PFCH2

Calculating Savings Amount

1. Convert savings goals into specific amounts 2. Use savings and investment plans to grow your money. 3. Use time value of money to calculate progress toward financial goals.

What are the 3 Components of Money Management activities?

1. Storing and maintaining personal financial records and documents. 2. Creating personal financial statements 3 Creating and implementing a plan for spending and saving (budgeting).

Copies of tax returns should be kept for at least...

7 years.

Current Ratio

A high current ratio is desirable to have cash available to pay bills. Liquid assets ➗ Current Liabilities.

Safe Deposit Box

A private storage area at a financial institution with maximum security for valuables.

Budget

A specific plan for spending income; also called a Spending Plan.

How long to keep records on property and investments?

As long as you own these items.

The Crown family has a difficult time staying on a budget. In an effort to actually see what funds are available for various expenses, a ____________ budget would be most appropriate. A) written B) computerized C) physical D) deficit E) mental

C) physical

Which of the following situations is a person who could be insolvent? A) Assets $56,000; annual expenses $60,000 B) Assets $78,000; net worth $22,000 C) Liabilities $45,000; net worth $6,000 D) Assets $40,000; liabilities $45,000 E) Annual cash inflows $45,000; liabilities $50,000

D) Assets $40,000; liabilities $45,000

Which of the following payments would be considered a variable expense? A) Rent B) An installment loan payment C) A mortgage payment D) A monthly parking fee E) A telephone bill

E) A telephone bill

Items with a monetary worth are referred to as A) liabilities. B) variable expenses. C) net worth. D) income. E) assets.

E) assets.

Liquidity Ratio

Indicates the number of months in which living expenses can be paid if an emergency is arises; a high Liquidity Ratio is desirable. Liquid Asset ➗Monthly Expenses.

Is Jewelry a Liquid Asset?

Jewelry is not a Liquid Asset.

How long to keep birth certificates?

Permanently.

During the past month, Jennifer Ernet had income of $3,000 and a decrease in net worth of $200. This means Jennifer's payments for the month were A) $3,200. B) $3,000. C) $2,800. D) $200.

A) $3,200.

A family with $45,000 in assets and $22,000 of liabilities would have a net worth of A) $45,000. B) $23,000. C) $22,000. D) $67,000. E) $41,000.

B) $23,000.

A personal balance sheet presents A) amounts budgeted for spending. B) income and expenses for a period of time. C) earnings on savings and investments. D) items owned and amounts owed. E) family financial goals.

D) items owned and amounts owed.

Selecting a Budgeting System

Mental Budget - Appropriate if Financial resources and responsibilities are limited. Physical Budget - Envelopes, folders, or containers. Written Budget - On paper. Computerized Budget - Spreadsheet or specialized software.

Debt Ratio

Shows relationship between debt and net worth; a low Debt Ratio is Best. Liabilities ➗ Net Worth.

Net Worth

Total Assets - Total Liabilities

Most Americans have an adequate savings for emergencies.

False

Liabilites

Amounts owed to others

A decrease in net worth would be the result of A) income greater than expenses for a month. B) expenses greater than income for a month. C) assets greater than expenses. D) increased earnings on the job. E) income and expenses equal for a month.

B) expenses greater than income for a month.

Helps you: - Live within your Income - Spend Money Wisely - Reach Financial Goals - Prepare for Financial Emergencies - Develop wise Financial Management habits

Budget

Current liabilities differ from long-term liabilities based on : A) the amount owed. B) the financial situation of the creditor. C) the interest rate charged. D) when the debt is due. E) current economic conditions.

D) when the debt is due.

Definite financial obligations are referred to as variable expenses.

False

Is home equity a liquid asset?

No.

A person's lifestyle is a reflection of his or her values, goals, career, and family situation.

True

A person's net worth is the difference between the value of the items owned and the amounts owed to others.

True

A broker statement is an example of a(n) ____________ record. A) investment B) insurance C) estate planning D) tax E) consumer purchase

A) investment

A person's net worth would increase as a result of A) reduced amounts owed to others. B) reduced earnings. C) increased spending for current living expenses. D) decreased value of personal possessions. E) decreased value of investments.

A) reduced amounts owed to others.

The current financial position of an individual or family is best presented with the use of a(n) A) budget. B) cash flow statement. C) balance sheet. D) bank statement. E) time value of money report.

C) balance sheet.

When it comes to savings, most Americans A) have an adequate emergency fund. B) use several different savings techniques. C) find saving difficult. D) keep substantial amounts in a regular savings account. E) reduce the amount they save during their working life.

