
◦ Consumer purchase and auto records
◦ Housing records
◦ Insurance records
◦ Investment records
◦ Estate planning and retirement records
2-9
What to Keep in a Safe Deposit Box
Records and items that would be hard to replace

◦ Birth, marriage and death certificates
◦ List of checking, savings, and financial institution account numbers
◦ 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
◦ Copy of will
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What to Keep in a Safe Deposit Box or Fireproof

Home Safe
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11
Records on Your Personal Computer*
Current and past budgets

Summary of checks written and other banking transactions
Past income tax returns
Account summaries, performance results of investments
Digital versions of wills, estate plans,
and other documents
* Keep a backup!
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Records on Your Personal Computer
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Keeping Computer Records Safe
➢Download copies of all statements and forms to local storage and use logical
filenames and folders
➢Back up files externally or online
➢Secure data with complex passwords or encryption
➢Scan copies of documents
➢ Hard copies of some documents may be required
➢Completely erase files
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What NOT to Keep & What to Shred
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How Long to Keep Records

Records Retention Period
Birth certificates, wills, and Permanently
Social Security information
Personal property and As long as you
investments own them
Documents re: purchase and Indefinitely
sale of real estate
Copies of tax returns and At least 7 years;
supporting data 10 years is better
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LO 2.2 Create a Personal Balance Sheet

and Cash Flow Statement
Benefits
1. Recap your current financial position in relation to the value of
items you own and amounts you owe
2. Measure progress toward financial goals
3. Maintain information on financial activities
4. Provide information for preparing tax forms or applying for credit
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Financial Statements
• Income statement (cash flow) — essentially a statement of cash availability
• Balance sheet — Total Assets minus total liabilities = Net Worth
• What items are included as assets
• What items are included as liabilities
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Balance Sheet
A financial statement that reports what an individual or family owns and

owes as of a specific date
Also called:
◦ Net worth statement
◦ Statement of financial position
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Components of a Balance Sheet
Step 1 – List items of value

◦ Liquid assets
◦ Real estate
◦ Personal possessions
◦ Investment assets
Step 2 – Determine amounts owed

◦ Current liabilities (< 1 year)
◦ Long term liabilities
Step 3 - Compute your net worth
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Net Worth
Assets - Liabilities = Net Worth

Measurement of current financial position
Net worth ≠ cash available
Insolvency:
◦ Inability to pay debts when due
◦ Liabilities far exceed assets
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21
Sample
Balance
Sheet
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Ways to Increase Net Worth
✓ Increase savings
✓ Reduce spending
✓ Increase the value of investments and other possessions
✓ Reduce amounts owed
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The Cash Flow Statement

Inflows and Outflows
Cash flow statement = Personal Income and Expenditure Statement
Summary of cash receipts and payments for a given period
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The Cash Flow Statement

Inflows and Outflows
Step 1 - Record Income

◦ Net income from employment (Net Pay)
◦ Savings and investment income
◦ Other sources
Step 2 - Record cash outflows

◦ Fixed and variable expenses
Step 3 - Determine Net Cash Flow

◦ Use this statement as a basis for creating a spending, saving and
investment plan
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Sample
Cash Flow
Statement
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Ratios for
Evaluating
Financial
Progress
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27
LO2.3 Develop and Implement a Personal Budget
Budget = spending plan

Helps you:
◦ Live within your income
◦ Spend money wisely
◦ Reach financial goals
◦ Prepare for financial emergencies
◦ Develop wise financial management habits
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A Plan for Effective Budgeting
Step 1: Set Financial Goals

Step 2: Estimate Income
Step 3: Budget an Emergency Fund and Savings
Step 4: Budget Fixed Expenses
Step 5: Budget Variable Expenses
Step 6: Record Spending Amounts
Step 7: Review Spending and Saving Patterns
◦ Review financial progress

◦ Revise goals and budget allocations
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Common
Financial
Goals
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30
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Sample
Budget
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Typical
Budget
Allocations
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A Money Management SWOT Analysis
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Characteristics of a Successful Budget
➢ Well planned
➢ Realistic
➢ Flexible
➢ Clearly communicated
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Selecting a Budgeting System
Mental Budget
◦ Appropriate if financial resources and responsibilities are limited
Physical Budget
◦ Envelopes, folders, or containers
Written Budget
◦ On paper
Computerized Budget
◦ Spreadsheet or specialized software
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LO2.4 Connect Money Management Activities with Savings

for Personal Financial Goals
1. Your Balance Sheet:

