2.2.3.F1 Statement of Financial Posi

2.2.3.F1

Statement of Financial Posi on

Advanced Level

Meet Ian and Mitchell. Ian has an income of $30,000 per year and a net worth of $50,000. Mitchell has an income of $85,000 per year and a net worth of $35,000.

Who do you think is wealthier, Ian or Mitchell? Why?

Who is wealthier?

Ian

Mitchell

Income

$30,000 $85,000

Net Worth $50,000 $35,000

Statement of Financial Posi on

Net worth is a measure of financial wealth and indicates the monetary value of all possessions that a person or household owns, minus the total amounts owed to others.

Net Worth

Wealth

Net worth is different than income. Income is money received such as wages earned from working for pay. A person can have a high income and low net worth and vice versa. If a person spends all money received and does not save

and/or invest any money, they may have low net worth (no ma er how high their income).

How do you determine your net worth? Net worth is calculated using the Statement of Financial Posi on. A Statement of Financial Posi on is a financial statement that describes an individual or family's financial condi on on a specified date by showing assets, liabili es and net worth. A Statement of Financial Posi on is similar to a balance sheet made for businesses but is designed for individuals, families, and/or households. In fact, you may be asked to create a Statement of Financial Posi on at some point in your life by a financial advisor, loan officer, accountant, etc.

Assets

Assets are items of monetary value that a person or household owns. Assets can be divided into three categories: monetary, tangible and investment. Monetary assets are assets that can be quickly and

easily converted into cash. This includes any cash you have on hand plus money in checking and savings accounts.

? Take Charge Today ? August 2013 ? Statement of Financial Posi on ? Page 1 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Ins tute at The University of Arizona

Assets, con nued

2.2.3.F1

Tangible assets (also known as use or lifestyle assets) are personal property items such as a home, an automobile, electronics, furniture and any other personal property used to create a lifestyle or to improve your life.

The value of tangible assets can change over me. For example, over the course of a year some of your tangible assets will increase in value while others may decrease in value. The relevant value for the Statement of Financial Posi on is the current market value of each item listed. The market value is the amount for which you could realis cally sell the asset today, not what you originally paid for it.

There are resources that can help you determine the market value. Some website tools es mate the market value of automobiles. For example, Derek purchased a car two years ago for $12,000. He used a website to determine that the current market value of his car was $8,500. He should record $8,500 on his Statement of Financial Posi on. To determine the market value of less expensive assets, such as electronics or furniture, your research could include websites such as Amazon, eBay and Craigslist. These websites and others specialize in selling new and used items.

Investment assets are 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. Investment assets include re rement accounts, stocks, bonds, mutual funds and other forms of financial investments.

What assets do you own?

Liabili es

A liability is a debt or obliga on owed to others. Examples of liabili es include the balances on your automobile loan and credit cards, student loan debt and other amounts you've promised to pay back to others.

Liabili es should be recorded in the liabili es sec on of your Statement of Financial Posi on. When recording the amount for each liability, indicate the amount necessary to pay off the loan in full today. For example, suppose you have an automobile loan that has a remaining balance of $5,490. You s ll have 35 months of payments le before the loan is paid in full. If you were to con nue making your scheduled monthly payments of $180 including interest owed, you would have paid a total of $6,300 over that 35 month period. But because a Statement of Financial Posi on is based on a specific date, you would record what you owe today, which is $5,490, not the total payments equaling $6,300.

It is important to note that liabili es are not expenses. A liability is a debt. The payment you make to pay back the debt is an expense. So, for example, your car loan is a liability and the monthly payment to repay the car loan is an expense.

Do you have any liabili es?

? Take Charge Today ? August 2013 ? Statement of Financial Posi on ? Page 2 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Ins tute at The University of Arizona

Net Worth

2.2.3.F1

Once you have determined the value of all your assets and liabili es, subtract the total liabili es from the total assets to determine your net worth:

Assets

Liabili es

Net Worth

Net worth is like your personal financial thermometer. It provides you with a number that can measure your "financial temperature." What do you want your financial temperature to be? The amount of desired wealth varies from person to person. For some, desired wealth is defined as having enough net worth to maintain a comfortable lifestyle during re rement. For others, it is having enough to feel a sense of sa sfac on with their financial well-being. Determine what amount of net worth you desire and then set goals to reach that amount.

