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Money Management
Day to day financial activities necessary to manage current personal economic resources while working toward long term financial security.
Daily spending and savings decisions are central to financial planning
– Must be coordinated with needs, goals, and personal situations.
Cash and other tangible property with monetary value.
What are the 3 Components of Money Management activities?
1. Storing and maintaining personal financial records and documents.
2. Creating personal financial statements
3 Creating and implementing a plan for spending and saving (budgeting).
What a System for Personal Financial Records do:
Provides a basis for:
1 Handling daily business affairs, such as bill paying.
2 Planning and measuring financial progress.
3 Completing required tax reports.
4 making effective investment decisions.
5 Determining available resources for current and future buying.
Records in Your Home File
1 Personal and Employment records
2 Money management records
3 Tax records
4 Financial services records
5 Credit records
6 Consumer purchase and auto records
7 Housing records
8 Insurance records
9 Investment records
10 Estate planning and retirement records
Safe Deposit Box
A private storage area at a financial institution with maximum security for valuables.
What types of financial records and documents should be kept in a Safe-Deposit Box?
A safe-deposit box should be used to store financial records that are difficulty to replace and that are not needed on a day-to-day basis. Examples of items stored in a safe-deposit box include Birth, marriage and death certificates, citizenship papers, stock certificates, contracts, insurance policies, a record of personal belongings, mortgage papers, rare coins, collectibles, and other rare and valuable items.
What types of financial records and documents should be kept in a Computer?
– Current and past budgets
– Summary of checks written and other banking transaction
– Past Income Tax returns
– Account summaries, performance results of investments
– Digital versions of wills, estate plans and other documents.
Balance Sheet
A financial statement that reports what an individual or family owns and owes: also called net worth statement or statement of financial position.
Items of Value minus ( – ) Amount Owed
(what you own) (what you owe)
= Net Worth
(your wealth)
Components of a Balance Sheet
Step 1 – List Items of Value
– Liquid Asset
– Real Estate
– Personal Possessions
– Investment Assets
Step 2 – Determine Amounts Owed
– Current Liabilities (<1 year) - Long-term Liabilities Step 3 - Compute your Net Worth Assets - Liabilities = Net Worth Assets = Liabilities - Net Worth
Cash and other property with a monetary value
Liquid Assets
Cash and items of value that can easily be converted to cash
Amounts owed to others
Current Liabilities
Debts that must be paid within a short time, usually within a year.
Long-Term Liabilities
Debts that are not required to be paid in full until more than a year from now.
Net Worth
The difference between total assets and total liabilities.
Measurement of current financial position
Net Worth ? Cash Availalble
Ways to Increase Net Worth
– Increase Savings
– Reduce spending
– Increase the value of investments and other
– Reduce Amounts owed
Assets minus Liabilities Equals?
= Net Worth
The Inability to pay debts when due because liabilities far exceed the value of assets
Cash Flow
The Actual inflow and outflow of cash during a given time period.
Money received, especially on a regular basis, for work or through investments.
Cash Flow Statement
Also called Personal Income and Expenditure Statement.
A financial statement that summarizes cash receipts and payments for a given period.
Take-home Pay
Earnings after deductions for taxes and other items; also called Disposable Income.
Money management activities refers to long-term investment decisions.
A specific plan for spending income; also called a Spending Plan.
Helps you:
– Live within your Income
– Spend Money Wisely
– Reach Financial Goals
– Prepare for Financial Emergencies
– Develop wise Financial Management habits
Plan for Effective Budgeting
Step 1: Set Financial Goals
Step 2: Estimate Income
Step 3: Budget and 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
SWOT Analysis
What are the Characteristics of Successful Budgeting?
– Well Planned
– Realistic
– Flexible
– Clearly Communicated
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.
Money Management and Achieving Financial Goals
1. Your Balance Sheet:
Snapshot of where you are now
2. Your Cash Flow Statement:
What you received and spend over a specific period.
3. Your Budget:
Planning spending and saving achieve financial goals.
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.
Calculating Savings Amount
1. Convert savings goals into specific amounts
2. Use savings and investment plans to grow your money.
3. Use time value of money to calculate progress toward financial goals.
Discretionary Income
Money left over after paying for housing, food, and other necessities.
Budget Variance
The difference between the amount budgeted and the actual amount received or spent.
The amount by which actual spending exceeds planned spending.
The amount by which actual spending is less than planned spending.
Copies of tax returns should be kept for at least…
7 years.
