Focus on Personal Finance: Chapter 2

1st step of personal balance sheet

*List Assets aka Items of Value* -cash & money in bank accounts (checking, savings/ money market accounts, and cash value of life insurance) - Real Estate at current market value (home, condo, vacation property, and any land owned) - Personal Possessions aka Total Personal Possessions (market value of car, furniture/appliances, stereo and video equipment, computer, and jewelry) -Investment Assets (retirement accounts and mutual funds- long term investment needs)

1st step for cash flow statements

*List Inflows*= Total Inflows -Salary aka Gross aka Earned Income- deductions/taxes (federal, state, and social security) - Dividend Income aka Distribution of Earnings to Shareholders aka Interest Earned from Savings - Interest Income aka Passive Income

2nd step of personal balance sheet

*List all Liabilities* - Current Liabilities (medical bills, credit card/ charge account balances, balance due on auto loan) - Long- Term Liabilities (mortgage, home improvement loans, student loans)

Debt Ration

Liabilities divided by net worth - low ratio debt is best

Debt- Payments Ratio

Monthly credit payments divided by take home pay - less than 20% is best

3 Places to Store Important Records

Safe deposit box: Max security storage area away from home.

Cash Flow Statement aka Personal Income aka Expenditure Statement

Statement that summarizes cash receipts and payments for a given period. Tells you what you've received and spent. Total Cash Received- Cash Outflows= Cash Surplus (positive amount) aka Deficit (negative amount)

Cash flow

the actual inflows and outflows of cash during a given period

2nd step for cash flow statements

* List Cash Outflows (cash payments for living expenses)= Total Outflows - Savings & Investments - Fixed Outflows/ Installments- things we must pay (taxes, mortgage payment, car payment, and insurance premiums) - Variable Outflows- things you can control (food/ eating out, transportation, clothing/personal care, entertainment/vacations, medical/dental, utilities/household expenses, credit card payments, and miscellaneous)

3rd step of personal balance sheet

*Calculating Net Worth* Assets- Liabilities

Types of income

- money from a job - self-employment income/ commissions - interest - dividends - gifts - grants/ scholarships - government payments - retirement income - alimony/ child support

How to increase net worth?

1. Increase Savings 2. Reduce Spending 3. Increase Investments and Possessions 4. Reduce Amounts Owed

Steps to creating a Cash Flow Statement

1. Record income 2. Record Cash Outflows 3. Determine Net Cash flow

What are the 7 steps of the budgeting process?

1. Set financial goals 2. Estimate income 3. Budget Emergency Fund and Savings 4. Budget Fixed Expenses 5. Budget Variable Expenses 6. Record Spending Amounts 7. Review Spending and Savings Patterns aka Budget Variances ( revise if needed)

Intermediate Goals

2-5 years

Long term goals

5+ years

Goal revision techniques

Buy used, spend less on entertainment and food, pack a lunch, avoid buying on credit, buy less expensive brands

Liquid assets

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

Liquid Assets

Cash and items of value that can easily be converted to cash. (ex. checking & savings/money market account)

Assets

Cash and other property with a monetary value

Money management

Day to day financial activities necessary to manage current personal economic resources while working toward long-term financial security

Savings Techniques

Deposit a specific amount each payday into an account not readily accessible, payroll deduction, save coins, and cut down on spending

Take home pay/Disposable income/Gross Income

Earnings after deductions for taxes and other items.

How do you calculate total outflows?

Fixed Outflows+ Variable Outflows+ Savings= total outflows

Budget Variance

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

Insolvency

The inability to pay debts when they are due because liabilities far exceed the value of assets

How can someone have financial difficulties with a high net worth?

The person has low liquidity and can doesn't have cash available to pay current expenses.

How do you calculate the Net Inflow aka Discretionary Income?

Total Inflows- Total Outflows= Net Inflow/ Discretionary Income

How to Calculate Savings Amounts

Use time value of money calculations. Be sure you have set specific amounts in your goals for savings

Short term goals

Within a year

Budget aka Spending Plan

a specific plan for spending income or planning spending and saving to achieve financial goals

What are three investments?

- Mutual Fund(stock) - IRAs - 401K

Personal Balance sheet aka Net Worth Statement aka Statement of Financial Position

A financial statement that reports what an individual or a family owns or owes; also called a net worth statement or statement of financial position. - reports your current financial situation

Savings Ratio

Amount saved each month divided by gross income - 5 to 10%

Current Ratio

Liquid assets divided by current liabilities - high ratio is best

Personal Computer System

budgets, checks written, income tax returns, account summaries, wills, estate plans, receipts and other scanned financial documents.

Long-term liabilities

debts that don't need to be paid in full more than a year from now (long-term) - mortgage - home improvement loan - student loans

Current liabilities

debts that must be paid within a year (short-term) -medical bills -credit card/ charge account balances -auto loan

What are three examples of taxes?

federal, state, and social security

Income/ Cash Inflows

inflows of cash for an individual or a household

What is an example of take-home pay/ net pay/ disposable income?

paycheck (after taxes) - 5% for people under 25 - 40% for people older

Home File

personal and employment records, tax records, credit records, housing records, investment records, money management records, financial services records, consumer purchase and automobile records, insurance records, estate planning and retirement records.

Payroll Deductions

available at place of employment, using direct deposit- where an amount is automatically deducted from your salary to desired account

Good vs bad assets

Good assets grow over time while bad assets just depreciate. The best kind grow as well as generate cash.

Good vs. bad debt

Good debt is something like education expenses, business expenses , and purchasing a home. Things that will either grow in value or help you to earn money in the future while bad debt is everything else. Credit cards, cars, and other expensive items still being paid off.

Systems for Personal Financial Records

Good for planning and measuring financial progress as well as handling daily business activities. Also good for making tax reports and financial investment decisions.

How do you calculate a personal balance sheet aka Net Worth Statement aka Statement of Financial Position?

Items of Value(what you own) - Amounts Owed (what you owe)= Net Worth (wealth)

Liquidity Ratio

Liquid assets divided by monthly expenses - high ratio is best

Discretionary Income

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