Crea ng a Statement of Financial Posi on

Your present self impacts your future self

As you plan for your financial future, determine your net worth by crea ng a Statement of Financial Posi on. Research shows that individuals have a tendency to believe they owe less than they actually do or own more than they actually do. To avoid falling into this trap, a wri en Statement of Financial Posi on gives you a tangible record to refer to and helps you set financial goals. Use any wri en method that works for you (by hand, a spreadsheet, etc.). To increase your net worth, increase your assets, decrease your liabili es, or work on a combina on of both.

Annual updates of your Statement of Financial Posi on are a good idea. If you are making major decisions such as to purchase a house or an automobile, create a statement more o en. This will help you to keep your net worth in mind when making financial decisions, especially when taking on more liabili es. Before you commit to a loan, ask yourself whether you could you use money gained from selling off an asset instead of taking out a loan? Could you decrease the amount of the loan by purchasing a less expensive item? Remember that the choices you make today will affect your financial future.

In addi on to the Statement of Financial Posi on, there are two other money management tools that help evaluate your past, present and future financial decisions. They are the Income and Expense Statement and the Spending Plan. These three money management tools work together to help you objec vely evaluate your financial situa on and work towards reaching the net worth level you desire.

? Take Charge Today ? August 2013 ? Statement of Financial Posi on ? Page 3 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Ins tute at The University of Arizona

Page | 13 2.2.3.L1

Statement of Financial Position Note Taking Guide

Total Points Earned Total Points Possible Percentage

Name Date Class

Statement of Financial Position for:

Date:

Assets

Monetary assets

Cash on hand

Value of checking account and savings account

Other:

Subtotal of monetary assets

$

Tangible Assets

Market value of home

Market value of household furnishings

Market value of automobile

Market value of electronics

Market value of clothing

Other:

Subtotal of tangible assets

$

Investment Assets

Value of investments

Other:

Subtotal of investment assets

$

Total Assets

$

Liabilities

Home mortgage balance

Installment loan balance for automobile

Student loan balance

Credit card balance

Money owed to others

Other:

Total Liabilities

$

Net Worth = Total Assets - Total Liabilities

$

What is net worth? What is wealth?

What is the Statement of Financial Position?

Circle where assets are located on the Statement of Financial Position. What is an asset?

Place a star next to where monetary assets are located on the Statement of Financial Position. What is a monetary asset?

Place a star next to where tangible assets are located on the Statement of Financial Position. What is a tangible asset?

Place a star next to where investment assets are located on the Statement of Financial Position. What is an investment asset?

Circle where liabilities are located on the Statement of Financial Position. What is a liability?

Circle where net worth is located on the Statement of Financial Position. How is net worth calculated?

? Take Charge Today ? August 2013 ? Statement of Financial Position Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona

How can you increase net worth?

Net Worth

Page | 14 2.2.3.L1

What three money management tools work together to help you manage your money, and therefore, increase net worth?

Why should you keep your net worth in mind when making financial decisions?

1. __________ ____________

2. __________ 3. __________ ____________ ____________

What is my financial position

____________?

How have I managed my money in the

__________?

What is my

_____________ money

management plan?

The Statement of Financial Position

How often is it recommended to create a Statement of Financial Position?

What are the benefits of writing down a Statement of Financial Position versus only "thinking" about it?

? Take Charge Today ? August 2013 ? Statement of Financial Position Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona

Page | 15 2.2.3.A2

Tori's Statement of Financial Position

Total Points Earned Name

26 Total Points Possible Date

Percentage Class

Step One:

Tori is considering purchasing a new pre-owned car. In order to help make a decision she would like to know her net worth. Use the information provided in the table below to create a Statement of Financial Position for Tori. (10 points for completion)

Tori is 21 years old

Works part-time to earn $13,000 per year

Owns a car that runs fine but would like an upgrade Has $1,000 in her checking account Keeps $2,000 in her savings account for emergencies Bought a laptop computer when she started school but estimates that it is only worth $200 Invests $20 per month into a retirement account that is currently worth $500

