Finance 8 Personal Finance - Ch 2 Money Management Skills - Focus on Personal Finance - McGraw Hill 5 edition

Brenda plans to reduce her spending by $50 a month. What would be the future value of this reduced spending over the next 10 years? (Assume an annual deposit to her savings account, and an annual interest rate of 3 percent.) And which table would you use?

50 x 12 = 600 x 11.464 = 6,878.40 Future Value of $1 paid in at the end of each period for a given number of time periods (an Annuity)

Assets

Cash and other property with a monetary value.

Current Ratio

Current Ratio = Liquid Assets / Current Liabilities (High ratio is best to have cash available to pay bills.)

Liquidity Ratio

Liquidity Ratio = Liquid Assets / Monthly Expenses (Indicates the # of months in which living expenses can be paid in an emergency. High ratio is best.)

Discretionary Income

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

Fixed Expenses

Payments that do not vary from month to month. i.e. Rent, mortgage payment, installment loan payments.

What are the main purposes of personal financial statements?

1 Report your current financial position 2 Measure your progress toward financial goals 3 Maintain information about your financial activities 4 Provide data for preparing tax forms or applying for credit

Kara George received a $5,000 gift for graduation from her uncle. If she deposits this in an account paying 3 percent, what would be the value of this gift in 12 years? And which table would you use?

5,000 x 1.426 = $7,130.00 Future Value of $1 after a given number of time periods

Balance Sheet

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

How does a person's life situation affect goal setting and amounts allocated for various budget categories?

A person's life situation, family situation and financial needs, age, marital status, number and age of house household members, employment situations and values affect goal setting and plans for spending based on needs.

Cash Surplus/Deficit

Cash Surplus/Deficit = Total Inflows - Total Outflows.

Take-Home Pay

Earnings after deductions for taxes and other items; also called disposable income.

Indicate if the item is a FIXED or a VARIABLE expense - Cable Television

Fixed

Indicate if the item is a FIXED or a VARIABLE expense - Health Insurance Premium

Fixed

The future value of saving $1,800 a year for five years at an annual interest rate of 5 percent.? Which table would you use and what would be the value?

Future Value of $1 paid in at the end of each period for a given number of time periods (an Annuity) 1,800 x 5.526 = $9,946.80

Income

Inflows of cash to an individual or a household

The present value of a $2,000 savings account that will earn 3 percent interest for four years. Which table would you use and what is the value?

Present Value of $1 to be received at the end of a given number of time periods 2,000 x .885 = $1,770.00

Indicate if the item is a FIXED or a VARIABLE expense - Auto Repairs

Variable

Identify as an asset (A), liability (L), cash inflow (CI), or cash outflow (CO) - Automobile Loan

Cash Outflow

Identify as an asset (A), liability (L), cash inflow (CI), or cash outflow (CO) - Electric Bill

Cash Outflow

Net Worth

The differences between total assets and total liabilities.

Indicate if the item is a FIXED or a VARIABLE expense - Electricity

Variable

Cash Flow Statement

A financial statement that summarizes cash receipts and payments for a given period; also called a personal income and expenditure statement.

Budget

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

Liabilities

Amounts owed to others

Identify as an asset (A), liability (L), cash inflow (CI), or cash outflow (CO) - Collection of Rare Coins

Asset

Identify as an asset (A), liability (L), cash inflow (CI), or cash outflow (CO) - Interest on Savings Account

Asset

Net Worth Formula

Net Worth = Total Assets - Total Liabilities

Indicate if the item is a FIXED or a VARIABLE expense - Food Away From Home

Variable

Money Management

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

What are the benefits of an organized system of financial records and documents?

1 Handling daily business activities i.e. 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 spending

What are the main purposes of a budget?

1 To help you live within your income 2 Spend our money wisely 3 Reach your financial goals 4 Prepare for financial emergencies 5 Develop wise financial management habits

What are some suggested methods to make savings easy?

1 Write a check/automatic payment/smartphone app to electronically transfer an amount to savings each payday to deposit in a separate savings account. 2 Payroll deduction automatically deduct from your salary and deposit in savings 3 Saving coins or spending less on certain items and put money saved in a container or transfer to savings/investing account.

What are the three major money management activities?

1. Storing and maintaining personal financial records and documents. 2. Creating personal financial statements (balance sheet, cash flow, income and outflows). 3. Creating and implement a plan for spending and saving (budgeting)

What does a personal balance sheet tell you about your financial situation?

A personal balance sheet tells what you own and what you owe, your current financial position.

Safe Deposit Box

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

Identify as an asset (A), liability (L), cash inflow (CI), or cash outflow (CO) - Market Value of Automobile

Asset

Identify as an asset (A), liability (L), cash inflow (CI), or cash outflow (CO) - Retirement Account

Asset

Identify as an asset (A), liability (L), cash inflow (CI), or cash outflow (CO) - Mortgage Amount

Cash Outflow

Liquid Assets

Cash and items of value that can EASILY be converted to cash.

Carl Lester has liquid assets of $2,680 and current liabilities of $2,436. What is their current ratio? What comments do you have about this financial position?

Current Ratio = Liquid Assets / Current Liabilities $2,680 ÷ 2,436 = 1.10 Too low, high ratio is wanted to have cash available

Debt Ratio

Debit Ratio = Liabilities / Net Worth (Low debt ratio is best.)

The Fram family has liabilities of $128,000 and a net worth of $340,000. What is their debt ratio? How would you assess this?

Debt Ratio = Liabilities ÷ Net worth $128,000 ÷ $340,000 =.376 (37.6%) A low debt ratio is best

Debt-Payments Ratio

Debt-Payments Ratio = Monthly Credit Payments/ Take-Home Pay. (Should be less than 20%)

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, - less than a year.

Indicate if the item is a FIXED or a VARIABLE expense - Rent

Fixed

Variable Expenses

Flexible payments that change from month to month. i.e. food, clothing, utilities, recreation, medical expenses, gifts, donations.

The future value of a $600 savings deposit after eight years at an annual interest rate of 6 percent. What table would you use and what would be the value?

Future Value or $1 after a given number of time periods. 600 x 1.594 =$956.40

Identify as an asset (A), liability (L), cash inflow (CI), or cash outflow (CO) - Monthly Rent

Liability

Jan Franks has liquid assets of $6.300 and monthly expenses of $2,100. Based on the liquidity ratio, she has _____ months in which living expenses could be paid if an emergency arises.-

Liquidity Ratio = Liquid Assets / Monthly Expenses = 3

What relationship exists among personal financial statements, budgeting, and achieving financial goals?

Provides the basis for achieving long-term financial security. The budget and cash flow statement help plan and measure spending and saving activities. The budget would serve to plan spending and savings. The cash flow statement of income and outflows would document your actual spending and saving.

Savings Ratio

Savings Ratio = Amount Saved Each Month/Gross Income. (Should be 5-10%)

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.

Budget Variance

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

Insolvency

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