MONEY MANAGEMENT BASICSRight now $1,000, 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 will probably earn nearly two million dollars, or more, 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 a 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, saving, and spending. 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 money manager.
The process of good money management should start with knowing your current financial status. When watching a baseball or soccer game, most people want to know the score. In the money management game, score is kept with the use of two financial statements: the balance sheet and the cash flow statement.
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 a 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, saving, and spending. 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 money manager.
The process of good money management should start with knowing your current financial status. When watching a baseball or soccer game, most people want to know the score. 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 a person or family owns as well as owes. The main parts of a balance sheet are displayed in Figure 16-1.
AssetsItems of value are personal assets . 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 a balance sheet.
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 a person or family owns as well as owes. The main parts of a balance sheet are displayed in Figure 16-1.
AssetsItems of value are personal assets . 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 a balance sheet.
LiabilitiesAmounts 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 WorthThe 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. For example, if a family has $189,000 in assets (including the value of a home) and has $87,000 in debts (mainly their home mortgage), the family has a net worth of $102,000. Net worth is also referred to as owner's equity.
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. In the same way, a balance sheet can help in measuring financial progress.
Net WorthThe 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. For example, if a family has $189,000 in assets (including the value of a home) and has $87,000 in debts (mainly their home mortgage), the family has a net worth of $102,000. Net worth is also referred to as owner's equity.
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. In the same way, a balance sheet can help in measuring financial progress.
PERSONAL CASH FLOW STATEMENT
A balance sheet reports assets, liabilities, and net worth on a given date. Almost every day, business transactions occur that change these balance sheet items. For example, when you make a loan 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, another financial statement can be helpful. A cash flow statement net wages and other income along with spending for a period, such as for a month. Figure 16-2 on the next page includes typical items found in a cash flow statement.
Cash InflowsThe 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 , which is the amount of a paycheck after taxes and other payroll deductions. These deductions may include retirement contributions, charges for health benefits, and other things, as well as local, state, and federal taxes. Your take-home pay is the amount you actually have available
to spend. Be sure to include any other income, such as interest earned.
Cash OutflowsThe second part of a 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 OutflowsThe final step in preparing the cash flow statement is to subtract the cash outflows (total spending) from the cash inflows (total income). If you spent less than you had in income, the difference represents an increase in your net worth. Most likely, this amount will be kept in savings for future needs or wants. If you spent more than you had in income, you either had to use some of your savings or had to use credit to pay these additional expenses.
A balance sheet reports assets, liabilities, and net worth on a given date. Almost every day, business transactions occur that change these balance sheet items. For example, when you make a loan 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, another financial statement can be helpful. A cash flow statement net wages and other income along with spending for a period, such as for a month. Figure 16-2 on the next page includes typical items found in a cash flow statement.
Cash InflowsThe 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 , which is the amount of a paycheck after taxes and other payroll deductions. These deductions may include retirement contributions, charges for health benefits, and other things, as well as local, state, and federal taxes. Your take-home pay is the amount you actually have available
to spend. Be sure to include any other income, such as interest earned.
Cash OutflowsThe second part of a 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 OutflowsThe final step in preparing the cash flow statement is to subtract the cash outflows (total spending) from the cash inflows (total income). If you spent less than you had in income, the difference represents an increase in your net worth. Most likely, this amount will be kept in savings for future needs or wants. If you spent more than you had in income, you either had to use some of your savings or had to use credit to pay these additional expenses.