Download Chapter Two

Garman/Forgue
Personal Finance
Ninth Edition
Chapter 3:
Financial Statements,
Tools, and Budgets
PPT slide program prepared by
Amy Forgue and Ray Forgue.
Learning Objectives
1. Identify your financial values, goals,
and strategies.
2. Use balance sheets and cash-flow
statements to measure your financial
health and progress.
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Learning Objectives
3. Evaluate your financial strength and
progress using financial ratios.
4. Maintain the financial records
necessary for managing your personal
finances.
5. Outline and work toward achieving
your financial goals through budgeting.
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Financial Values, Goals, and Strategies
• Financial Planning: Managing income
and wealth continuously through life to
meet financial goals.
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Financial Values, Goals, and Strategies
• Values define your financial success.
• Financial goals follow from values.
• Financial Goals: Specific objectives to
be attained through financial planning
and management efforts.
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Financial Values, Goals, and Strategies
• Financial strategies guide your financial
success.
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Financial Statements
• Financial Statements measure your
financial health and progress.
• Balance Sheet (or Net Worth
Statement)
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Financial Statements
• Components of the balance sheet:
– Assets
– Liabilities
– Net Worth
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Financial Statements
• Assets: What Is owned
– Monetary Assets (or liquid assets or
cash equivalents)
– Tangible (or use) assets
– Investment (or capital) assets
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Financial Statements
• Liabilities: What Is owed
– Short-term (or current) liability
– Long-term liability
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Financial Statements
• Net Worth: What is left
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Strategies to Increase Your Net Worth
• Increase Assets.
• Decrease Liabilities.
• or both!
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Cash-Flow Statement
• The Cash-Flow Statement tracks where
your money came from and went.
– Income
– Expenses
– Surplus (or Net Gain or Net Income)
– Deficit (or Net Loss)
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Cash-Flow Statement
• Expenses
– Fixed Expenses
– Variable Expenses
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Financial Ratios
• Basic liquidity ratio
• Liquidity: The speed and ease with
which an asset can be converted to
cash.
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Financial Ratios
• Asset-to-debt ratio
• Do you have enough assets compared
to liabilities?
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Financial Ratios
• Debt service-to-income ratio
• Can you meet your total debt
obligations?
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Financial Ratios
• Debt payments-to-disposable income
ratio
• Can you pay your debts?
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Financial Ratios
• Investment assets-to-total assets
ratio
• Do you need to invest more?
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Financial Record Keeping
• Financial record keeping saves time
and makes you money.
• Financial Records: Documents that
evidence financial transactions.
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Budgeting
• Budget: A paper or electronic document
used to record both planned and actual
income and expenditures over a period
of time.
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Budgeting
Rules for successful budgeting:
1. Keep it simple.
2. Make it personal.
3. Keep it flexible.
4. Be positive.
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Budgeting – Action Before
• Set financial goals.
– Long-term goals
– Intermediate goals
– Short-term goals
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Budgeting – Action Before
• Make and reconcile budget estimates.
• Take-home pay (or disposable
income)
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Budgeting – Action Before
• Revise budget estimates.
• Earn more income.
• Cut back on expenses.
• Try a combination of more income and
fewer expenses.
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Budgeting – Action Before
• Plan cash flows.
• Cash-Flow Calendar
• Revolving Savings Fund
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Budgeting – Action During
• Control spending.
• Monitor unexpended balances to control
overspending.
• Use a subordinate budget.
• Pay by check to record the purpose of
expenditures.
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Budgeting – Action During
• Keep track of credit transactions.
• Justify exceptions.
• Use the envelope system.
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Budgeting – Action After
• Evaluate budgeting progress.
• Budget Variance: Difference between
amount budgeted and actual amount
spent or received.
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Budgeting
• Record Keeping: Recording sources
and amounts of dollars earned and
spent.
• Adding up actual income and
expenditures
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What to Do with Budgeted Money Left
Over at the End of the Month
• Put into a revolving savings fund.
• Build a cash reserve in a savings
account.
• Pay down credit card debt.
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What to Do with Budgeted Money Left
Over at the End of the Month
• Put toward a mortgage or other loan.
• Invest in a retirement account.
• Spend like “made money.”
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Top 3 Financial Missteps in Financial
Statements, Tools and Budgets
People slip up in building and maintaining
good credit when they do the following:
1. Fail to plan for occasional, non-monthly
expenditures.
2. Underestimate how much you spend each
month.
3. Using credit cards to “balance” your budget.
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Good Money Habits in Financial
Statements, Tools, and Budgets
•
Identify your financial values, goals,
and strategies so you can always keep
a balance between spending and
saving and stay committed to your
financial plans.
•
Develop your own balance sheet and
update it annually.
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Good Money Habits in Financial
Statements, Tools, and Budgets
•
Develop your own cash-flow
statements monthly or quarterly and
compile them into an annual statement.
•
Calculate your financial ratios annually
to assess your financial progress.
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Good Money Habits in Financial
Statements, Tools, and Budgets
•
Develop a list of financial goals. Start
with short-term goals and then expand
your list to longer-range goals. Update
and revise your goals annually.
•
Start an uncomplicated personal
financial record-keeping system that
meets your needs.
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