Completing training to be a radiology technician and has one semester left Owes $5,000 in student loans that helped pay for her training Used a website to determine the market value of her current car is $3000 Keeps $20 in cash in her wallet at all times Rents a one bedroom apartment and owns $1,000 worth of furniture and other household supplies Loves to shop and estimates that she owns $1,500 worth of clothes and shoes

Step Two:

Tori would like to trade in her car for a new pre-owned car priced at $12,000. She would receive $2,000 trade-in value on her car making the purchase price of the new car $10,000. She will use $1,000 from her emergency savings and apply for a loan for the remaining $9,000. Create a new Statement of Financial Position for Tori if she were to purchase the new car. (10 points for completion)

Step Three: Use Tori's Statements of Financial Position to answer the questions below. 1. What is Tori's current net worth? (1 point)

2. What would her net worth be if she purchased the new car today? (1 point)

3. Based upon Tori's Statements of Financial Position, would you recommend that she purchase the new car? Why or why not? Make sure to consider what trade-offs she will have to make with both options. (2

points)

4. How could Tori increase her current net worth? (1 point)

5. Tori has chosen to use student loans to help her pay for training to become a radiology technician. This has lowered her current net worth, but what impact may it have on her future net worth? (1 point)

? Take Charge Today ? August 2013 ? Statement of Financial Position Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona

Statement of Financial Position for: Tori Date:

Monetary assets Cash on hand Value of checking account Value of savings account Other: Subtotal of monetary assets Tangible Assets Market value of home Market value of household furnishings Market value of automobile Market value of electronics Market value of clothing Market value of jewelry Market value of sporting goods Other: Subtotal of tangible assets Investment Assets Value of investments Other: Subtotal of investment assets Total Assets

Home mortgage balance Loan balance for automobile Student loan balance Personal loan balance Credit card balance Money owed to others Other: Total Liabilities Net Worth = Total Assets - Total Liabilities

Assets Liabilities

Page | 16 2.2.3.A2

Current:

If she purchased a new car:

$

$ $ $

$ $

? Take Charge Today ? August 2013 ? Statement of Financial Position Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona

Page | 22 2.2.3.A6

Ed and Mary's Statement of Financial Position

Total Points Earned 15 Total Points Possible

Percentage

Name Date Class

As retirement grows near, Ed and Mary are more and more anxious about their financial position. They worked hard for many years and saved quite a bit of money, but they aren't sure they have planned well enough to meet their financial needs during retirement. Their financial advisor has encouraged them to take a serious look at their finances by creating a Statement of Financial Position for October 15. Use the information below to help Ed and Mary complete this task. (10 points for completion)

As Mary and Ed look through their information, they see both positive and negative factors that contribute to their financial position. Their home was just appraised at $215,000, on which they owe only $18,000. They have $37,500 in their savings account. Other positives included their $12,000 in stocks, a balance of $2,250 in a joint checking account and $3,000 in other savings tools. Their individual retirement accounts total $230,500, and they own fifty acres of land that is valued at $48,000. They also own two vehicles, one valued at $12,000 and the other at $8,000. Items the couple owns include a computer, worth $500, a television worth $400, and antiques valued at $7,000. They also own furniture that is worth approximately $12,000. Mary inherited jewelry that is valued at $3,000, and Ed has a collection of hunting rifles valued at $5,300.

Although it would appear that Ed and Mary are well off financially, there are additional factors to consider when evaluating their net worth. They took out a home improvement loan a few years back and still owe $27,500 to pay that in full. The couple has three credit card balances, for a grand total of $14,300. They owe $4,000 and $8,000 for their vehicles, and another $8,000 for the fifty acres of land.

Using the template provided, complete Ed and Mary's Statement of Financial Position. When the statement is complete, analyze the statement to answer the questions below about Ed and Mary's overall "financial temperature." 1. Would you describe Ed and Mary's current financial position as good, average, or poor? Provide two specific examples to support your position. (3 points)

2. What are two specific steps Ed and Mary could take to increase their net worth in the next year? (2 points)

? Take Charge Today ? August 2013 ? Statement of Financial Position Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download