C) find saving difficult.

Which of the following presents a summary of income and outflows for a period of time? A) A balance sheet B) A bank statement C) An investment summary D) A cash flow statement E) An asset report

D) A cash flow statement

An example of a long-term goal for a young couple may be : A) a new car. B) reduction of amounts owed on credit cards. C) increased savings. D) income for retirement. E) funds for a vacation.

D) income for retirement.

Parent (young children)

Short-Term Goals (Less than 2 years) - Increase life insurance - Increase savings Intermediate Goals (2-5 years) - Increase investments - Buy a new car Long-Term Goals (over 5 years) - Accumulate a college fund for children - Move to a larger home

Payments that do not vary from month to month are ____________ expenses. A) fixed B) current C) variable D) luxury E) budgeted

A) fixed

A budget deficit would result when a person's or family's A) actual expenses are less than planned expenses. B) actual expenses are greater than planned expenses. C) actual expenses equal planned expenses. D) assets exceed liabilities. E) net worth decreases.

B) actual expenses are greater than planned expenses.

A cash flow statement reports a person's or a family's A) net worth. B) current income and payments. C) plan for spending. D) value of investments. E) balance of savings.

B) current income and payments.

Ben Chase needs to pay off some of his debts over the next few months. Which item on his balance sheet would help him decide what amounts are due in the near future? A) The budget variance B) Investment assets C) Long-term liabilities D) Current assets E) Current liabilities

E) Current liabilities

Total earnings of a person less deductions for taxes and other items is called A) budgeted income. B) gross pay. C) net worth. D) total revenue. E) take-home pay.

E) take-home pay.

Take-home Pay

Earnings after deductions for taxes and other items; also called Disposable Income.

Cash Surplus (or Deficit) Ratio

Total Inflows - Total Outflows

"Pay yourself first" is an attitude that can assure building savings for the future.

True

Ways to Increase Net Worth

- Increase Savings - Reduce spending - Increase the value of investments and other possessions. - Reduce Amounts owed

What are the Characteristics of Successful Budgeting?

- Well Planned - Realistic - Flexible - Clearly Communicated

Money Management and Achieving Financial Goals

1. Your Balance Sheet: Snapshot of where you are now 2. Your Cash Flow Statement: What you received and spend over a specific period. 3. Your Budget: Planning spending and saving achieve financial goals.

Assets minus Liabilities Equals?

= Net Worth

What are the main components of a personal balance sheet and a cash flow statement? What is the main purpose of each of these personal financial statements?

A balance sheet reports the current financial position of an individual or family; it includes assets, liabilities, and net worth. A cash flow statement is designed to report the actual inflow and outflow of cash during a given time period for a person; it includes current income and cash payments.

Balance Sheet

A financial statement that reports what an individual or family owns and owes: also called net worth statement or statement of financial position.

Liabilities are amounts representing: A) debts. B) items of value. C) living expenses. D) taxable income. E) current assets.

A) debts.

Discretionary Income

Money left over after paying for housing, food, and other necessities.

Income

Money received, especially on a regular basis, for work or through investments.

How long to keep social security data?

Permanently.

When one money management decision is selected, something else must be given up.

True

Records in Your Home File

1 Personal and Employment records 2 Money management records 3 Tax records 4 Financial services records 5 Credit records 6 Consumer purchase and auto records 7 Housing records 8 Insurance records 9 Investment records 10 Estate planning and retirement records

Rule of thumb when saving money for an emergency fund is to set aside:

3-6 months of living expenses.

How long to keep copies of tax data?

7 Years.

Items of Value minus ( - ) Amount Owed (what you own) (what you owe)

= Net Worth (your wealth)

Diane Rossiter lives with her two sons, ages 6 and 9. They have had difficulty managing their finances. What purposes could a budget serve for the Rossiters? What actions would you suggest for the budgeting process to be successful?

A budget can help a person or family live within their income, spend money wisely, reach financial goals, prepare for financial emergencies, and develop wise financial management habits. A successful budget should be well-planned, realistic, flexible, and clearly communicated.

What types of financial records and documents should be kept in a Safe-Deposit Box?

A safe-deposit box should be used to store financial records that are difficulty to replace and that are not needed on a day-to-day basis. Examples of items stored in a safe-deposit box include Birth, marriage and death certificates, citizenship papers, stock certificates, contracts, insurance policies, a record of personal belongings, mortgage papers, rare coins, collectibles, and other rare and valuable items.

