Personal Finance Chapter 3

what are some examples of liquid assets?

-checking and savings accounts -cash value of life insurance

How can you increase net worth?

-increase savings -reduce spending -increasing value of investments -reducing amounts you owe

How long should you keep personal finance records?

-keep birth certificates, ss cards and wills permanently. -keep records of property and investments as long as you own them -tax data should be kept for 7 years

What are some commonly used budgeting systems?

-mental budget (in a persons mind) -physical budget (involves physical containers to hold physical money) -written budget (detailed plan for spending) -computerized budgeting system (spreadsheet software) -online budget (websites like mint.com) -budgeting app

Name some examples of opportunity costs in regards to money management

-spending on current living situations reduces amount in savings long term -saving and investing for the future reduces how much you can spend now

Money management experts advise that a successful budget should be:

-well planned -realistic -flexible -clearly communicated

What are some methods for saving?

-write a check to deposit into a separate savings account -payroll deduction -spending less

What are the phases to creating and implementing a budget?

1. assess your current situation 2. plan your financial direction 3. implement your budget 4. evaluate your budget

What are the two major categories of cash outflows?

1. fixed expenses 2. variable expenses

What are the four types of assets?

1. liquid assets 2. real estate 4. personal possessions 5. investment assets

What two steps are involved in creating a personal balance sheet?

1. list items of value 2. determine amounts owed

What is the process for preparing a cash flow statement?

1. record income 2. record cash outflows 3. determine net cash flow (total cash received during the time period - cash outflows during the time period = cash surplus or deficit)

What are the five steps to follow when doing actual budgeting activities?

1. set financial goals 2. estimate income 3. budget an emergency fund and savings 4. budget fixed expenses 5. budget variable expenses

What are the three major money management activities?

1. storing and maintaining personal finance records and documents 2. creating personal finance statements 3. creating and implementing a plan for spending and saving (budgeting)

how do you calculate liquidity ratio and should the value be low or high?

liquid assets/monthly expenses value should be high

discretionary income

money left over after paying for housing, food, and other necessities

how do you calculate debt payments ratio and should the value be low or high?

monthly credit payment/take-home pay value recommended less than 20 percent

What are fixed expenses?

payments that do not vary from month to month (ex: rent or mortgage payments, cable)

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

What is the purpose of financial ratios?

they provide guidelines for measuring the changes in your financial situation

What are personal finance statements?

two documents you create yourself: personal balance sheet and cash flow sheet

What is the major "budget buster"?

L (underestimated "listed" expenses, such as housing and utilities) I (impulse spending) F ( "forgotten" bills such as annual insurance payments) E (emergencies)

financial goals should take a ____ approach

S (specific) M (measurable) A (action-oriented) R (realistic) T (time-based)

current liabilities

debts that must be paid within a short period of time, usually less than a year (ex: medical bills, cash loans)

take-home pay (disposable income)

earnings after deductions for taxes and other items; also called net pay

What are variable expenses?

flexible payments that change from month to month (ex: food, clothing, utilities such as electricity, medical expenses)

Income

inflows of cash to an individual or household

how do you calculate debt ratio and should the value be low or high?

liabilities/net worth value should be low

how do you calculate current ratio and should the value be low or high?

liquid assets/current liabilities value should be high

What is the difference between a cash flow statement and a budget?

a cash flow statement reports the actual spending of a household, a budget considers both projected income and spending.

Balance sheet

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

cash flow statement

a financial statement that summarizes cash receipts and payments for a given period. AKA personal income and expenditure statement

Safe deposit box

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

budget

a specific plan for spending income

how do you calculate savings ratio and should the value be low or high?

amount saved each month/gross income monthly savings of 5-10 percent recommended

liabilities

amounts owed to others

How do you calculate net worth?

assets-liabilities= net worth

liquid assets

cash and items of value that cam easily be converted to cash

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.

long term liabilities

debts that are not required to be paid in full until more than a year from now (ex: mortgage, education loans)