MONEY MANAGEMENT

Meaning

 Money Management is the day to day financial

activities necessary for managing personal financial
resources
 Money management activities include

1. Storing and maintaining personal financial records

and documents.
 These provide written evidence of business
transactions, ownership of properties and legal
matters.
2. Creating personal financial statements i.e. balance
sheets and statements of cash inflow and outflows.
 Financial statements enable an individual to

measure and assess his/her financial position

3. Budgeting i.e. creating and implementing a plan
for spending and saving
 Budgeting is the base for effective money
management
1. PERSONAL FINANCIAL RECORD
KEEPING AND ITS IMPORTANCE

 For a successful personal financial management,

an individual must record and keep all financial
transactions made by him/her or his/her family
Importance
 An organized system of financial record keeping

provides a basis for

i. Handling daily business activities, such as payment
of bills
ii. Planning and measuring financial progress
iii. Completing required tax reports
iv. Making effective investment decisions
v. Determining available resources for current and
future spending
Places for keeping Financial
Records&Documents

 Personal financial records may be kept in one of

the following places.
i. Home file: used to keep records for current needs
and documents with limited value
ii. Safe deposit box: for documents and items of
higher values or
iii. a home computer
2. PERSONAL FINANCIAL STATEMENTS

 Personal financial statements that an individual always

have to create are; personal balance sheet and personal
statement of cash flows (an income and expense statement)
Purpose of personal financial statements
 The main purpose of these personal financial statements are

to;
i. Report an individual’s current financial position/situation
ii. Measure his/her progress towards financial goals
iii. Maintain information about financial activities
iv. Provide data for preparing tax forms or applying for credit
2.1Personal balance sheet
 A personal balance sheet (net worth statement or
statement of financial position) refers to financial
statement that reports what an individual or a
family owns and owes i.e. family’s assets,
liabilities and netwoth
 Net worth(wealth) = value of items owned-amounts
owed
Steps in Preparation of Personal Balance Sheet
(PBS)

The aim of PBS is to find an individual’s net worth (financial

position of an individual).
Steps
1. Listing Items of Value. Items that should be included are;
 Liquid assets(monetary assets): these includes cash,

money in checking and savings account, tax refunds due,

money owed to you by others.
 Liquid assets are primarily used for maintenance of
living expenses, emergencies, savings and payment of
bills
 Real estate e.g. home, condominium, land etc
 Personal possessions: this includes all personal
belongings in their market value e.g. automobiles,
motorcycles, bicycles, household furniture and
appliances, jewelry, clothing etc
 The purpose of both real estate and personal
possessions is to maintain one’s life style.
 Investment assets/capital assets: they are
tangible and intangible items acquired for
monetary benefits they provide such as generating
additional income and increasing value.
 Investment assets include treasury bonds, treasury
bills, stocks, life insurance, real estate
investments, pension plans, retirement plans etc
2. Determine amounts owed: Determination of both
current liabilities and long term liabilities
 Short term liabilities may include; personal

loans, credit card charges, insurance premiums,

rent due, taxes unpaid, professional services
unpaid (doctors, lawyers) etc
 Long term liabilities may include; personal loan

balance, education loan balance, home mortgage

balance, automobile installment balance etc
 3. Computing the net worth: this is the difference between total
assets and total liabilities
 Net worth is the amount left if all assets were sold and all

debts were paid in full i.e. Net worth is not money available
for use, but an indication of individual’s financial position at a
given date
NB:
 A person may have high net worth but still have financial

difficulties.
 This happens when an individual has high assets with low

liquidity i.e. low proportion of monetary assets to total assets.

How is individual’s net worth increased?

By
 Increasing savings

 Reducing spending

 Increasing the value of investments and other

possessions
 Reducing amounts owed
2.2 PERSONAL STATEMET OF CASH FLOWS
(INCOME&EXPENDITURE )

 Cash flow statement (personal income and

expenditure) is a summary of cash receipts and
payments for a given time period.
 Cash flow is the actual inflow and outflow of cash
during a given period of time.
 The aim of creating personal cash flow statement is:
 To determine individual’s cash surplus or deficit
 To show whether you were able to live within
your income during that period of time
Receipts/Income/Cash inflow
 Receipts/income are earnings from different
sources during a certain period of time, usually a
year.
 Receipts/income usually include; salaries or wages,
bonuses and commissions, social security benefits,
child support and alimony, scholarships and grants,
interest and dividends, income from
sale(disposition) of assets, tax refunds, rent and any
other income.
Payments/Expenses/Cash outflow
 Payments/expenses represents all expenditures made
during the period. They are categorized according to
whether they are fixed or variable
 Variable expenses: these are cash outflows of which
its payment varies over time and an individual has
considerable control over them.
 Variable expenses/payments usually include; food
clothing, utilities, transportation, child care, medical
expenses, entertainment, vacations, contributions,
credit card payments etc
 Fixed Expenses: are usually paid in the same
amount during each time period and they are often
contractual
 Usually include; automobile installments, rent,