Rule of thumb when saving money for an emergency fund is to set aside:
3-6 months of living expenses.
Is Jewelry a Liquid Asset?
Jewelry is not a Liquid Asset.
Are retirement accounts liquid assets?
Is home equity a liquid asset?
How long to keep birth certificates?
How long to keep social security data?
How long to keep records on property and investments?
As long as you own these items.
How long to keep copies of tax data?
7 Years.
How long to keep documents related to the purchase and sale of real estate?
Net Worth
Total Assets – Total Liabilities
Debt Ratio
Shows relationship between debt and net worth; a low Debt Ratio is Best.
Liabilities ? Net Worth.
Current Ratio
A high current ratio is desirable to have cash available to pay bills.
Liquid assets ? Current Liabilities.
Liquidity Ratio
Indicates the number of months in which living expenses can be paid if an emergency is arises; a high Liquidity Ratio is desirable.
Liquid Asset ?Monthly Expenses.
Debt-payment Ratio
How much of a person’s earnings goes for debt payments (Excluding Home Mortgage); most financial advisers recommended a Debt-payment Ratio of less than 20%.
Monthly Credit Payments ?Take-home Pay
Savings Ratio
Financial experts recommend monthly savings of 5%-10%.
Amount Saved each Month ?Gross Income
Cash Surplus (or Deficit)
Total Inflows – Total Outflows
Single Person
Short-Term Goals (Less than 2 years)
– Complete College
– Pay off auto loan
Intermediate Goals (2-5 years)
– Take a vacation to Europe
– Pay off education loan
– Attend graduate school
Long-Term Goals (over 5 years)
– Buy a vacation home in the mountains
– Provide for retirement income
Married Couple (no children)
Short-Term Goals (Less than 2 years)
– Take an annual vacation
– Buy a new car
Intermediate Goals (2-5 years)
– Remodel home
– Build a stock portfolio
Long-Term Goals (over 5 years)
– Buy a retirement home
– Provide for retirement income
Parent (young children)
Short-Term Goals (Less than 2 years)
– Increase life insurance
– Increase savings
Intermediate Goals (2-5 years)
– Increase investments
– Buy a new car
Long-Term Goals (over 5 years)
– Accumulate a college fund for children
– Move to a larger home
When one money management decision is selected, something else must be given up.
Opportunity costs are only associated with money management decisions involving long-term financial security.
Financial records that may need to be referred to on a regular basis should be kept in a safe-deposit box.
A budget is a record of how a person or family has spent their money.
Personal records include birth certificate, marriage license, and social security card.
Most income tax documents and records should be kept in a safe-deposit box.
A personal balance sheet reports your income and expenses.
A person’s net worth is the difference between the value of the items owned and the amounts owed to others.
Furniture, jewelry, and an automobile are examples of liquid assets.
Current liabilities are amounts that must be paid within a short period of time, usually less than a year.
Insolvency is a result of having more liabilities than assets.
A personal cash flow statement presents income and outflows of cash for a given time period, such as a month.
Take-home pay is a person’s earnings after deductions for taxes and other items.
Medical expenses, clothing, and telephone are examples of fixed expenses.
If expenses for a month are greater than income, an increase in net worth will result.
A person’s lifestyle is a reflection of his or her values, goals, career, and family situation.
A personal cash flow statement can serve as the basis for the budget categories used by an individual or family.
Definite financial obligations are referred to as variable expenses.
If budgeted spending is less than actual spending, this is referred to as a deficit.
Most Americans have an adequate savings for emergencies.
“Pay yourself first” is an attitude that can assure building savings for the future.
Money management refers to:
A) preparing personal financial statements.
B) day-to-day financial activities.
C) trade-offs that occur with financial decisions.
D) storing financial records for easy access.
E) spending money on current living expenses.
B) day-to-day financial activities.
Opportunity cost refers to:
A) current spending habits.
B) changing economic conditions that affect a person’s cost of living.
C) storage facilities to make financial documents easily available.
D) trade-offs associated with financial decisions.
E) avoiding the use of consumer credit.
D) trade-offs associated with financial decisions.
Which of the following financial documents would most likely be stored in a safe-deposit box?
A) W-2 forms
B) personal financial statements
C) warranties
D) savings certificates
E) checking account statements
D) savings certificates
An example of a personal and employment document is a :
A) budget.
B) passbook.
C) Social Security card.
D) property tax bill.
E) lease.
C) Social Security card.
A broker statement is an example of a(n) ____________ record.
