Personal Finance Chapter 4

Let's assume your net worth is currently $2,910​, and you get a $1,300 gift from your grandparents. What happens to your net worth if you spend $250 of the gift and save the​ remainder?

1,300-250= $1,050

What is the value of​ Stephanie's stock holdings if she owns 30 shares of a company that are worth $113 ​each?

113x30= $3,390

Nika wants to borrow some money from the bank and needs to determine her net worth. She has a car worth $3,900 and has $450 in her checking account. If her only debt is $630 she still owes on her​ car, what is her net​ worth?

3,900+450=4350 4350-630= $3720

Which is a true statement about a​ budget?

A budget should include both fixed and variable expenses.

Give an example of a current liability and a​ long-term liability.

A current liability includes a credit card​ bill, and a longterm liability includes a loan that is payable over many years.

What is the purpose of a personal balance​ sheet?

A personal balance sheet helps you identify your financial situation at a given point in time.

Briefly define and give examples of each category of asset.

An example of a liquid asset is cash in your​ wallet, an example of a household asset is a​ car, and an example of an investment is a bond.

What are​ bonds?

Bonds are like IOUs—promises to repay a​ debt, with​ interest, at some point in the future.

Describe how each of these provides a return on your investment.

Bonds return by paying interest on the principle invested. Stocks provide a return if the company performs well and increases in value​ (and some may pay​ dividends). Mutual funds increase in value as the investments they hold increase in value.

How can finding forecasting errors improve your​ budget?

By finding and eliminating forecast​ errors, you can create a more accurate budget and adjust your cash inflows or outflows as necessary.

How can a personal balance sheet help you when you are making financial​ decisions?

By knowing where you are​ financially, you are better able to make decisions about how to get where you want to be.

What's an example of how a current liability can be converted into a​ long-term liability?

Failure to pay a credit card bill can convert a current liability into a​ long-term liability.

Describe the process of creating an annual budget.

First you must create a​ cash-flow statement. Then you must use that information to forecast inflows and outflows for a full year. Then you must assess the accuracy of your budget and revise as necessary.

Why do you think stocks are not considered liquid​ assets?

It is not possible to convert a share of a​ company's stock to cash quickly without risking a significant loss.

What are mutual​ funds?

Mutual funds are professionally managed collections of multiple​ investments, of which investors can own shares.

Explain how net worth is a measure of wealth.

Net worth explains what your assets are worth after all your liabilities have been satisfied and therefore provides a snapshot of your total wealth.

Describe how your net worth increases.

Net worth increases as you increase your assets or decrease your liabilities.

Will the purchase of additional assets always increase your net​ worth? Why or why​ not?

Purchasing assets will not increase your net worth if you incur liabilities—that is, take loans—to make the purchase that is priced at its true value.

What are​ stocks?

Stocks represent partial ownership in a company.

How does a person determine her net​ worth?

Subtract investments from cash inflow.

How do you assess the accuracy of your​ budget?

You check the accuracy of your budget by keeping an expense journal to see if your forecasts match reality.

Suppose you want to change your budget to increase your savings. Explain what you could do.

You could cut expenses somewhere or find ways to increase your income.

Justus owes $570 to his uncle for money he borrowed to go on​ vacation, $1,000 on his​ car, and $698 on his credit card. How much are his total​ liabilities?

570+1,000+698= $2,268

how can a budget help when you are anticipating cash shortages or a cash surplus?

A budget helps ensure that there is money available to meet unexpected or unplanned shortfalls.

According to your budget forecast you will have expenses of $1,500 next month and income of $950. How much do you have available to​ save?

You have no money to save and you are forecasting a cash shortfall.

Let's assume your net worth is currently $2,910. What happens to it if you get a $1,000 gift from your​ grandparents?

Your net worth will increase by $1,000 to $3,910.

what is the purpose of a budget?

a budget helps you forecast future inflows and outflows. It provides a plan of action for achieving financial goals.

Samantha just bought a car for $4,700. She paid $600 down and took out a loan for the remainder. She also has $1,500 in a savings account. What is the value of her​ assets?

car value + savings account balance = total assets 4,700 + 1,500 = $6,200

Let's assume your net worth is currently $2,950​, and you get a $1,500 gift from your grandparents. What happens to your net worth if you spend $280 of the gift and save the​ remainder?

cash inflow-cash outflow 1,500-280= $1,220

The purpose of investing money is to...

have an asset that will increase in value over time

What is the value of your total assets if you own stocks worth $3,900​, have $558 in a savings​ account, and own a motorcycle valued at $2,200​?

stocks+savings+motorcycle 3,900+558+2,200= $6,658