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Glencoe Personal Finance
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Chapter
Money Management Strategy
5
What money management techniques can
you employ to achieve your future
financial goals?
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
Money Management Strategy
5
Organizing and maintaining a personal financial plan are
essential to budgeting for future financial goals.
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
Money Management Strategy
5
money management
safe-deposit box
personal financial
statement
net worth
assets
wealth
liquid assets
real estate
market value
Glencoe Personal Finance
liabilities
insolvency
cash flow
income
take-home pay
discretionary income
surplus
deficit
budget
budget variance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
Money Management Strategy
5
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 1 Organizing Financial Records
Discuss the relationship between opportunity costs and money
management.
Explain the benefits of keeping financial records and
documents.
Describe a system to maintain personal financial documents.
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 1 Organizing Financial Records
Opportunity Costs and Money Management
How do your spending options fit:
Your
Values
Your
Current Financial
Situation
Your
Goal of Effective
Money
Management
money management
day-to-day financial activities necessary to
get the most from one’s money
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 1 Organizing Financial Records
Organization of Financial Documents
Financial Documents
Glencoe Personal Finance
Pay Stubs
Automobile
Titles
Bank Statements
Birth
Certificates
Broker Reports
Marriage
License
Credit Card
Statements
Tax Forms
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 1 Organizing Financial Records
Organization of Financial Documents
What can an organized system do for you?
Determine your current financial status.
Pay your bills on time.
Complete required tax reports.
Plan for the future.
Make sound financial decisions related to investments.
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 1 Organizing Financial Records
Organization of Financial Documents
Storing Your Financial Documents
Home
Files
Safe-Deposit
Box
Home
Computer
safe-deposit box
a small, secure storage compartment
that can be rented in a bank (see
example on next slide)
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Safe Deposit Box
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 1 Organizing Financial Records
How are the roles of maintaining financial records and
managing opportunity costs in a sound financial plan similar
and different?
Managing opportunity costs and maintaining financial records
are both critical to a sound financial plan. Making sound
financial decisions to get the most out of your money is an
important step. In order to make and track these decisions
you need to maintain financial records to keep track of your
money and determine your financial position.
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 2 Personal Financial Statements
Describe a personal balance sheet and cash flow statement.
Develop a personal balance sheet and cash flow statement.
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 2 Personal Financial Statements
Personal Balance Sheet
(see example on page 127, 147)
Personal financial statements can help you:
Determine what you own and what you owe
Measure your progress toward your financial goals
Track your financial activities
Organize information required to file your
tax return or apply for credit
personal financial statement
a statement that gives information about current financial
position and presents a summary of income and spending
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 2 Personal Financial Statements
Personal Balance Sheet
Your personal balance sheet includes
your net worth.
personal balance sheet
a financial statement that shows what one owns and
debts that one owes
net worth
the difference between the amount you own and the
debts you owe
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 2 Personal Financial Statements
Personal Balance Sheet
Your assets are an indication
of your wealth.
assets
owned items of value, such as cash, real estate,
personal possessions, and investments
wealth
property that has a money value or an
exchangeable value
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 2 Personal Financial Statements
Personal Balance Sheet
Liquid Assets
Categories
of Wealth
Real Estate
Personal Possessions
Investment Assets
liquid assets
cash and items that
can be quickly
converted to cash
Glencoe Personal Finance
real estate
land and any structures that
are on it, such as a house or
any other building
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 2 Personal Financial Statements
Personal Balance Sheet
What is market value?
market value
the price at which
property would sell
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 2 Personal Financial Statements
Personal Balance Sheet
Types of Liabilities
Current Liabilities
Insurance premiums
Current taxes
Utility bills
Medical bills
Long-Term Liabilities
Home improvement loans
Vehicles
College tuition
Mortgage Loans
liabilities
debts that one owes
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 2 Personal Financial Statements
Personal Balance Sheet
What is insolvency?
insolvency
the inability to pay debts when
they are due
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 2 Personal Financial Statements
Personal Balance Sheet
Reduce Expenses
How to
Increase
Your Net
Worth
Reduce Spending and Debts
Increase Your Savings
Increase Your Investments
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Create Your Own Personal Balance Statement
Put your name on worksheet
Fill in all categories
– List your personal possession assets using your best
guess as to the value
– Use a zero in category if it is not applicable
Record Total Assets and Total Liabilities
Calculate Net Worth
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 2 Personal Financial Statements
Cash Flow Statement: (see example on page 131)
Income Versus Expenses
How to Create a Cash Flow Statement
Record all your
sources of
income.