Changes in the cost of living are A) different in various geographic areas. B) the same for different locations. C) constant from month to month. D) the same for all goods and services. E) not a factor when preparing a budget.

A) different in various geographic areas.

If a family planned to spend $370 for food during March but only spent $348, this difference would be referred to as a A) surplus. B) deficit. C) fixed living expense. D) budget reduction. E) contribution to net worth.

A) surplus.

Cash Flow Statement

Also called Personal Income and Expenditure Statement. A financial statement that summarizes cash receipts and payments for a given period.

Which of the following would be considered a long-term liability? A) A charge account payment B) A mortgage C) An installment loan D) An amount due for taxes E) The amount due on a credit card

B) A mortgage

Which of the following are considered to be personal financial statements? A) Budget and credit card statements B) Balance sheet and cash flow statement C) Checkbook and budget D) Tax returns E) Bank statement and savings passbook

B) Balance sheet and cash flow statement

Liquid assets refer to: A) amounts that must be paid soon. B) items that are easily converted to cash. C) total income available to a family for spending. D) the value of investments. E) amounts on which taxes must be paid.

B) items that are easily converted to cash.

Items of value less amounts owed to others equals A) net assets. B) net worth. C) total liabilities. D) total income. E) budgeted expenses.

B) net worth.

A common deduction from a person's paycheck is for A) interest. B) taxes. C) rent. D) unemployment. E) current liabilities.

B) taxes.

Gerard Pique wants to reduce his fixed expenses. What action would be appropriate? A) Get a part-time job B) Eat more meals at home than in restaurants C) Find a place to live with a lower rent D) Save more money for the future E) Buy on credit for items than might cost more later

C) Find a place to live with a lower rent

An example of a personal and employment document is a : A) budget. B) passbook. C) Social Security card. D) property tax bill. E) lease.

C) Social Security card.

The payment items that should be budgeted first are A) variable expenses. B) investment funds. C) fixed expenses. D) unplanned living expenses.

C) fixed expenses.

Improvements in a person's financial position are the result of A) increased liabilities. B) reductions in earnings. C) increased savings and investments. D) increased purchases on credit. E) lower amounts deposited in savings.

C) increased savings and investments.

An individual retirement account is an example of a(n) ____________ asset. A) liquid B) common C) investment D) household E) budgeted

C) investment

A person's net worth is computed by A) adding assets and liabilities. B) deducting current living expenses from total assets. C) subtracting total liabilities from total assets. D) subtracting assets from current liabilities. E) adding liabilities and budgeted expenses.

C) subtracting total liabilities from total assets.

Liquid Assets

Cash and items of value that can easily be converted to cash

Assets

Cash and other property with a monetary value

To determine a person's solvency, which financial document should be consulted? A) Cash flow statement B) Budget C) Debt consolidation statement D) Balance sheet E) Credit report

D) Balance sheet

The difference between the amount budgeted and the actual amount is called a A) financial plan. B) current liability. C) change in net worth. D) budget variance. E) variable living expense.

D) budget variance.

Which of the following financial documents would most likely be stored in a safe-deposit box? A) W-2 forms B) personal financial statements C) warranties D) savings certificates E) checking account statements

D) savings certificates

Opportunity cost refers to: A) current spending habits. B) changing economic conditions that affect a person's cost of living. C) storage facilities to make financial documents easily available. D) trade-offs associated with financial decisions. E) avoiding the use of consumer credit.

D) trade-offs associated with financial decisions.

Darlene Elkin has the following financial amounts: checking accounts $850, savings account $3,500, credit card balance $300, jewelry $1,600, real estate valued at $78,000, a mortgage on the restate of $23,000. What is the total of Darlene's assets? What actions could she take to increase her net worth?

Darlene's total assets amount to $83,950. For Darlene to increase her net worth, she should increase her income, decrease her living expenses, increase the amount in savings, or reduce amount owed.

Money Management

Day to day financial activities necessary to manage current personal economic resources while working toward long term financial security. Daily spending and savings decisions are central to financial planning - Must be coordinated with needs, goals, and personal situations.

Long-Term Liabilities

Debts that are not required to be paid in full until more than a year from now.

Current Liabilities

Debts that must be paid within a short time, usually within a year.

Warranties are commonly associated with ____________ purchases. A) investment B) insurance C) credit D) financial service E) consumer

E) consumer

A major expenditure for most families is A) insurance. B) contributions. C) clothing. D) utilities. E) transportation.

E) transportation.

