Finance Chapter 3
what can provide information for your cash flow statement?
a checking account
real estate
a home, condo, vacation property,or other land that a family owns
mortgage
amount borrowed to buy a house or other real estate that will be repaid over 15, 20, or 30 years
liabilities
amounts owed to others
an alternative for a person in a state of insolvency?
bankruptcy
step 3 of the budgeting process
budgeting an emergency fund and savings
step 4 of the budgeting process
budgeting fixed expenses
step 5 of the budgeting process
budgeting variable expenses
how should you determine income?
by including money youre SURE you will receive
personal posessions
cars and other personal belongings (major portion of assets for most people). these may be harder to convert to cash
liquid assets
cash and items of value that can easily be converted to cash
assets
cash and other tangible property with a monetary value
the outflows?
checks written out to people
step 3 of the balance sheet
computing your net worth
2 types of liabilities
current and long term
market value means what
current value
money management
day to day financial activities necessary to manage current personal economic resources while working toward long term financial security
long term liabilities
debts you don't have to pay in full until more than a year from now. like auto loans, education loans, mortgages
current liabilities
debts you have to pay within a short time, usually in a year. include stuff like medical bills, insurance premiums, etc
negative
deficit
what makes up this part of the budget?
definite obligations, like life insurance
in the checking account, what would be the inflows?
deposits to the account
step 3 of cash flow statement
determine net cash flow
step 2 of a balance sheet
determining amounts owed
budget variance
difference between the amount budgeted and the actual amount received or spent
net worth
difference between your total assets and total liabilities
step 2 of the budgeting process
estimating income
variable expenses
flexible payments that change from month to month
investment assets
funds set aside for long term financial needs like financing their kids education
where are most financial records kept
home file, safe deposit box, or home computer
when does a deficit exist
if more cash goes out than comes in
insolvency
inability to pay debts when they are due
example of inflow
income from employment
income
inflows of cash for an individual or a household
net worth is not what?
it is not money available for use, it is an indication of your financial position
formula for net worth (your wealth)
items of value (what you own) - amounts owed (what you owe) = net worth
after establishing spending plan, what do you do?
keep records of your actual income and expenses, like an income statement
what should a home file be used for
keeping records of current needs and documents with limited value
step 1 of creating balance sheet
listing items of value
what do personal financial statements do?
measure progress, maintain info about financial activities
discretionary income
money left over after paying for housing, food, and other necessities
balance sheet also called what
net worth statement
example of outflow
payments for items like rent, food and loans
fixed expenses
payments that dont vary much month to month like rent or tv fees
personal financial statements: which 2 documents?
personal balance sheet and cash flow statement
cash flow statement also called what
personal income and expenditure statement
take home pay (net pay)
persons earnings after deductions for taxes and other items, also called disposable income
safe deposit box
private storage area at a financial institution with maximum security for valuables and hard to replace documents
step 2 of cash flow statement
record cash outcome
step 1 of cash flow statement
record income
step 6 of the budgeting process
recording spending amounts
Cash flow statement
records where your money is going
balance sheet
reports what an individual or a family owns and owes
step 7 of the budgeting process
reviewing spending and saving patterns
where should important financial records and valuable articles be kept? things like annual stock investment, contracts, list of insurance policies(more security than a home file)
safe deposit box
step 1 of the budgeting process
setting financial goals
budgeting helps with what
skilled money managing, live within your income, spend money wisely, etc
what EXACTLY is a liability?
something that you owe now, not something you may owe in the future
budget (spending plan)
specific plan for spending income
cash flow statement is what
summary of cash receipts and payments for a given period, such as a month or a year
positive
surplus
cash flow
the actual inflow and outflow of cash during a given time period
deficit
the amount by which actual spending exceeds planned spending
surplus
the amount by which actual spending is less than planned spending
what makes up this part?
things like food clothes etc, for many people this is where they spend the most
process for preparing a cash flow statement
total cash received during the time period - cash outflows during the time period = cash surplus or cash deficit (depending on spending)
money management should be what?
well planned, realistic, flexible and clearly communicated
net worth is what exactly
what you would have left if all your assets were sold for the listed values and all your debts were paid fully back
when does insolvency occur?
when a persons liabilities far exceed available assets
financial goals should
SMART acronym
example of a common budgeting period
1 month, since many payments are due monthly
3 major money management activities
1. store and maintain personal financial records and documents 2. create personal financial statements (balance sheets and cash flow statements of income and outflow) 3. creating and implementing a plan for spending and saving (budgeting)
experts suggest your emergency fund be for how long?
3-6 months, but if its unrealistic try having about 1 month