Chapter 2: Money Management Skills

How long should you keep documents relating to investments?

As long as you own these items

Itemes with monetary value are referred to as

Assets

Which of the following situations describes a person who could be insolvent?

Assets $40,000; liabilities $50,000

The equation to calculate net worth is

Assets - Liabilities = Net worth

When household budgets must be cut, which of the following categories would be most difficult to cut?

Auto insurance

Which of the following will increase the net worth of a household?

Decrease spending by $5 per day

A home file should be used to keep

Financial records for current needs

Take-home pay is also called

Net pay

The amount you would have left if all assets were sold and all debts were paid in full is called your

Net worth

When creating a budget, which of the following statements is true?

Numbers in the budget are estimates.

A budget system that involves envelopes, folders, or containers to hold money or slips of paper is called a

Physical budget

The main purposes of personal financial statements are to

Report your current financial position, Measure your progress toward financial goals, Maintain information about your financial activities, and Provide data for preparing tax forms or applying for credit

A budget system that can be kept on notebook paper or accounting paper is called a

Written budget

A mortgage is an amount borrowed to buy a tv or other personal possession.

false

An organized system of financial records provides a basis for reducing credit card usage.

false

Annual investment account statements should be shredded.

false

Birth certificates, wills, and Social Security data should be kept for up to 7 years.

false

Copies of tax returns and supporting data should be saved for 10 years.

false

Financial advisers suggest that an emergency fund should cover one to two months of living expenses.

false

Financial documents that you may need quick access to should be kept in a safe deposit box.

false

If a household has $195,000 of assets and $75,000 of liabilities, then their net worth would be $125,000.

false

In an organized system of financial records, credit card records belong in a safe deposit box.

false

Liquid assets can be easily converted to cash and include money in checking accounts and personal possessions.

false

Money management refers to annual financial activities necessary to manage personal economic resources.

false

Net worth is the amount owed to others.

false

One method to spend more money is to deduct an amount automatically from your salary in a direct deposit system.

false

The two personal financial statements that you create yourself are the personal balance sheet and a credit card payoff statement.

false

Brokerage statements are an example of a(n) _______ record.

investment

A balance sheet reports what an individual or family owns and owes.

true

A cash flow statement uses this equation: Total cash received during the time period - Cash outflows during the time period = Cash surplus (or deficit).

true

Current liabilities are the debts you must pay within a short time, usually less than a year.

true

In an organized system of financial records, birth and marriage certificates belong in a safe deposit box.

true

In an organized system of financial records, medical information belongs in a home file.

true

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

true

One method to save more money is to write a check each payday and deposit it in a separate savings account.

true

Programs are available to help low-income people around the world improve their money management skills or financial literacy.

true

The current financial position of an individual or family is a common starting point for financial planning.

true

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

Discretionary income

Disposable income equals

Disposable income

Which of the following is NOT a main purpose of a budget?

Spend your money without care

Which of the following is a component of money management?

Storing and maintaining personal financial records and documents, Creating a balance sheet, Creating and implementing a plan for spending and saving, and Creating a cash flow statement

Which of the following is most correct?

Tax records belong in a home file; Rare coins and stamps belong in a safe deposit box.

When completing a cash flow statement, deductions are subtracted from gross salary to determine take-home pay.

true

Rebecca Wilson budgeted $395 for a new wardrobe in June. She actually spend $425. What is her budget variance?

$30 deficit

Patrick Guitman has a net worth of $145,000 and liabilities of $155,000. What are his total assets?

$300,000

Another name for a statement of financial position is a

Balance sheet

The current financial position of an individual or family is best presented with the use of a

Balance sheet

The document that would tell you what you received and spent over the past month is the

Cash flow statment

Money management refers to

Day-to-day financial activities

Given the following information, calculate the net worth: Assets = $8,000 Cash inflows - $6,000 Cash outflows = $4,500 Liabilities = $4,000

$4,000

Rebecca Wilson budgeted $1,200 for housing and utilities in July. She actually spend $1,160. What is her budget variance?

$40 surplus

A family with $100,000 in assets and $60,000 of liabilities would have a net worth of

$40,000

Given the following information, calculate the liquidity ratio: Liabilities = $25,000 Liquid assets = $5,000 Monthly credit payments = $800 Monthly savings = $760 Net worth = $75,000 Current liabilities = $2,600 Take-home pay = $2,300 Gross income = $3,500 Monthly expenses = $2,050

2.44

Given the following information, calculate the current ratio: Liquid assets = $5,000 Monthly credit payments = $800 Monthly savings = $760 Net worth = $75,000 Current liabilities = $2,000 Take-home pay = $2,300 Gross income = $3,500 Monthly expenses = $2,050

2.50

Financial experts recommend a debt/payments ratio of less than ____ of take-home pay.