Record all your
expenses.
cash flow
the amount of cash that is
available at any given time
Glencoe Personal Finance
Calculate your
net cash flow.
income
cash inflow, including paychecks,
allowances, and interest earned
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 2 Personal Financial Statements
Cash Flow Statement:
Income Versus Expenses
What is take-home pay?
take-home pay
amount of income left after taxes and
other deductions are subtracted from
gross pay
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 2 Personal Financial Statements
Cash Flow Statement:
Income Versus Expenses
What is discretionary income?
discretionary income
the money left over after paying for
essentials such as rent, utilities, clothing,
transportation, and medications
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 2 Personal Financial Statements
Cash Flow Statement:
Income Versus Expenses
What is a surplus?
surplus
extra money that you can
spend or save
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 2 Personal Financial Statements
Your Financial Position
If you end the month
with a negative cash
flow a deficit is created.
If you end the month
with a positive cash
flow, you can invest
the surplus.
deficit
financial situation that occurs
when more money is spent
than received
In-Class Activity: Complete a Personal Balance
Statement for yourself. Fill in all blank lines, using a
zero if the category is not applicable.
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Partner Activity: Evaluate Financial Statements
Work with a partner (or alone, if you prefer)
Be sure to write your name(s) on the worksheet
There are two statements
– Balance Sheet
– Monthly Cash Flow Statement
Find the mistakes in each statement
– Items in the wrong category
– Math mistakes
– Missing categories
– Incorrect use
– Remember…these are MONTHLY statements
Correct the statements
Be sure to answer the questions at the bottom of the worksheet
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 2 Personal Financial Statements
How are a personal balance sheet and cash flow statement
similar? How are they different? What role does each play in the
development of a personal financial plan?
A cash flow statement and a personal balance sheet both
list expenses/liabilities and provide a snapshot of your
financial situation. However, a cash flow statement does
not break down all of your liabilities. It focuses on your
monthly payments. A personal balance sheet does not
show your income only the balance in your accounts.
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 3 Budgeting for Financial Goals
Identify the steps to create a personal budget.
Discuss the advantages of increasing your savings.
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 3 Budgeting for Financial Goals
Preparing a Budget
(see example on page 136)
If you want to be
successful at financial
planning, you must
have a budget.
budget
a plan for spending and
investing money
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 3 Budgeting for Financial Goals
Preparing a Budget
Steps to
Developing a
Budget
7. Review Spending and Saving Patterns
6. Record What You Spend
See page 135
5. Budget for Variable Expenses
4. Budget for Fixed Expenses
3. Budget for Unexpected Expenses
2. Estimate Your Income
1. Set Your Financial Goals
Glencoe Personal Finance
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The Monthly Budget: Month Ending October 31, 2015 (see page 136)
Directions: Fill in gray area with your "goal" and estimated expenses for the month. Change categories as needed.
Keep a record of income/expenses (save receipts). At end of month fill-in "Actual Amounts", calculate "Variances"
Financial Goal:
Budgeted Amounts
Actual Amounts
Variance
INCOME
Salary, Allowance, Interest
OUTFLOW
Unexpected Expenses & Savings
Emergency fund savings
Vacation savings
College savings
Investments
Total savings
Fixed Expenses
Automobile loan
Insurance Premiums
Cell Phone
PYF (Pay Yourself First)
Total fixed expenses
Variable Expenses
Food
Clothing
Gifts
Entertainment
Medical
Transportation
Personal items
Total variable expenses
TOTAL OUTFLOW
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 3 Budgeting for Financial Goals
Preparing a Budget
A budget variance can
be a surplus or a deficit.
budget variance
the difference between the
budgeted amount and the
actual amount spent
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 3 Budgeting for Financial Goals
A Successful Budget
Characteristics of an Effective Budget
Carefully
Planned
Glencoe Personal Finance
Practical
Flexible
Easily
Accessible
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 3 Budgeting for Financial Goals
Increasing Your Savings
Savings Strategies
Pay
Yourself First
Glencoe Personal Finance
Use Payroll
Savings
Spend
Less
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
How much should you spend in each category?