mortgage payments, taxes, pension contributions,

installment loan payments for furniture and
appliances, savings etc
 Cash surplus or deficit (Net Cash Flow) =

cash inflow/income-cash outflow/expenses

3. BUDGETING
 BUDGET: is a specific plan for spending income.
It is a document or set of documents used to
record both projected and actual income and
expenditures over a period of time.
 A budget/spending plan is necessary for effective
financial planning
Purposes of a budget
 The purposes of budget are to;
Help an individual,
i. live within his/her income
ii. Spend money wisely
iii. Reach his/her financial goals
iv. Prepare for emergencies
v. Develop wise financial management habits
BUDGETING
 Budgeting is the process of projecting, organizing,
monitoring and controlling future income and
expenditures
 Expenditures here include; cash purchase, credit
purchases and savings.
 Financial statements and budgets are some of the
tools of financial planning.
CHARACTERISTICS OF A SUCCESSFUL
BUDGET

 A budget will only work if you follow it.

Successful budgets are commonly viewed as
1. Well planned.
2. Realistic. Plan to spend according to your income.
A budget is designed not to prevent an
individual from enjoying life but help him/her
achieve what he/she want most
3. Flexible.
4. Clearly communicated. The budget should be
written and available to all household members
PHASES IN THE BUDGETING PROCESS

1. Goal setting phase (already discussed)

2. Organization phase.
Under this phase an individual have to;
 Select appropriate recordkeeping format. An individual
can set his/her own record keeping format of sources
of income, amount earned and spent or can purchase
forms that satisfy his/her needs.
The primary objective of record keeping lies in
providing detailed information about what
happened financially during any given time period.
 Select basis of budgeting i.e. cash basis budgeting or accrual
basis budgeting
NB: Cash basis budgeting recognizes earnings and expenditure
when actually received or paid while Accrual basis
recognizes earnings and expenditure when earned or incurred.
 Decide which budget classification is appropriate for him/her.
The two broad budgeting classifications are income(money
earned/received) and expenditures(money spent)
 Select appropriate time periods e.g. a month, quarter a year,
semi annual or annually
3. Decision making phase.
 This phase focuses on the decisions about the

sources of funds as well as their destination i.e.

where fund is obtained and where is allocated
 An individual have to make realistic estimates for

income and expenditure and revise estimates

regularly to resolve conflicting needs and wants
4. Implementation phase of budgeting
 This phase bring about putting a budget into

effect.
 Specifically a person records income earned and

expenditures made during a budgeting period,

manage cash flow problems, determine totals for
the time period , and prepare financial statements
5. Control phase of budgeting
 In the control phase of budgeting, family or an

individual uses various methods and techniques

(budget control measures) to keep income and
expenditure within planned range.
 The control phase occurs simultaneously with the

implementation phase because the best time to

control spending is during the budget period
Budget Control Measures: Individuals can use the
following methods to keep income and
expenditures within a planned range
 Use checking account instead of cash: if a
person uses cash frequently instead of checks
may have trouble in tracking amount he/she spent
or may have to retain many receipts and write the
purpose of each expense on the back of the
receipt
ii. Employ credit control sheet. This is the form which helps a person
monitor credit use, amounts owed and parties to whom debts are
owed.
iii. Justify exceptions. Exceptions occur when budget estimates differ
from actual expenditures, with the discrepancies taking the form of
over expenditures. A person have to justify reason for the
discrepancies
iv. Use the envelope system. An envelope is a budget control measure
where by amounts of money equal to the budget estimate expenditure
are placed into envelopes for a purpose of strict budgetary control.
Write the budget classification name and budget amount on the outside
of each envelope
v. Employ subordinate budgets: a subordinate budget
is a detailed listing of planned expenses within a
single budgeting classification. For example an
estimate of Tsh 1,200,000 for week vacation could
be supported by subordinate budget as Hotel Tsh.
700, 000; Restaurants 300,000 and Entertainment
200,000.
Without a subordinate budget to guide expenditures,
the Tsh 1.2M might last for few days because of
overspending.
6. Evaluation phase of budgeting
 Evaluation phase provides feedback for

reexamining short term goals and, if necessary, for

reclarifying long term goals.
 An individual financial values may be reaffirmed

or reorganized to fit one’s needs

 Although evaluation is an ongoing process, a

formal evaluation phase should occur at the end of

each budgeting process