Chapter 2 Study Guide

Using Appendix B, what is the future value of an annuity of $40,000 in 5 years while earning an interest rate of 5%?

$40,000 / 5.526 = $7,238.5

Using Appendix C, calculate the present value of a retirement fund of $500,000 in 20 year at a rate of 3%?

$500,000 x 0.554 = $277,000

Using Appendix A, what is the future value of an investment of $7,000 in 5 years at 3 %?

$7,000 x 1.159 = $8,113

Using Appendix D, calculate the present value of an annuity if you would be willing to pay up front that will pay $800 a year for 5 years and earning a 5% return?

$800 / 4.329 = $184.800

If I had cash income of $50,000 and expenses of 48,000 - what would be my cash surplus amount?

$2,000

How often should you prepare your personal balance sheet at least once a year but it's better to do so every.....

3-6 months

What are the names of the 4 Appendix tables:

Appendix A - Future Value Appendix B - Future Value Annuity Appendix C - Present Value Appendix D - Present Value of Annuity

A Balance Sheet has 3 parts. Explain each part:

Assets (What you own) ex: cash/checking/savings account, property, investments Liabilities (What you owe) pay them off ex: debts that are owed over 1 year, car or student loans, mortgages, credit card bills Net Worth (The difference between your assets and liabilities) ex: the amount left when you pay off all of the liabilities and the money you would have after selling the assets you owned

Calculate the net worth:

Assets = $225,000, Liabilities = $175,000 Net Worth = $ 50,000

What are 5 ways to spend less?

Make a budget and use it to set financial goals Use your savings account first and checking account last Spend cash and don't depend on credit cards Have someone to hold you accountable Think before you buy - consider alternatives

True or False: Preparing an income and expense statement answers the question "where did my money go".

True

A cash budget has value only if you:

Use it Keep careful records of your income and expenses

If I had cash income of $50,000 and expenses of $53,000 - what would be my cash deficit amount? -$3,000

-$3,000

The cash budget preparation process has three stages. What are they:

Forecasting (predicting) income Estimating expenses Finalizing Cash Budget

What is the formula for future value?

Future value = amount invested x future value factor (Appendix A)

A cash budget is a valuable money management tool that helps you:

Helps you maintain necessary information to control finances. Helps you to decide where income goes to reach goals Helps you keep disciplined spending habits - not waiting for the next payment Reduce unnecessary spending, increase investments Achieve long-term financial goals

What are the five categories of household expenditures (costs):

Housing Transportation Food Personal insurance/person Health care

Four important money management ratios are:

Solvency ratio (net worth + total assets) Liquidity ratio (total liquid assets + total current debts) Savings ratio (Cash surplus + income after tax) Debt Service ratio (Total monthly loan payments + monthly gross [before tax] income)

Explain the 50/30/20 rule:

The 50/30/20 is when you should spend 50% of your income on priority like living expenses and needs since that's more important will use up a lot of your money. 30% is to spend your income on flexible spending/wants. 20% is to spend your income on savings/investments. Altogether is your income/budget but just split up on certain things.

What is the formula for yearly savings?

The formula is yearly savings = future amount of money desired future value of annuity factor (Appendix B)