• Snapshot of where you are now
2. Your Cash Flow Statement:
• What you received and spent over a
specific period
3. Your Budget:
• Planning spending and saving to achieve
financial goals
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Changes in Net Worth
Changes in Net Worth result from cash inflows and outflows

◦ Outflows > Inflows
◦Draw from savings or borrow (buy on credit)
◦Problem/Result: Lower assets or higher liabilities
◦ Inflows > Outflows
◦Put money into savings or pay off debts
◦Result: Higher net worth
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Selecting a Saving Technique
1. Write a check each payday or electronic transfer and deposit in a

savings account
2. Use payroll deduction to deposit a certain amount in savings (direct

deposit)
3. Save coins or spend less on certain items
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Calculating Savings Amounts
1. Convert savings goals into specific amounts
2. Use savings and investments plans to grow

your money
3. Use time value of money to calculate progress

toward financial goals
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Using
Savings to
Achieve
Financial
Goals
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Chapter Summary
Identify the main components of wise money

management
◦Coordination of personal financial records,
statements, and budgeting activities
◦An organized system providing ease of access and
security
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41
Chapter Summary
Create a personal balance sheet and cash flow statement
◦ Balance Sheet = Net Worth Statement

◦ Cash Flow Statement = Personal Income and
Expenditure Statement
2-42
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Chapter Summary
The 7 Step Budgeting process:

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
7: Review Spending and Saving Patterns
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Chapter Summary
Connect money management activities with
saving for personal financial goals
◦ Basis for achieving financial security = relationship
between the personal balance sheet, cash flow
statement, and budget
◦ Use Time Value of Money calculations to determine
increased value of savings and amounts needed to
reach future goals
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22

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7/28/2021

LO2.1 Identify the main components of wise money

Kakeibo method of planning your income-

What do you learn from this method?

Johnny Depp – How has his money management?

Is lottery winning helpful? Why?

LO2.1 Identify the Main Components of Wise Money Management

Money management = day-to-day financial activities necessary to

Components of Money Management

A System for Personal Financial Records

Provides a basis for:

Records in Your Home File

Items you refer to often

What to Keep in a Safe Deposit Box

Records and items that would be hard to replace

What to Keep in a Safe Deposit Box or Fireproof

Records on Your Personal Computer*

Current and past budgets

Records on Your Personal Computer

Keeping Computer Records Safe

➢Completely erase files

What NOT to Keep & What to Shred

How Long to Keep Records

LO 2.2 Create a Personal Balance Sheet

• Income statement (cash flow) — essentially a statement of cash availability

• Balance sheet — Total Assets minus total liabilities = Net Worth

• What items are included as assets

• What items are included as liabilities

A financial statement that reports what an individual or family owns and

Components of a Balance Sheet

Step 1 – List items of value

Step 2 – Determine amounts owed

Step 3 - Compute your net worth

Assets - Liabilities = Net Worth

Ways to Increase Net Worth

The Cash Flow Statement

Cash flow statement = Personal Income and Expenditure Statement

Summary of cash receipts and payments for a given period

The Cash Flow Statement

Step 1 - Record Income

Step 2 - Record cash outflows

Step 3 - Determine Net Cash Flow

LO2.3 Develop and Implement a Personal Budget

Budget = spending plan

A Plan for Effective Budgeting

Step 1: Set Financial Goals

◦ Review financial progress

A Money Management SWOT Analysis

Characteristics of a Successful Budget

Selecting a Budgeting System

LO2.4 Connect Money Management Activities with Savings

1. Your Balance Sheet:

Changes in Net Worth

Changes in Net Worth result from cash inflows and outflows

Selecting a Saving Technique

1. Write a check each payday or electronic transfer and deposit in a

2. Use payroll deduction to deposit a certain amount in savings (direct

3. Save coins or spend less on certain items

Calculating Savings Amounts