Personal Financial Statements
Goals:
Key Terms:
Money Management Basics – Right now $1000, or maybe $100 seems like a lot of money to you. Once you graduate from high school, and perhaps college, and have a full-time job, your thinking about what is a large amount of money will change. You probably will earn much more than one million dollars in your lifetime. As a college graduate, you will likely make even more.
While this may seem like a lot of money, remember that you will be responsible for many living expenses. You will have to pay for food, housing, clothing, and transportation as well as other goods and services you need and want. Upon beginning a career and living on your own, you will face the same problem you face now – having limited amount of money to pay for all the goods and services you want and need.
Money management refers to the day-to-day financial activities associated with using limited income to satisfy your unlimited needs and wants. Money management involves getting the most for your money through careful planning. It involves making and using a plan for spending.
Some people have the wrong idea about money management. They think it means never spending, doing without things, and not having any fun. If you learn to manage your money well, you will be able to buy what you really want. Planning ahead and deciding what is important will help you have money for things you enjoy. If you set goals, make wise decisions, buy wisely, and live within your income, you will be a successful manager.
The process of good money management should start with knowing your current financial status. In the money management game, score is kept with the use of two financial statements: the balance sheet and the cash flow statement.
Personal Balance Sheet – “How much money do you have?” might be the first question many people would ask when measuring your financial situation.
The answer to that question would not give the entire picture because most people have other items of value besides money. A balance sheet is a record of assets and liabilities at a point in time. It reports what the person owns as well as owes.
Assets – Items of value are known as personal assets. Include such things as money in bank accounts, investments, furniture, clothing, automobiles, jewelry, and rare coins. The current value of all assets of an individual or family is the first thing stated on the balance sheet.
Liabilities – Amounts owed to others are liabilities. These debts may include credit card balances, car loans, a home mortgage, or personal loans. A listing of your liabilities is the second item on a balance sheet.
Net Worth – The difference between a person’s assets and liabilities is your net worth. This difference represents the amount of money that could be claimed if all assets were sold for cash and all debts were paid off.
A balance sheet is a helpful way to measure financial strength. Businesses commonly prepare a balance sheet either once a month or quarterly to determine the financial condition of the business. A balance sheet can help in measuring financial progress.
Personal Cash Flow Statement - Almost every day, business transactions occur that change balance sheet items. If you make a mortgage payment, your liabilities decrease. If you save part of your earnings, your assets and net worth increase by the amount of the savings.
To examine changes in a person’s net worth, a cash flow statement can be helpful. A cash flow statement reports net wages and other income along with spending for a period, such as a month.
Cash Inflows – The first part of a cash flow statement reports cash inflows, or your income. Cash inflows is the money you have available to spend as a result of working or from other income, such as interest earned on your savings.
When preparing a cash flow statement, first report your net pay or take home pay, the amount of a paycheck after taxes and other payroll deductions. Your take-home pay is the amount you actually have available to spend. Be sure to include any other income, such as interest.
Cash Outflows – The second part of the cash flow statement reports your cash outflows, or your expenditures. Amounts spent for food, clothing, transportation, and other living costs are cash outflows. Keeping track of how much is spent for various living expenses will help you plan and control your spending. Your personal cash flow statement can be used to develop a budget, which can help you avoid cash flow problems.
Compare Inflows and Outflows – The final step in preparing the cash flow statement is to subtract the cash outflows (total spending) from the cash inflows (total income). If you spend less than you had in income, the difference represents your net worth. If you spent more than you had in income, you either had to use some of your savings or had to use some of your savings or had to use credit to pay for these additional expenses.
Assignments:
Define Key Terms (Pg. 398)
16-1 Assessment (Pg. 401)
Questions 1-4
Create a Personal Balance Sheet
Create a Personal Cash Flow Statement
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