STATEMENT OF FINANCIAL POSITION ADVANCED LEVEL
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1 STATEMENT OF FINANCIAL POSITION ADVANCED LEVEL
2 WHO IS WEALTHIER? Ian Mitchell Income - $30,000 Income - $85,000 Net Worth - $50,000 Net Worth - $35,000 Let s learn more to answer this question! Take Charge Today August 2013 Statement of Financial Position Slide 2
3 Net Worth Wealth The measure of financial wealth Indicates the monetary value of all possessions that a person or household owns, minus the total amounts owed to others Take Charge Today August 2013 Statement of Financial Position Slide 3
4 NET WORTH VS. INCOME Net Worth Depends on how a person manages their income Income Money received such as wages earned from working for pay A person may have high income and low net worth or vice versa Take Charge Today August 2013 Statement of Financial Position Slide 4
5 HOW DO YOU DETERMINE WHAT YOUR NET WORTH IS? G1 Statement of Financial Position - A financial statement that describes an individual or family s financial condition on a specified date by showing assets, liabilities, and net worth Shows a person s net worth Similar to a net worth statement or balance sheet Take Charge Today August 2013 Statement of Financial Position Slide 5
6 THREE COMPONENTS 1. Assets 2. Liabilities 3. Net Worth Take Charge Today August 2013 Statement of Financial Position Slide 6
7 WHAT IS AN ASSET? Asset - Everything a person owns with monetary value Cash Value of personal possessions Take Charge Today August 2013 Statement of Financial Position Slide 7
8 MONETARY ASSETS Cash Monetary assets - Can be quickly and easily converted into cash Money in checking and savings accounts Take Charge Today August 2013 Statement of Financial Position Slide 8
9 TANGIBLE ASSETS Tangible assets - Personal property that was purchased to create a lifestyle or improve your life (also known as use or lifestyle assets) Homes Automobiles Electronics Take Charge Today August 2013 Statement of Financial Position Slide 9
10 HOW DO YOU DETERMINE THE VALUE OF TANGIBLE ASSETS? G1 Market value What you could realistically sell that asset for today, not what you originally paid Listed on the Statement of Financial Position Where can you find the market value? Websites available to estimate the value of automobiles Research the place you would sell the item to determine what similar items are selling for Example Derek purchased a car for $12,000 two years ago The current market value = $8,500 He records $8,500 on his Statement of Financial Position Take Charge Today August 2013 Statement of Financial Position Slide 10
11 INVESTMENT ASSETS Investment assets Financial assets purchased with the hope that they will generate income and appreciate in value to make it possible to sell at a higher price in the future Value of retirement accounts Stocks Take Charge Today August 2013 Statement of Financial Position Slide 11
12 WHAT ARE LIABILITIES? Loans (mortgage, automobile, student) Liabilities A debt or obligation owed to others Balance on a credit card Take Charge Today August 2013 Statement of Financial Position Slide 12
13 WHAT IS RECORDED IN THE LIABILITIES SECTION? Amount you owe if you were to pay the amount owed in full today Automobile loan If monthly payments are continued to be made If paid in full today Record on statement $180/ month $6,300 $5,490 $5,490 Take Charge Today August 2013 Statement of Financial Position Slide 13
14 LIABILITIES VS. EXPENSES Definition Characteristics Example Liabilities Money owed to others Total amount owed Automobile loan - $5,490 owed Expenses Money spent Bills paid on a regular basis Monthly payment to repay that automobile loan - $180/month Take Charge Today August 2013 Statement of Financial Position Slide 14
15 CALCULATING NET WORTH Assets Liabilities Net Worth Take Charge Today August 2013 Statement of Financial Position Slide 15
16 NET WORTH YOUR PERSONAL FINANCIAL THERMOMETER Provides a number that can objectively measure your financial temperature Determine what amount of net worth you desire and then set goals to reach that amount Take Charge Today August 2013 Statement of Financial Position Slide 16
17 HOW CAN YOU INCREASE NET WORTH? How do you increase assets and/or decrease liabilities? Assets Evaluate how you manage your money Liabilities Take Charge Today August 2013 Statement of Financial Position Slide 17
18 MONEY MANAGEMENT TOOLS Statement of Financial Position Income & Expense Statement Spending Plan What is my financial position today? How have I managed my money in the past? What is my future money management plan? Work together to help you objectively evaluate your past, present, and future financial decisions Reach net worth level desired Take Charge Today August 2013 Statement of Financial Position Slide 18
19 YOUR PRESENT SELF IMPACTS YOUR FUTURE SELF Keep your net worth in mind when making financial decisions Present Future How will this financial decision affect my future net worth? Take Charge Today August 2013 Statement of Financial Position Slide 19
20 SO WHO IS WEALTHIER? Ian s Statement of Financial Position Mitchell s Statement of Financial Position Assets Assets Home 60,000 Home 100,000 Retirement Savings 20,000 5,000 Retirement Savings 20,000 7,000 Automobile 10,000 Automobile 20,000 Total Assets $95,000 Total Assets $147,000 Liabilities Liabilities Mortgage (house loan) 40,000 Mortgage (house loan) 80,000 College loan 5,000 College loan 20,000 Automobile loan 0 Automobile loan 10,000 Credit card debt 0 Credit card debt 2,000 Total Liabilities $45,000 Total Liabilities $112,000 Net Worth $50,000 Net Worth $35,000 Income - $30,000 Net Worth - $50,000 Income - $85,000 Net Worth - $35,000 Take Charge Today August 2013 Statement of Financial Position Slide 20
