Measuring Your Financial Health and Making a Plan

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Chapter 2

• Measuring Your Financial Health and Making a Plan

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Using a Balance Sheet to Measure Your Wealth

• Personal balance sheet
• The financial Polaroid
• The financial equation calculating net worth or
  equity
• Assets Liabilities Net Worth

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Your Assets What You Own

• Monetary
• Investment
• Retirement plans
• Real estate
• Automobiles and other vehicles
• Personal property
• Other tangible and intangible assets

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Monetary Assets

• Cash or other assets that can be easily converted
  into cash
• Provide necessary liquidity in case of an
  emergency
• Examples cash, checking accounts, savings
  accounts

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Investment Assets

• Invested for the future
• Used to accumulate wealth to satisfy a goal
• Examples stocks, bonds, mutual funds, cash
  value life insurance

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Retirement Plans

• Investments by you or your employer to save for
  retirement
• Long-term investments that often carry a penalty
  if used before a certain age
• Examples pensions, IRAs, 401(k), 403(b), Keogh,
  or SEP-IRA plans

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Housing/Real Estate

• Tangible asset such as land and a dwelling,
  reported as fair market value
• Represents most of your savings, and normally
  appreciates in value
• Examples primary residence, vacation home,
  rental properties

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Automobiles and Other Vehicles

• Tangible assets that normally must be inspected
  and licensed
• Reported as fair market value, but normally
  depreciate in value
• Examples cars, trucks, motorcycles, and
  recreational vehicles

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Personal Property

• Tangible assets that represent your lifestyle
• Reported as fair market value, but normally
  depreciate in value
• Examples boats, furniture, electronics,
  clothing, jewelry

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Other Assets

• Any other tangible or intangible asset that may
  or may not be of value
• Examples business ownership, collections, money
  owed you

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Your Liabilities What You Owe

• Current
• Long-term

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Current Liabilities

• Must be paid off within the next year
• Examples credit cards, current utility bills,
  and short-term loans

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Long-term Liabilities

• Extend beyond one year
• Examples home mortgage and auto loans

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Your Net Worth A Measure of Your Wealth

• Insolvency
• Do you owe more than you own?
• How age affects net worth guidelines
• Uses of a balance sheet

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Using an Income Statement to Trace Your Money

• Personal income statement
• The financial motion picture
• Cash basis
• Statement based entirely on actual cash flow

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Income Where Your Money Comes From

• Sources of income
• Wages, tips, royalties, salary, and commissions
• Amount earned, not necessarily amount received

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Expenditures Where Your Money Goes

• The two major expenditure categories
• Taxes and living expenses
• Fixed expenses
• Expenses you dont directly control e.g.,
  mortgage, rent, cable TV
• Variable expense
• Expenses you can control e.g., food,
  entertainment, clothing

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Using Ratios A Financial Thermometer

• Question 1
• Do you have adequate liquidity to meet
  emergencies?
• Question 2
• Do you have the ability to meet your debt
  obligations?
• Question 3
• Are you saving as much as you think you are?
• Review Financial Ratios handout

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Record Keeping

• The three reasons for accurate record keeping
• Preparing taxes
• Tracking expenses
• Providing information for others to use in the
  event of an emergency

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Record Keeping (contd)

• The two steps of record keeping
• Tracking your personal financial dealings
• Storing your financial records in an accessible
  manner

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Ways to Track Expenditures

• Using checks and credit cards
• Leave a paper trail
• Using cash
• Record expenditures in a notebook or ledger
• Generating a monthly income and expense statement
• Using computer programs to track all financial
  transactions
• Learning how and where to keep records

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Personal Income Taxes

• Keep all tax-related receipts and records for 6
  years
• Always keep accurate tax records in the event of
  an audit

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A Financial Plan A Plan for the Future

• Evaluate your financial health
• Balance sheet, income statement, and ratios
• Define your financial goals
• Know how much you can save
• Develop a plan of action
• Use the income statement and a cash budget
• Implement your plan
• Just do it!
• Review your progress, reevaluate, and revise your
  plan

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A Cash BudgetA Plan for Today

• A plan for controlling cash inflows and outflows
• Purpose
• To balance income with expenditures AND savings

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Putting It All Together Budgeting

• Evaluate your financial health and your financial
  plan
• Develop a cash budget
• Implement a cash budget

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Developing a Cash Budget

• Examine last years total income and adjust for
  the current year
• Estimate your tax liability
• Identify all fixed expenditures
• Identify all variable expenditures
• Look for ways to reduce your variable expenses
• Consider the effect of credit payments on future
  income

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Calculating the Bottom Line