A) investment
B) insurance
C) estate planning
D) tax
E) consumer purchase
A) investment
Warranties are commonly associated with ____________ purchases.
A) investment
B) insurance
C) credit
D) financial service
E) consumer
E) consumer
Which of the following are considered to be personal financial statements?
A) Budget and credit card statements
B) Balance sheet and cash flow statement
C) Checkbook and budget
D) Tax returns
E) Bank statement and savings passbook
B) Balance sheet and cash flow statement
A home file should be used for :
A) storing all financial documents and records.
B) financial records for current needs.
C) documents that require maximum security.
D) obsolete financial documents.
E) records that are difficult to replace.
B) financial records for current needs.
A personal balance sheet presents
A) amounts budgeted for spending.
B) income and expenses for a period of time.
C) earnings on savings and investments.
D) items owned and amounts owed.
E) family financial goals.
D) items owned and amounts owed.
The current financial position of an individual or family is best presented with the use of a(n)
A) budget.
B) cash flow statement.
C) balance sheet.
D) bank statement.
E) time value of money report.
C) balance sheet.
A family with $45,000 in assets and $22,000 of liabilities would have a net worth of
A) $45,000.
B) $23,000.
C) $22,000.
D) $67,000.
E) $41,000.
B) $23,000.
Items with a monetary worth are referred to as
A) liabilities.
B) variable expenses.
C) net worth.
D) income.
E) assets.
E) assets.
Items of value less amounts owed to others equals
A) net assets.
B) net worth.
C) total liabilities.
D) total income.
E) budgeted expenses.
B) net worth.
An individual retirement account is an example of a(n) ____________ asset.
A) liquid
B) common
C) investment
D) household
E) budgeted
C) investment
Liquid assets refer to:
A) amounts that must be paid soon.
B) items that are easily converted to cash.
C) total income available to a family for spending.
D) the value of investments.
E) amounts on which taxes must be paid.
B) items that are easily converted to cash.
Liabilities are amounts representing:
A) debts.
B) items of value.
C) living expenses.
D) taxable income.
E) current assets.
A) debts.
Current liabilities differ from long-term liabilities based on :
A) the amount owed.
B) the financial situation of the creditor.
C) the interest rate charged.
D) when the debt is due.
E) current economic conditions.
D) when the debt is due.
Ben Chase needs to pay off some of his debts over the next few months. Which item on his balance sheet would help him decide what amounts are due in the near future?
A) The budget variance
B) Investment assets
C) Long-term liabilities
D) Current assets
E) Current liabilities
E) Current liabilities
Which of the following would be considered a long-term liability?
A) A charge account payment
B) A mortgage
C) An installment loan
D) An amount due for taxes
E) The amount due on a credit card
B) A mortgage
A person’s net worth is computed by
A) adding assets and liabilities.
B) deducting current living expenses from total assets.
C) subtracting total liabilities from total assets.
D) subtracting assets from current liabilities.
E) adding liabilities and budgeted expenses.
C) subtracting total liabilities from total assets.
Which of the following situations is a person who could be insolvent?
A) Assets $56,000; annual expenses $60,000
B) Assets $78,000; net worth $22,000
C) Liabilities $45,000; net worth $6,000
D) Assets $40,000; liabilities $45,000
E) Annual cash inflows $45,000; liabilities $50,000
D) Assets $40,000; liabilities $45,000
A person’s net worth would increase as a result of
A) reduced amounts owed to others.
B) reduced earnings.
C) increased spending for current living expenses.
D) decreased value of personal possessions.
E) decreased value of investments.
A) reduced amounts owed to others.
A cash flow statement reports a person’s or a family’s
A) net worth.
B) current income and payments.
C) plan for spending.
D) value of investments.
E) balance of savings.
B) current income and payments.
Which of the following presents a summary of income and outflows for a period of time?
A) A balance sheet
B) A bank statement
C) An investment summary
D) A cash flow statement
E) An asset report
D) A cash flow statement
Total earnings of a person less deductions for taxes and other items is called
A) budgeted income.
B) gross pay.
C) net worth.
D) total revenue.
E) take-home pay.
E) take-home pay.
A common deduction from a person’s paycheck is for
A) interest.
B) taxes.
C) rent.
D) unemployment.
E) current liabilities.
B) taxes.
Payments that do not vary from month to month are ____________ expenses.
A) fixed
B) current
C) variable
D) luxury
E) budgeted
A) fixed
Gerard Pique wants to reduce his fixed expenses. What action would be appropriate?