A budget is a record of how a person or family has spent their money.

False

A personal balance sheet reports your income and expenses.

False

Financial records that may need to be referred to on a regular basis should be kept in a safe-deposit box.

False

Furniture, jewelry, and an automobile are examples of liquid assets.

False

If expenses for a month are greater than income, an increase in net worth will result.

False

Medical expenses, clothing, and telephone are examples of fixed expenses.

False

Money management activities refers to long-term investment decisions.

False

Most income tax documents and records should be kept in a safe-deposit box.

False

Opportunity costs are only associated with money management decisions involving long-term financial security.

False

Debt-payment Ratio

How much of a person's earnings goes for debt payments (Excluding Home Mortgage); most financial advisers recommended a Debt-payment Ratio of less than 20%. Monthly Credit Payments ➗Take-home Pay

Are retirement accounts liquid assets?

No.

What a System for Personal Financial Records do:

Provides a basis for: 1 Handling daily business affairs, such as bill paying. 2 Planning and measuring financial progress. 3 Completing required tax reports. 4 making effective investment decisions. 5 Determining available resources for current and future buying.

Single Person

Short-Term Goals (Less than 2 years) - Complete College - Pay off auto loan Intermediate Goals (2-5 years) - Take a vacation to Europe - Pay off education loan - Attend graduate school Long-Term Goals (over 5 years) - Buy a vacation home in the mountains - Provide for retirement income

Married Couple (no children)

Short-Term Goals (Less than 2 years) - Take an annual vacation - Buy a new car Intermediate Goals (2-5 years) - Remodel home - Build a stock portfolio Long-Term Goals (over 5 years) - Buy a retirement home - Provide for retirement income

Plan for Effective Budgeting

Step 1: Set Financial Goals Step 2: Estimate Income Step 3: Budget and Emergency Fund and Savings Step 4: Budget Fixed Expenses Step 5: Budget Variable Expenses Step 6: Record Spending Amounts Step 7: Review Spending and Saving Patterns - Review Financial Progress - Revise Goals and Budget Allocations

SWOT Analysis

Strengths Weaknesses Opportunities Threats

Cash Flow

The Actual inflow and outflow of cash during a given time period.

Insolvency

The Inability to pay debts when due because liabilities far exceed the value of assets

Deficit

The amount by which actual spending exceeds planned spending.

Surplus

The amount by which actual spending is less than planned spending.

Budget Variance

The difference between the amount budgeted and the actual amount received or spent.

Net Worth

The difference between total assets and total liabilities. Measurement of current financial position Net Worth ≠ Cash Availalble

A personal cash flow statement can serve as the basis for the budget categories used by an individual or family.

True

A personal cash flow statement presents income and outflows of cash for a given time period, such as a month.

True

Current liabilities are amounts that must be paid within a short period of time, usually less than a year.

True

If budgeted spending is less than actual spending, this is referred to as a deficit.

True

Insolvency is a result of having more liabilities than assets.

True

Personal records include birth certificate, marriage license, and social security card.

True

Take-home pay is a person's earnings after deductions for taxes and other items.

True

What types of financial records and documents should be kept in a Computer?

- Current and past budgets - Summary of checks written and other banking transaction - Past Income Tax returns - Account summaries, performance results of investments - Digital versions of wills, estate plans and other documents.

Selecting a Saving Technique

1. Write a check each payday or electronic transfer and deposit in a savings account. 2. Use payroll deduction to deposit a certain amount in savings (direct deposit). 3. Save coins or spend less on certain items.

Money management refers to: A) preparing personal financial statements. B) day-to-day financial activities. C) trade-offs that occur with financial decisions. D) storing financial records for easy access. E) spending money on current living expenses.

B) day-to-day financial activities.

A home file should be used for : A) storing all financial documents and records. B) financial records for current needs. C) documents that require maximum security. D) obsolete financial documents. E) records that are difficult to replace.

B) financial records for current needs.

Asset

Cash and other tangible property with monetary value.

Savings Ratio

Financial experts recommend monthly savings of 5%-10%. Amount Saved each Month ➗Gross Income

How long to keep documents related to the purchase and sale of real estate?

Indefinitely

Components of a Balance Sheet

Step 1 - List Items of Value - Liquid Asset - Real Estate - Personal Possessions - Investment Assets Step 2 - Determine Amounts Owed - Current Liabilities (<1 year) - Long-term Liabilities Step 3 - Compute your Net Worth Assets - Liabilities = Net Worth Assets = Liabilities - Net Worth