21 DISCUSSION Do you think Ian is making any trade-offs to have higher net worth than Mitchell even though he has a lower income? How could both Ian and Mitchell increase their net worth? If Ian and Mitchell were thinking about going on vacation, how would their statement of financial position guide their decision? Take Charge Today August 2013 Statement of Financial Position Slide 21
22 WHEN WOULD A PERSON NEED OR WANT TO CREATE A STATEMENT OF FINANCIAL POSITION? G1 Recommended Special Times Once per year When making decisions regarding assets or liabilities Must be written to be most effective use any written method that works for you May have to create a statement for a financial professional Take Charge Today August 2013 Statement of Financial Position Slide 22
23 MEET TORI Tori is considering purchasing a new preowned car. She would like to know what her net worth is to help her make this decision. Your Job: Use the information provided to create a Statement of Financial Position for Tori Take Charge Today August 2013 Statement of Financial Position Slide 23
24 ABOUT TORI Record all applicable information in the current column of Tori s Statement of Financial Position 21 years old Completing training to be a radiology technician Has one semester of training left Works part-time to earn $13,000 per year Owes $5,000 in student loans that helped pay for her schooling Take Charge Today August 2013 Statement of Financial Position Slide 24
25 ABOUT TORI Owns a car that runs fine but would like an upgrade Used a website to determine the market value of her current car = $3000 Has $1,000 in her checking account Keeps $20 in cash in her wallet at all times Keeps $2,000 in her savings account for emergencies Take Charge Today August 2013 Statement of Financial Position Slide 25
26 ABOUT TORI Rents a one bedroom apartment and owns $1,000 worth of furniture and other household supplies Loves to shop and estimates that she owns $1,500 worth of clothes and shoes Bought a laptop computer when she started school but estimates that it is only worth $200 now Invests $20 per month into a retirement account that account is currently worth $500 Take Charge Today August 2013 Statement of Financial Position Slide 26
27 TORI S CURRENT STATEMENT OF FINANCIAL POSITION Assets Monetary assets Cash on hand Value of checking account 1, Value of savings account 2, Subtotal of monetary assets $3, Tangible Assets Market value of household furnishings 1, Market value of automobile 3, Market value of electronics Market value of clothing 1, Subtotal of tangible assets $5, Investment Assets Value of retirement account Subtotal of investment assets $ Total Assets $9, Liabilities Student loan balance 5, Total Liabilities $5, Net Worth = Total Assets - Total Liabilities $4, G1 Take Charge Today August 2013 Statement of Financial Position Slide 27
28 Tori would like to trade in her car for a new pre-owned car priced at $12,000. She would receive $2,000 tradein value for her car making the purchase price of the new car $10,000. She will use $1,000 from her emergency savings and apply for a loan for the remaining $9,000. If Tori purchased this car today, how would her Statement of Financial Position be affected? If she purchased a Current new car Assets Monetary assets Cash on hand Value of checking account Decrease savings 1, to 1, Value of savings account $1,000 2, , Subtotal of monetary assets $3, $2, Tangible Assets Market value of household furnishings Increase value of 1, , Market value of automobile automobile to 3, , Market value of electronics $12, Market value of clothing 1, , Subtotal of tangible assets $5, $14, Investment Assets Value of retirement account Subtotal of investment assets $ $ Total Assets $9, $17, Liabilities Student loan balance 5, , Installment loan balance for automobile 9, Add automobile Total Liabilities $5, $14, loan for $9,000 Net Worth = Total Assets - Total Liabilities $4, $3, Take Charge Today August 2013 Statement of Financial Position Slide 28
29 DISCUSSION What is Tori s current net worth? What would her net worth be if she purchased the new car today? Based upon Tori s Statements of Financial Position, would you recommend that she purchase the new car? Why or why not? Consider what trade-offs she will have to make with both options Take Charge Today August 2013 Statement of Financial Position Slide 29
30 DISCUSSION How could Tori increase her current net worth? Tori has chosen to use student loans to help her pay for training to become a radiology technician This has lowered her current net worth, but what affect may it have on her future net worth? By investing in higher education she is helping to increase her future income earning ability and therefore make it easier to increase her future net worth Take Charge Today August 2013 Statement of Financial Position Slide 30
31 SUMMARY Statement of Financial Position is an important money management tool that shows net worth Assets Liabilities = Net Worth Net worth is an objective measure of wealth Net worth is your financial thermometer to objectively measure your financial position To increase net worth you will have to increase assets or decrease liabilities Take Charge Today August 2013 Statement of Financial Position Slide 31
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Budgeting and Measuring Your Financial Health: Giving Every Dollar a Name
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