FIN3001EF Personal Financial Planning2-1Topic 2Money Management Strategy: Money Management Strategy: Financial Statements and BudgetingFinancial Statements and Budgeting FIN3001EF Personal Financial Planning2-2Planning for Successful Money Management•Daily spending and saving decisions are the heart of financial planning.•Decisions must be coordinated with needs, goals, and personal situations.•Money management is the day-to-day financial activities needed to manage personal economic resources, while working toward long-term financial security. FIN3001EF Personal Financial Planning2-3Opportunity Cost andMoney Management•Spending money on current living expenses reduces the amount you can save and invest.•Saving and investing for the future reduces the amount you can spend now.•Buying on credit ties up future income.•Using savings for purchases results in lost interest and depletes savings.•Comparison shopping can save money but takes valuable time. FIN3001EF Personal Financial Planning2-4Major Money Management Activities FIN3001EF Personal Financial Planning2-5Benefits of an Organized System of Financial Records•Handling daily business affairs, including payment of bills on time.•Planning and measuring financial progress.•Completing required tax reports.•Making effective investment decisions.•Determining available resources for current and future buying. FIN3001EF Personal Financial Planning2-6What to Keep in Your Home File•Items you refer to often.§Personal and employment records.§Money management records. §Tax records.§Financial services records.§Consumer purchase, auto and credit records.§Housing records. §Insurance records.§Investment records.§Estate planning and retirement records. FIN3001EF Personal Financial Planning2-7What to Keep in Your Home File FIN3001EF Personal Financial Planning2-8What to Keep in a Safe Deposit Box•Safe deposit box is for records that would be hard to replace.§Birth, marriage and death certificates, copy of will§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. FIN3001EF Personal Financial Planning2-9What to Keep in a Safe Deposit Box FIN3001EF Personal Financial Planning2-10Records on Personal Computer FIN3001EF Personal Financial Planning2-11How Long to Keep Records•Birth certificates, wills, and Social Security information should be kept indefinitely.•Keep records on personal property and investments as long as you own them.•Keep documents related to the purchase and sale of real estate indefinitely.•Copies of tax returns and supporting data should be kept seven years. FIN3001EF Personal Financial Planning2-12Purpose of Personal Financial Statements•Report your current financial position in relation to the value of the items you own and the amounts you owe.•Measure your progress toward your financial goals.•Maintain information on your financial activities.•Provide data you can use when preparing tax forms or applying for credit. FIN3001EF Personal Financial Planning2-13Components of a Balance Sheet(net worth statement)•Assets - what you own.§Liquid assets.§Real estate.§Personal possessions.§Investment assets.•Liabilities - what you owe§Current liabilities (< 1 year). §Long term liabilities.•Compute your net worth.§Assets minus liabilities. FIN3001EF Personal Financial Planning2-14 FIN3001EF Personal Financial Planning2-15Where Did Your Money Go? Components of a Cash Flow Statement•Shows inflow, outflow for a given time period.§Record inflow.•Net income from employment.•Savings and investment income.•Other sources.§Record cash outflows.•Fixed and variable expenses.•Net cash flow can be a surplus or a deficit.•Use this statement as a basis for creating a spending, saving and investment plan. FIN3001EF Personal Financial Planning2-16 FIN3001EF Personal Financial Planning2-17Ratios for Evaluating Financial Progress•Debt ratio = total liabilities/net worth; compares debt to net worth; lower debt ratio is best•Current ratio = liquid assets/current liabilities; shows how well short term assets cover short term debt; higher ratio is good•Liquidity ratio = liquid assets/monthly expenses; shows # of months that living expenses can be paid; higher ratio is good•Debt payments ratio = monthly credit payments/take-home pay; try to keep ratio below 20%•Savings ratio = monthly savings/gross income; Americans tend to be poor savers; shoot for at least 10% FIN3001EF Personal Financial Planning2-18Ratios for Evaluating Financial Progress FIN3001EF Personal Financial Planning2-19Ratios for Evaluating Financial ProgressBased on the following information, calculate the ratios requested:Debt ratio: Current ratio: Debt-payments ratio: Savings ratio: Liabilities $12,000Liquid assets $2,200Monthly credit payments $150Monthly savings $130Net worth $36,000Current liabilities $550Take-home pay $900Gross income $1,500 FIN3001EF Personal Financial Planning2-20Purposes of a Budget •In contrast to cash flow, which was a record of how you spent money in a past time period, a budget is a plan for spending in the future, such as for the next month. A budget helps you…§Live within your income.§Spend your money wisely.§Reach your financial goals.§Prepare for financial emergencies.§Develop wise financial management habits. FIN3001EF Personal Financial Planning2-21Creating and Implementing a Budget FIN3001EF Personal Financial Planning2-22Creating and Implementing a Budget•Assessing your current situation.§Measure your current financial position.§Determine your needs, values and life situation.•Steps in the budgeting process.1Set financial goals.2Estimate income from all sources.3Budget amount for an emergency fund, periodic expenses and financial goals.4Budget set amounts that you are obligated to pay. These are your fixed expenses. BE SURE TO BUDGET FOR SAVINGS. FIN3001EF Personal Financial Planning2-23Creating and Implementing a Budget•Steps in the budgeting process (continued).5Estimate amounts that are to be spent for household and living expenses. These are your variable expenses.6Record actual amounts for inflows and outflows, comparing actual amounts with budgeted amounts to determine variances.tDeficits and surpluses.7Review your spending and savings patterns and evaluate whether revisions are needed in your savings and spending plans. FIN3001EF Personal Financial Planning2-24Common Financial Goals FIN3001EF Personal Financial Planning2-25 FIN3001EF Personal Financial Planning2-26An Annual Budget Summary FIN3001EF Personal Financial Planning2-27Characteristics of Successful Budgeting•Well planned.•Realistic.•Flexible.•Clearly communicated. FIN3001EF Personal Financial Planning2-28Selecting a Budgeting System1) Mental budget – it is all in your head2) Physical budget-use envelopes for your expenses such as food, rent.3) Written budget – use spreadsheets4) Computerized budget – use software such as Quicken () FIN3001EF Personal Financial Planning2-29Saving to Achieve Financial Goals•Common reasoning for saving include…§To set aside money for irregular and unexpected expenses.§To pay for the replacement of expensive items, such as cars or a down payment on a house.§To buy special items like recreational equipment or to pay for a vacation.§To provide for long-term expenses such as retirement or the education of children.§To earn income from the interest on savings for use in paying living expenses. FIN3001EF Personal Financial Planning2-30Using Savings to Achieve Financial Goals FIN3001EF Personal Financial Planning2-31Savings Techniques-If I don’t see it, I won’t spend it•Payroll deductions into saving accounts•Automatic payments from checking into savings accounts or mutual funds•Saving regularly in MPF/ORSO accounts.•Also save coins, make periodic deposits•Write a check each payday as a % of income and deposit into savings FIN3001EF Personal Financial Planning2-32Money Management & Achieving Financial Goals•Balance Sheet reports current financial position•Cash Flow Statement shows cash you have received and spent in the past•Budget helps you to spend and save to achieve financial goals FIN3001EF Personal Financial Planning2-33Relate Money Management & Saving Activities to Achieving Financial Goals FIN3001EF Personal Financial Planning2-34Assignments•Prepare a balance sheet for yourself•Prepare a cash flow statement for last month•Prepare a monthly budget•Monitor the budget and show variances FIN3001EF Personal Financial Planning2-35Online Research•Do an online search to see if you can find the savings rate in Hong Kong.•How does your savings ratio compare to the average? 。