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FIN 200: Personal Finance
Topic 5-BudgetingLawrence Schrenk, Instructor
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Learning Objectives
1. Explain the elements contained in a personal cash flow statement and balance sheet. ▪
2. Construct a personal cash flow statement and balance sheet. ▪
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Cash Flow Categorization I
Inflow versus Outflow Pay Period versus Pro Rated Single versus Repeated Expected versus Unexpected Voluntary versus Involuntary Cyclical versus Non-Cyclical
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Cash Flow Categorization II
Inflow versus Outflow Positive–Salary, Interest, etc, Negative–Groceries, Car Payments
Pay Period versus Pro Rated Pay Period–Groceries, Recreation Pro-Rated
Cash Flows that Extend beyond One Pay Period–Water Duration: Monthly, Quarterly, Annual
Total PaymentPeriod Payment =
Pay Periods in Duration
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Cash Flow Categorization III
Single versus Repeated Bonus, Lottery Salary, Rent
Expected versus Unexpected Lottery Salary, Rent
Involuntary versus Voluntary Salary, Rent Recreation ▪
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Cash Flow Categorization IV
Cyclical/Seasonal Gas (Winter–Heating) Heating Oil (Winter–Heating) Electricity (Summer–Air Conditioning)
Non-Cyclical/Non-Seasonal Salary Water* Recreation* Food Telephone Insurance
* May vary.
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Salary
Paycheck versus Direct Deposit Pay Stub (Proof Monthly Earnings) Salary Estimation
Bureau of Labor Statistics (BLS) Data Salary Wizard (CNNMoney.com)
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Salary and Wealth Cycles
Age ▪
Cash Flows
College Career Retirement
Savings
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Withholdings
Employee’s Earnings Statement (Pay Stub) Federal Tax FICA/Med
FICA/Med (Social Security) Medicare
State Taxes Insurance (Medical and Life) Flexcomp (Flexible Spending Plan)
Medical Dependent Care
Retirement Contribution
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Typical Cash Outflows
Rent/Mortgage Monthly, Constant Utilities (Some minimally voluntary) Insurance Auto Expenses Miscellaneous
Food, Recreation, Clothing
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Assets
Market Value versus Price Paid Liquid Assets
Immediate Liquidity No Selling Loss Day-to-Day Expenses
Household Assets Very Little Liquidity High Selling Loss
Investments Moderate Liquidity No Selling Loss, but Commissions, etc.
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Software I Packages
Quicken Money
Yodlee MoneyCenter Free service, but registration required Uses data from your bank accounts, credit cards,
mortgage, etc. Categorizes by type, not payee
Shell and Citco payments both go under ‘gas’ Net-worth statement Bill reminders Should be safe: used in major banks' online products
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Software II
Mint.com Free service, but registration required Less sophisticated than MoneyCenter
No investment accounts But more user friendly Online community
Budget Calculator (CNNMoney.com)
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Potential Problems
Cash Leakage You cannot Easily Monitor or Analyze Cash Payments
Going beyond your Financial Limits Spending, Borrowing
Thinking of Luxuries as Necessities Jimmy Choo shoes are not necessities. Nothing made by Ferrari is a necessity.
Spending More than You Make Spending Creep Misusing ‘Windfalls’, e.g., Bonuses Relying on ‘Windfalls’
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Current Cash FlowsCash Inflows Cash OutflowsSalary $9,262.00 Mortgage $1,498.88Withholdings (33%) ($3,056.46) UtilitiesDividends $120.00 Natural Gas $50.00
Total Inflows $6,325.54 Electricity $200.00Water $75.00Cable $100.00
Telephone $50.00Health Expenses $50.00
Car ExpensesLoan Payment $0.00
Insurance $150.00Maintenance $300.00
Gas $464.02Food $750.00Recreation $1,500.00
Total Outflows $5,187.89
NET CASH FLOWS $1,137.65
Current Cash Flows
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Current Balance SheetAssets LiabilitiesLiquid Assets CurrentCash $200.00 Credit Card $1,000.00Checking $1,000.00 Total $1,000.00
Savings $8,000.00Total $9,200.00 Long-Term
Mortgage $250,000.00Household Assets Car Loan $0.00Home $300,000.00 Total $251,000.00
Car $5,000.00 Total Liabilities $252,000.00Furniture $3,000.00 NET WORTH $87,200.00
Total $308,000.00
InvestmentsStocks $2,000.00Mutual Funds $20,000.00
Total $22,000.00Total Assets $339,200.00
Current Balance Sheet
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New Balance Sheet
Assets LiabilitiesLiquid Assets CurrentCash $200.00 Credit Card $1,000.00Checking $1,000.00 Total $1,000.00
Savings $3,000.00Total $4,200.00 Long-Term
Mortgage $250,000.00Household Assets Car Loan $32,414.00Home $300,000.00 Total $283,414.00
Car $37,400.00 Total Liabilities $284,414.00Furniture $3,000.00 NET WORTH $83,323.65
Total $340,400.00
InvestmentsStocks $3,137.65Mutual Funds $20,000.00
Total $23,137.65Total Assets $367,737.65
New Balance Sheet
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New Cash FlowsCash Inflows Cash OutflowsSalary $9,262.00 Mortgage $1,498.88Withholdings (33%) ($3,056.46) UtilitiesDividends $188.26 Natural Gas $50.00
Total Inflows $6,393.80 Electricity $200.00Water $75.00Cable $100.00
Telephone $50.00Health Expenses $50.00
Car ExpensesLoan Payment $972.56
Insurance $250.00Maintenance $100.00
Gas $510.42Food $600.00Recreation $1,000.00
Total Outflows $5,456.85
NET CASH FLOWS $936.94
New Cash Flows
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Ethical Dilemma
Dennis and Nancy do not have sufficient money for a down payment on a house. Nancy's Uncle Charley has agreed to loan them the money, but requests a personal balance sheet and cash flow statement as well as tax returns for the last two years. While Dennis has been working substantial overtime, the overtime will not continue, so Uncle Charley may not loan them the money. They choose to provide the last two years' personal cash flow statements and tax returns, but not to provide any additional information unless he asks.
a. Comment on Nancy and Dennis' decision not to provide the information underlying their cash flow statement. What potential problems could result from their decision?
b. Discuss in general the disadvantages of borrowing money from relatives.
