Personal Finance Ch 2

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cash flow

Movement of the money you receive and the money you spend.

long-term liabilities

Obligations are not due to be paid within one year or the operating cycle, whichever is longer.

variable expenses will fluctuate by

- household situation - time of year - health - economic conditions

ways to increase net worth

- increasing your savings - reducing spending - increasing the value of investments and other possessions - reducing the amounts you owe

A budget will help you

- live within your income - spend your money wisely - reach your financial goals - prepare for financial emergencies - develop wise financial management habits

steps to creating a balanced sheet

1) List items of value 2) Determine items owed 3) Compute net worth

An organized system of financial records provides a basis for

1) handling daily business activities, like bills 2) planning & measuring financial progress 3) completing required tax reports 4) making effective investment decisions 5) determining available resources for current & future spending

What are the main purposes of personal financial statements?

1) report your current financial situation 2) measure your progress towards financial goals 3) maintain information about your financial activities 4) provide data or preparing tax forms or applying for credit

steps in the budgeting process

1. Set Financial Goals 2. Estimate Income 3. Budget an Emergency Fund and Savings 4. Budget Fixed Expenses 5. Budget Variable Expenses 6. Record Spending Amounts 7. Review Spending and Saving Patterns

Cash Flow Statement

A summary that shows total income and spending for a given time period, like a month or a year

Investment Asset

Assets that are purchased for the purpose of making more money

money management

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

fixed expenses

Expenses that do not change from month to month, such as auto insurance or rent.

variable expenses

Expenses that vary from month to month, such as entertainment, car repairs, or doctor bills.

liquid assets

Resources such as cash that are easily converted into other assets or used to pay for goods, services, or liabilities.

Financial records are kept in

a home file, a safe deposit box, and computer system

real estate

a home, a condo, a vacation property, other buildings or land that you own

the difference between inflows and outflows can be either

a positive (surplus) or a negative (deficit) cash flow

safe deposit box

a secure container located in a bank vault

Mortgages

amount borrowed to buy a house or other real estate that is repaid over a period of 15, 20 or 30 years

How long should you keep the records of an investment?

as long as you own the item

Examples of longe-term liabilities

auto loans, educational loans, and mortgages

Assets

cash and other property with a monetary value

Examples of personal financial statements

cash flow statement and personal balanced sheet

Common income sources include

commissions, self-employment income, interest, dividends, gifts, grants, scholarships, government payments, pensions, retirement income, alimony, and child support

Budgeting

creating and implementing a plan for spending and saving

Money management activities

financial documents, financial statements, and budgeting

Keep documents related to the purchase and sale of real estate ________

indefinitely

balance sheet approach

items of value (what you own) - amounts owed (what you owe) = net worth (your wealth)

Current Liabilities

liabilities due within a short time, usually within a year

Financial Ratios are guidelines for

measuring changes in your financial situation

Current Liabilities examples

medical bills, tax payments, insurance premiums, cash loans, and credit card balances

discretionary income

money income left after necessities have been bought and paid for

When determining available income include

only money that you are sure you will receive

If your earning vary be season or you income is irregular then estimate your income on the low side to avoid

overspending and financial difficulties

financial statements

preparing a Balance Sheet and Cash Flow Statement on a regular basis

Balanced sheet

reports what you own and what you owe

When you have a cash surplus, this amount is available for

saving, investing or paying off debts

How long should you keep tax records?

six years

Financial Documents

storing and maintaining personal financial records and documents

take-home pay

the amount of income left after taxes and other deductions are taken out of your gross pay

Net worth

the difference between assets and liabilities, assets - liabilities = net worth OR assets = liabilities + networth

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

Financial advisors suggest that an emergency fund presenting __________ months of living be established for periods of unexpected financial difficulties

three to six months

Many people prepare a balance sheet every

three to six months

How many years should you keep your Federal tax documents from the date you file your return?

three years

A home file is a place where you should keep financial records that you may need to access regularly. True or false?

true

Most financial documents come from financial institutions, businesses or government. true or false?

true

Records such as birth certificates, wills and social security data should be kept permanently. True or false?

true

personal possessions

type of asset that includes automobiles, electronics, jewelry

Successful budgets are those that are

well-planned, realistic, flexible, and clearly communicated


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