Choose a Strategy:
Find Average spending percentages nationally (CPI)
Use a template
Track your spending and create percentages off what
you already spend
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Determining Reasonable Expense Levels
Consumer Price Index
– Produced by the U.S. Dept of Labor
– Measures the changes in prices for commonly purchased goods
and services in the U.S.
– Compare the CPI to your actual budget
• Can indicate when you are spending too much/little on various items
http://www.bls.gov/news.release/cpi.t01.htm
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Percentage Budgeting
Simple and straightforward concept
Instead of allocating fixed-dollar amounts to every
line item, you establish a target percentage for
each expense category
This process shows you the inherent trade-offs in
your spending decisions
Can show you where you need to consider cutting
back and where you may be able to afford to spend
a little more
Flexible…easily adustable
– Live with parents, use housing % elsewhere
– Not as interested in food, use for clothing
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Additional Resources for Suggested Budget Percents:
• See Shared FilesClaxton NewPersonal
FinanceBudget Forensics Resources
• Google “Budget Percentage Guidelines”
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Budget Forensics Activity
Read “The Set Up”
Complete “The Investigation”
On page 2, Column 2, Calculate the Current Dollar Amount and % for
each category
– To get percent of Income: Divide money spent by income
Example: $700 spent on housing divided by $2500 income = 700/2500
= .28 or 28%
On page 2, Column 3, Calculate Recommended Dollar Amount and %
for each category
– To get dollar amount: multiply income by percent
Example $2500 income x .31 (31%) = $775
(To review formulas see bottom of worksheet)
Glencoe Personal Finance
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Budget Forensics (continued)
Determine in which categories the family is overspending
– i.e. Food = $ 2,500 x .15 (15%) = $375 (recommended)
– The Pence’s current expenditures in food = $400
– The Pence’s are spending $25 more than the recommended
amount
Re-allocate the expenditures into an appropriate category to solve
the Pence’s saving problem
– i.e. The “extra” $25 the Pence’s were spending on “Food” could
instead be added to the “Savings” category
Write a simple explanation for each of your changes
Complete the “Assessment Questions” on the next page
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Think About It…What Will Your Future Budget Look
Like? (Activity continued)
Create a budget proposal for your future self
Use your “Monthly Income” from the “My Life” assignment
Create and classify a list of expenses
Assign Percentages and dollar amounts to each category
of your budget (use “tips” at bottom of worksheet)
REMEMBER: When you total your percentages column it
should equal 100%, which is equal to 100% of your
monthly income
When budget is complete, review and adjust as
needed…fill in simple reason as to why it was adjusted
Rubric is attached…Total Points Available = 100
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
5
Money Management Strategy
Section 3 Budgeting for Financial Goals
Explain why it is sometimes difficult for people to increase
their savings. How will increasing the amount you put in
savings affect your budget?
It is difficult to resist the temptation to spend any extra money
each month. If you increase your savings you may need to adjust
spending in another area such as your variable expenses.
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
Money Management Strategy
5
Balance of Trade
Balance of trade is determined
by subtracting total imports
from total exports over a period
of time.
What could a surplus in the
balance of trade mean?
Strong
Manufacturing Base
High Tariffs
Overseas Demand for
U.S. Products
Less Disposable Income for
Consumers
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
Money Management Strategy
5
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
Money Management Strategy
5
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Answer: Question #10, page 146
$925 cost of trip
- 250 parent’s contribution
$675
$675/12 = $56.25 needed per month
8 hours x $10 per hour = $80
$80 income
-45 expenses (fixed and variable)
$35
$56.25
- 35.00
$21.25 additional will need to be saved EACH month
Glencoe Personal Finance
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End of
Glencoe Personal Finance
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.