BUDGETING AND SAVING MONEY

Statement of Financial PositionWho is wealthier?

Ian

Income $30,00

Net Worth $45,000

•Mitchell

•Income-$85,000

•Net Worth-$28,000

Statement of financial position

Your net worth = wealth!Net worth: the objective measure of financial

wealth.Wealth: Measurement of how much a

person or household owns once all debts have been paid

Net Worth Net Worth is more about how you

MANAGE your income.Someone can have a high income, but low

net worth.Living within your means will help build your

net worth. Your net worth is actually the difference

between your assets and liabilities.

How do you determine your net worth? Statement of financial

position: that describes an individual or family’s financial condition on a specified date. Uses assets, liabilities, and net

worth.

3 components of Statement of Financial Position:1. Assets

2. Liabilities

3. Net worth

Assets

Asset: everything a person owns with monetary valueCan be cashCan also be value of personal possessions

Examples: Checking account, savings account, money in stocks, value of current home or car

○ The value of these assets must be what you can realistically sell them for TODAY, not the purchase price. Kellybluebook.com

Liabilities

Liabilities: debt or obligations owed to othersCan be bills or loans that are due

Can also be value owed on credit cards

Liabilities

What is recorded in the liabilities section of a personal financial statement?The amount you owe if you were to pay the

amount owed in full today.○ Example: You have an auto loan that you pay

$180 per month on; if you continued payments till it was paid off $6300.

○ If paid the loan off in full today $5490 Amount recorded on statement.

Net Worth The difference between your liabilities

and your assets is your Net Worth.Assets – Liabilities = Net worth

Assets Liabilities

Checking Account $540Savings Account $3250

Current Bills Due $1,250Credit Cards Owed $4500

Stocks & Bonds $10,000Home Value $92,000 Mortgage Owed $68,000

Car Value $2,300Total: $108,090 Total $73,750

Net Worth:$34,340

How to increase Net Worth Your net worth increases when your

assets increase or your liabilities decrease.

Ideal assets Ideal Liabilities

Update your personal financial statement at least once a year, Especially if there are dramatic changes to assets or liabilities

How to Increase Net Worth By properly using money management

tools!Statement of financial position (updated

yearly)Income and Expense StatementUsing a spending plan

So…Who is wealthier?

Ian

Income $30,00

Net Worth $45,000

•Mitchell

•Income-$85,000

•Net Worth-$28,000

Income and Expense Statement

Jessica is paid once a month. She puts enough money in the bank to

cover her expenses every month; but still runs out of money before all expenses are paid.

Meet Jessica…

Expense Amount

Rent/Utilities $500

Health Insurance $100

Renter’s Insurance

$10

Car Insurance $40

Gas $100

Groceries $100

Cell phone $70

Personal Care $30

Entertainment $50

Total $1000

-Jessica made a list of all her expenses

-Doesn’t expect to have more than $1000 in expenses every month; but still runs out!

-Where is her money going?

Jessica…

Jessica forgot to account for the $1.50 coffee she buys every morning and the lunch she has with friends about once a week.

$1.50 $45 $540 on Coffee! $8.00 $32 $416 on Lunch!

○ Jessica is forgetting $77 that she thinks is minimally nothing!

The costs add upItem Avg Cost Of

ItemCost/Month if purchased daily

Approximate cost per year if purchased daily

16 oz pop $1-$2 $30-$60 $365-$730

16 oz Energy Drink

$2-$3 $60-$90 $730-$1095

16 oz Starbucks coffee

$2.50-$4 $75-$120 $900-$1440

Candy Bar $1 $30 $360

Income and Expense Statement

A statement that lists and summarizes income and expense transactions that have taken place over a specific period of time, usually a month or year.

○ Can help evaluate past financial decisions to increase net worth

Income and Expense Statement

3 ComponentsIncome: Money receivedExpenses: money spentNet Gain/Net Loss: Your income minus your

expenses

Spending Plans

Think of a personal/financial goal. Based on your current spending, is it

realistic to achieve your goal? Think of how you can adjust your

spending to achieve this goal…This is the beginning of a spending plan!

Spending Plan

A document used to record both planned and actual income and expenses over a period of time.

A BUDGET!

Spending Plan

Look at your current financial position and how you have managed money in the past.

Determine what changes to make & then make changes!

Why is a spending plan so important for financial planning?

Manage $ in a positive manner Increase net worth Help set and reach goals Analyze opportunity costs and trade offs

to maximize financial well being