A) Get a part-time job
B) Eat more meals at home than in restaurants
C) Find a place to live with a lower rent
D) Save more money for the future
E) Buy on credit for items than might cost more later
C) Find a place to live with a lower rent
Which of the following payments would be considered a variable expense?
A) Rent
B) An installment loan payment
C) A mortgage payment
D) A monthly parking fee
E) A telephone bill
E) A telephone bill
A decrease in net worth would be the result of
A) income greater than expenses for a month.
B) expenses greater than income for a month.
C) assets greater than expenses.
D) increased earnings on the job.
E) income and expenses equal for a month.
B) expenses greater than income for a month.
During the past month, Jennifer Ernet had income of $3,000 and a decrease in net worth of $200. This means Jennifer’s payments for the month were
A) $3,200.
B) $3,000.
C) $2,800.
D) $200.
A) $3,200.
Improvements in a person’s financial position are the result of
A) increased liabilities.
B) reductions in earnings.
C) increased savings and investments.
D) increased purchases on credit.
E) lower amounts deposited in savings.
C) increased savings and investments.
To determine a person’s solvency, which financial document should be consulted?
A) Cash flow statement
B) Budget
C) Debt consolidation statement
D) Balance sheet
E) Credit report
D) Balance sheet
An example of a long-term goal for a young couple may be :
A) a new car.
B) reduction of amounts owed on credit cards.
C) increased savings.
D) income for retirement.
E) funds for a vacation.
D) income for retirement.
A major expenditure for most families is
A) insurance.
B) contributions.
C) clothing.
D) utilities.
E) transportation.
E) transportation.
The payment items that should be budgeted first are
A) variable expenses.
B) investment funds.
C) fixed expenses.
D) unplanned living expenses.
C) fixed expenses.
Changes in the cost of living are
A) different in various geographic areas.
B) the same for different locations.
C) constant from month to month.
D) the same for all goods and services.
E) not a factor when preparing a budget.
Changes in the cost of living are
A) different in various geographic areas.
B) the same for different locations.
C) constant from month to month.
D) the same for all goods and services.
E) not a factor when preparing a budget.
A) different in various geographic areas.
The difference between the amount budgeted and the actual amount is called a
A) financial plan.
B) current liability.
C) change in net worth.
D) budget variance.
E) variable living expense.
D) budget variance.
If a family planned to spend $370 for food during March but only spent $348, this difference would be referred to as a
A) surplus.
B) deficit.
C) fixed living expense.
D) budget reduction.
E) contribution to net worth.
A) surplus.
A budget deficit would result when a person’s or family’s
A) actual expenses are less than planned expenses.
B) actual expenses are greater than planned expenses.
C) actual expenses equal planned expenses.
D) assets exceed liabilities.
E) net worth decreases.
B) actual expenses are greater than planned expenses.
The Crown family has a difficult time staying on a budget. In an effort to actually see what funds are available for various expenses, a ____________ budget would be most appropriate.
A) written
B) computerized
C) physical
D) deficit
E) mental
C) physical
When it comes to savings, most Americans
A) have an adequate emergency fund.
B) use several different savings techniques.
C) find saving difficult.
D) keep substantial amounts in a regular savings account.
E) reduce the amount they save during their working life.
C) find saving difficult.
What are the main components of a personal balance sheet and a cash flow statement? What is the main purpose of each of these personal financial statements?
A balance sheet reports the current financial position of an individual or family; it includes assets, liabilities, and net worth. A cash flow statement is designed to report the actual inflow and outflow of cash during a given time period for a person; it includes current income and cash payments.
Darlene Elkin has the following financial amounts: checking accounts $850, savings account $3,500, credit card balance $300, jewelry $1,600, real estate valued at $78,000, a mortgage on the restate of $23,000. What is the total of Darlene’s assets? What actions could she take to increase her net worth?
Darlene’s total assets amount to $83,950. For Darlene to increase her net worth, she should increase her income, decrease her living expenses, increase the amount in savings, or reduce amount owed.
Diane Rossiter lives with her two sons, ages 6 and 9. They have had difficulty managing their finances. What purposes could a budget serve for the Rossiters? What actions would you suggest for the budgeting process to be successful?
A budget can help a person or family live within their income, spend money wisely, reach financial goals, prepare for financial emergencies, and develop wise financial management habits. A successful budget should be well-planned, realistic, flexible, and clearly communicated.

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