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Personal Finance Essay

3530 words - 15 pages

Foundations for Financial Success
Volume 1, Issue 1, March 3, 2011 TABLE CONTENTS

What is financial literacy and why is it important?
Financial literacy is the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being. More specifically, it refers to the set of skills and knowledge that allow an individual to make informed and effective decisions through their understanding of finances. Financial literacy involves a number of different areas of understanding. Learning about money and how it works is an important aspect, as well as understanding products like credit, loans, and investments. Competency in managing money ...view middle of the document...

This is why money alone does not make you rich." - Robert Kiyosaki

Newsletter Determining Where Your Money Goes Title
To determine where your money goes, you must be able to understand the importance of a personal cash flow statement, and the components needed to develop this tool. The cash flow statement outlines your total income and total expenses to demonstrate where your money is going and how much of it. This can help you control expenses. The potential benefits of examining your cash flow may lead to moderate spending, increased savings and investments, and peace of mind knowing that you are now in control. The merits of examining a cash flow statement will be illustrated in the following example. Once you have gone through Stephanie Spratt’s cash flow statement, you Example will realize how important it is to make sure your expenses are not exceeding your income. The best way to do this is by budgeting. In Stephanie Spratt’s case you will see how much her morning coffee can add up over the course of a month. You will also realize that making small, manageable changes in your everyday expenses can have just as big of an impact on your financial situation as getting a raise. Opportunity cost is a financial term which represents what you give up as a result of that decision. By spending money for a specific purpose, you sacrifice alternative ways that you could have spent the money and also sacrifice saving the money for a future purpose. In Stephanie Spratt’s example, purchasing a morning coffee every day at the cost of $3.25 per coffee added up to approximately $100 per month. She has given up the possibility of using that money to save toward next month’s deficiency.
“Net Cash flow = Total Income LESS Total Expenses”

Opportunity cost: what you give up as a result of a decision

Get involved in Personal cash flow statements
Let’s examine the following cash flow statement that Stephanie Spratt has provided. Stephanie Spratt wants to determine whether she will have sufficient funds this month to cover the additional expenses she will incur.  Car maintenance expenses are an additional $600 this month, primarily because Stephanie's car needs to have its brakes replaced. Figure 1 Cash Flow Statement demonstrates that LAST MONTH’s cash flow was a positive balance of $330.00, and THIS MONTH’s cash flow is a negative balance of $270.00. Therefore, Stephanie Spratt will not have sufficient funds to cover the additional expenses. How can Stephanie Spratt budget for this anticipated expense knowing that she has an additional $330.00 from last month’s cash flow? (refer to page 2)


Foundations for Financial Success, Volume 1, Issue 1, February 2011

` Budgeting Title Newsletter

Page 3

The next step in expanding your financial literacy the amount of excess cash that you will have availais to understand the budgeting process and how to allo- ble to plan an emergency fund, to invest in additioncate excess cash towards your...

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