20%

Given the following information, calculate the savings ratio: Liabilities = $25,000 Liquid assets = $5,000 Monthly credit payments = $800 Monthly savings = $760 Net worth = $75,000 Current liabilities = $2,000 Take-home pay = $2,300 Gross income = $3,500 Monthly expenses = $2,050

21.71%

Given the following information, calculate the debt ratio percentage: Liabilities = $25,000 Liquid assets = $5,000 Monthly credit payments = $800 Monthly savings = $760 Net worth = $75,000 Take-home pay = $2,300 Gross income = $3,500 Monthly expenses = $2,050

33.3 percent

Given the following information, calculate the debt payments ratio: Liabilities = $25,000 Liquid assets = $5,000 Monthly credit payments = $800 Monthly savings = $760 Net worth = $75,000 Current liabilities = $2,000 Take-home pay = $2,300 Gross income = $3,500 Monthly expenses = $2,050

34.78%

Financial experts recommend monthly savings of ____ of gross income.

5-10%

Which of the following financial documents would most likely be stored in a safe deposit box or fireproof home safe?

Marriage certificates

When creating a personal balance sheet, which of the following is a current liability?

Medical bill

Discretionary income equals

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

How long should you keep your most current will?

Permanently

The statement that includes liquid assets, real estate, personal possessions, and investment assets is known as a

Personal balance sheet

Which of the following are two personal financial statements that you create yourself?

Personal balance sheet and cash flow statement

When creating a personal balance sheet, which of the following is an investment asset?

Retirement account

Which of the following ratios shows the relationship between gross income and money saved?

Savings ratio

Which of the following is a liquid asset?

Savings/money market accounts, Cash value of life insurance, Checking account balance, and Money market accounts

The number of personal financial records a household has to organize may seem overwhelming. How long should you keep copies of your tax returns?

Seven years

All of the following are sources of income except

Social Security taxes

Which of the following is a deduction to determine take-home pay?

Social Security taxes

When creating a budget, it is important to

"Pay yourself first" by setting aside savings before other expenses are budgeted

A current ratio of 2 means

$2 in liquid assets are available for every $1 of current liabilities

When creating a personal balance sheet, which of the following is considered to be a personal possession asset?

A five-year-old television set

An example of a fixed expense is

A mortgage payment

The document that would be most useful to plan spending and saving to achieve financial goals is the

Budget

The difference between the amount budgeted and the actual amount received or spent is called the

Budget variance

A debt ratio of 0.5 indicates

For every dollar of net worth, debt equals $0.50

Which of the following is a cash inflow?

Income from employment

All of the following are ways that households can increase their net worth except

Increase their debt ratio

The number of personal financial records a household has to organize may seem overwhelming. How long should you keep documents relating to the purchase and sale of real estate?

Indefinitely

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

Insolvency

A personal balance sheet reports

Items owned and amounts owed

After having established a spending plan, it is important to

Keep track of your actual income and expenses

Which of the following ratios indicates the number of months in which living expenses can be paid if an emergency arises?

Liquidity ratio

All of the following are fixed expenses except a(n)

Utilities

When creating a personal balance sheet, which of the following is a real estate asset?

Vacation property

Which of the following appears as a cash outflow on a cash flow statement?

Variable expenses; Loan payment

The document that would report your current financial position is the

Balance sheet

Which of the following ratios indicates that liquid assets are available to pay current liabilities for a household?

Current ratio

Which of the following ratios indicates the amount of a person's earnings that goes for payments for credit cards, auto loans, and other debt (except mortgage)?

Debt payments ratio

Which of the following ratios shows the relationship between debt and net worth?

Debt ratio

An example of a variable expense is a(n)

Electric bill

A budget deficit would result when a person's or family's

Actual spending exceeds planned spending

A budget is a record of how a person or family has spent their money.

false

A cash flow statement uses this equation: Assets - Liabilities = Net worth.

false

A high debt ratio is best.

false

When completing a cash flow statement, take-home pay less deductions equals gross salary.

false

When creating a budget, it is important to save the amount you have left at the end of the month.

false

In an organized system of financial records, investment records belong in a home file, home computer, or online.

true