The Role of Financial Statements. The Role of Financial Statements

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1 Honors Personal Finance 1 $ The average person spends money three times a day. $ A movie with popcorn and a soft drink can easily cost $20 $ Just one soft drink a day for.99c adds up to $ in a year $ What s the biggest expense item for teenagers? FOOD! 2 Before you can set goals and develop an effective financial plan, you must take stock of your current financial situation. Personal Financial Statements are a key tool to accurately analyzing your financial well-being. 3 Some of these useful tools are: 1 Balance Sheets a financial statement that describes a person s financial position at a given point in time. 2 Income & Expense Statement - a financial statement that measures financial performance over time The ultimate statement tool is the budget. Budgets a detailed financial report that is forward looking in nature, based on expected income and expenses. Budgets are better accomplished with the aid of a personal balance sheet. A balance sheet has three parts, taken together, summarize your financial picture: Items that one owns. (Debts) What you owe. Net Worth The difference between your assets and liabilities. can be broken down in to 4 broad categories: 1 Liquid 2 Investments 3 Real Property 4 Personal Property

2 Liquid assets that are held in the form of cash or can readily be converted to cash with little or no loss in value. Ex: Cash on hand, or in a checking or savings account, money market deposit accounts, money market mutual funds, CD s that mature in less than 1 year. 10 Investments assets such as stocks, bonds, mutual funds, and real estate that are acquired in order to earn a return rather than provide a service. Ex: see above. 11 Real Property Tangible assets that are immovable: land or anything fixed to it such as a house. These items usually have a relatively long life and a high cost. 12 Personal Property tangible assets that are movable and used in everyday life. Ex: automobiles, recreation equipment, household furnishings, etc. are generally classified according to maturity. 1 Current (Short Term) 2 Open Account Credit Obligations 3 Long Term Current (Short Term) any debt due within 1 year of the date of the balance sheet. Ex: charges for consumable goods, utility bills, rent, insurance premiums, taxes, medical bills, repair bills, etc Open Account Credit Obligations current liabilities that represent the balance outstanding against established credit lines. Ex: Credit card purchases. Long Term any debt due 1 year or more of the date of the balance sheet. Ex: real estate mortgages, most consumer installment loans, education loans. Now that we know what you own and what you owe, we can calculate your net worth. Net Worth an individual s or family s actual wealth; determined by subtracting total liabilities from total assets Net Worth 18 2

3 When all is said and done it all comes down to income vs. expenses. Income earnings received as wages, salaries, bonuses, commissions, interest and dividends, or proceeds from the sale of assets. Expenses money spent on living expenses and to pay taxes, purchase assets, or repay debt. Income Expenses Net gain or loss Budgeting is the first step on the road to financial success. Controlling your day to day finances allows you to do the things you want to do. Start budgeting now don t wait until you re financially on your feet, to begin to budget. The sooner you start the process, the easier and more effective it will be. Step 1 - Track your expenses; Figure out the amount of money you re spending, then ask; 1. What do you have to spend? 2. What spending is necessary vs. not necessary? Step 2- Calculate your total income; This includes all monies coming in; Salary, bonuses, investments, etc. Step 3 - Calculate your Total Income - Total Expenses; This will allow you to see if you are spending too much, or if you have some discretionary income. Step 4 Now you can set your financial goals, and determine whether you need to cut your expenses or increase your income in order to meet your goals

4 A budget is nothing more than the activity of balancing income vs. expenses. Income is measured in two ways: 1. Gross Pay Monies earned prior to any deductions being made. 2. Net Pay The remaining monies after deductions from the total salary. There are two sub-categories: 1. Fixed Expenses contractual, predetermined expenses involving equal payments each period. Ex: Fixed Expenses: Mortgage or rent, Insurance auto, home, life, car & school loan payments Variable Expenses expenses involving payment amounts that chance from one time period to the next. Ex: Variable Expenses: Car maintenance, Gas, Food & Groceries, and Dining out Utilities: Electricity, Heat, Water, Phone To start a basic budget: Each student receives a small notebook. For the next month, write down EVERYTHING you spend money on. Also write down anytime you receive money. To start a basic budget: Use E = Expense or I = Income Date 2/12 2/15 Item Gas Subway Amount $21.00E $5.43E Track your expenses; Figure out the amount of money you re spending, then ask; 1. What do you have to spend? 2. What spending is necessary vs. not necessary? At the end of the month, break everything down into categories. Is your income greater than your expenses? If: YES! Great, successful budget. NO! There s a problem! Setting financial goals In order for a budget to be effective you need a set of goals: Short term less than 1 year Intermediate term 1 to 6 years Long term 6 years or more

5 12/28/17 What is included in a budget for a family in a given month? When Expenses > Income Why dowho budgets fail? is Wealthier? John earns $35,000 per year The typical family spends their money on: Housing - 30% Transportation - 20% Food -15% Utilities, Home Improvements - 14% Saving - 10% Insurance - 7% Other - 4% 37 Home Retirement Automobile $60,000 Home $24,000 Retirement $92,000 Mortgage $75, $8,000 Negative Attitude Total College loan Alex earns $100,000 per year Automobile $41,000 $8,000 College loan $10,000 Automobile loan $4,000 Credit card debt $20,000 Mortgage $65, $6,000 Lack of motivation $35,000 Total $35,000 Total $118,000 Total $99, $51,000 Unrealistic expectations Net Worth What can you cut out? 1. Dining out too often. 2. Buying mostly from the want list. 3. Unnecessary shopping. Net Worth $19,