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Chapter 3 Planning with Personal Financial Statements
Introduction to Finance (FIN2303)
Algonquin College
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Chapter 3: Planning with Personal Financial Statements
Personal Cash Flow Statement ● A financial Statement that measures a person’s income and expenses ○ Record Your Income ■ Salary, Interest Income, Dividends, Capital Gains ● Record Your Expenses ○ Rent, Living expenses, credit card payments ○ Monitoring expenses is much easier if you use your debit card or credit card, as opposed to cash, to make purchases and pay bills Net Cash Flows ● Disposable (after-tax) income - expenses
Factors That Affect Cash Flow (Income) * SEEN ON A TEST ● Stage in Your Career Path ○ Closely related to your life stage (e. early earning vs. prime earning) ● Type of Job ○ Based on skill level and demand for those skills ● Number of Income Earners in Your Household
Factors Affecting Expenses ● Size of Family ● Age ● Personal Consumption Behaviour ○ Some people spend all of their income and more, while others, “big savers”, spend mainly on necessities and concentrate on saving for the future
Creating a Budget
Budget ● A cash flow statement that is based on forecasted cash flows (income and expenses) for a future time period ○ Budgets are useful for anticipating either cash surpluses or cash deficiencies
Anticipating Cash Shortages ● Small Shortages can usually be made up from your chequing account or an emergency fund ● Budgets provide warning of shortages so that you can prepare for them ● Assessing the Accuracy of the budget ○ Compare predicted cash flows to actual cash flows and take any necessary steps to improve your cash flow
Alternative Budgeting Strategies ● Envelope Method ○ Create a separate envelope for each category of spending ● Pay Yourself First Method ○ Arrange an automatic transfer of money from chequing account to your savings account ○ This method removes net cash flows at the beginning of the budget period Focus on Ethics: Excessive Financial Dependence
Chapter 3 Planning with Personal Financial Statements
Course: Introduction to Finance (FIN2303)
University: Algonquin College
