Money Management Guide
Top 10 Most Important Concepts!
Depository Institutions
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1. Types of Depository Institutions
Commercial Banks
- For profit
- Open to anyone who wants to utilize a depository institution
- Offer numerous financial services
- Usually the largest depository institutions
Credit Unions
- Not-for-profit / owned by members
- Have membership qualifications / members must share a "common bond"
- Offer many services but usually not as many as a bank
- Are often able to pay higher interest rates and charge lower fees
2. Features of Depository Institutions
Online Banking
What is it?- Complete certain transactions from a secured internet site
- Use a username and password
- Access account information any place
- Transfer money
- Pay bills/set up recurring bill payments
- Apply for credit
Mobile Banking
What is it?- Apps that many depository institutions have developed that allow online banking from mobile devices
- Usually offers the same services as online banking
Debit Cards
What is it?
- A plastic card that is electronically connected to the cardholder’s depository institution account
What can you do?
- Function in the same manner as checks but faster and more portable
Other Information
- Use a Personal Identification Number (PIN) or signature to authorize transactions
ATM
- A machine that allows individuals to complete certain transactions from the machine without human assistance
What can you Do?
- Withdraw and deposit money
- Transfer money
- Check account balance
Accessed via an ATM card (usually the debit card) and PIN
Contactless Payments
What is it?
- Transactions completed with no physical connection between the payment device and the Point of Sale (POS) device or store clerk
What can you do?
- “Wave” a card in front of a sensor for fast and easy transactions
- Not all merchants have this technology
Taxes
Taxes are the sum of money demanded by a government to support the government itself as well as specific facilities or services. Taxes are paid by taxpayers, people who pay taxes to national, state, county or municipal governments.
3. Taxes
Income Tax - tax on earned and unearned income
- Earned Income - money earned from working for pay
EX: Wages/Salaries from employment
- Unearned Income - income received from sources other than employment
EX: Interest earned from a savings account/ profits made on investments
- Federal Income Tax
Determined by - earned and unearned income
Helps Fund: Operations of federal government, national roads, education, National Defense, Disaster relief, National Parks/Museums, Gov. Assistance Programs
- State Income Tax (varies by state)
Determined by - earned and unearned income
Helps Fund: State highways, operations of state government, schools, State Parks, State Assistance Programs
Payroll Tax - A tax on earned income that supports the Social Security and Medicare programs
Determined by - percentage of earned income
Helps Fund: Social Security program and Medicare program
Property Tax - a tax on property, such as land, buildings (including homes), and motor vehicles
Determined by - percentage of property value
Helps Fund: Schools and Expenses of State/Local governments
Sales Tax - tax on purchased goods and services
Determined by - percentage added to the original price of an item
Helps Fund: Expenses of State/Local governments
Excise Tax
Determined by - Purchase of certain items: gas, hotel rooms, airline tickets, cigarettes, alcohol, etc. (often included within price of these items)
Helps Fund: Expenses of State/Local governments
4. How Tax Rates are Determined
- Determined by public representatives (city councils, county commissions, state legislatures, Congress)
- Elected by voters (taxpayers)
- Work as a voting group to elect representatives who will represent the majority
Statement of Financial Position
The Statement of Financial Position is a financial statement that describes an individual or family’s financial condition on a specified date by showing assets, liabilities, and net worth.
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5. Statement of Financial Position Components
Assets -
- Monetary Assets - can be quickly/easily converted into cash (Cash/Money in Checking/Savings account)
- Tangible Assets - Personal property that was purchased to create a lifestyle or improve your life (Homes/Automobiles/Electronics)
- 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)
Liabilities - A debt/obligation owed to others (Loans/Balance on a Credit Card)
Difference between Liabilities/Expenses
- Liabilities: money owed to others, total amount owed
- Expenses: money spent, bills paid on a regular basis
Net worth - The measure of financial wealth
Calculated
- Assets - Liabilities = Net Worth
Your "financial thermometer" to objectively measure your financial position
To increase your net worth you must Increase assets or decrease your liabilities.
6. Money Management Tools
Statement of Financial Position
- What is my financial position TODAY?
Income and Expense Statement
- How have I managed my money in the PAST?
Spending Plan
- 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
Income and Expense Statement
The Income and Expense Statement lists and summarizes income and expense transactions that have taken place over a specific period of time, usually a month or year.
7. Money Management Tools/ Components
Money Management Tools
- How I have managed my money in the past?
- Tells you where your money came from and where it went.
Components
- Income - money received (earned (gross/net)/unearned, received income from government programs)
- Expenses - money spent (taxes, savings/investing, insurance, housing, transportation, food, other)
- Net gain/Net loss - Income + / - Expenses = net Gain/Loss
8. Tracking Methods
- Record in writing
- Smartphone
- Keep receipts
- Depository institution account statements
- Money management computer software programs
A written system is more effective than a mental system!
Spending Plan
An income and expense statement sometimes referred to as a budget which records both planned and actual income and expenses over a period of time.
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9. Importance of a Budget/Money Management Tools
Importance
- Help manage your money in a positive manner
- Increase net worth
- Help set/reach goals
- Analyze the opportunity costs of your trade-offs to your maximize your financial well-being
Money Management Tools
- What is my future money management plan?
- Determine what changes to make in the Statement of Financial Position and the Income and Expense Statement then make those changes in your Spending Plan.
10. Spending Plan Development Process
1. Track Current Income and Expense (developing)
- Completed by developing Income and Expense Statement
- Ensures spending plan is realistic
2. Personalize Your Spending Plan (developing)
- How will you develop a spending plan?
Any written method that works for you: paper/pencil, spreadsheet, money management computer software, or applications
- What is the intended time period for your spending plan?
- What categories will your spending plan include?
3. Allocate Money to Each Category (developing)
- Reference tracking from Step One
- Determine what changes to make
Consider: trade-offs/opportunity costs, goals, and contractual expenses
Contractual Expenses-required to pay expenses for a specific amount of time (not easy to reduce/eliminate) EX: Rent, Internet, Cell-phone
Non-Contractual Expenses - Easy to reduce/eliminate EX: Food, Entertainment
4. Implement and Control (maintaining)
- Make your planned spending decisions
- Use a control system to stay on track
Control systems: Money management computer software, Internet-based spending plan program, Depository institutions programs, Check register system, envelope system
5. Evaluate and Make Adjustments (maintaining)
- How well did your spending plan work?
- Is your spending plan helping your reach goals?
- Do you need to make any adjustments?