Personal finance chap 3

What are the six steps of financial decision making?

1. Establish your goals. 2. Evaluate your current financial position. 3. Identify and evaluate the options for reaching your goals. 4. Pick the best plan. 5. Evaluate your plan periodically. 6. Revise your plan as necessary.

1. Cash inflow refers to money received from income but not other sources. T/F 2. Cash outflow refers to money that an individual spends. T/F

1. F 2. T

1. Allowance Nicole receives from her parents (Inflow or Outflow?) 2. Interest Nicole earns from her savings account (Inflow or Outflow?) 3. Interest Nicole is charged on her credit card balance. (Inflow or Outflow?) 4. The price of a ticket for a concert which Nicole purchases (Inflow or Outflow?) 5. The amount that Nicole spends on gas for her car each week. (Inflow or Outflow?) 6. The tips Nicole makes waiting tables at a restaurant (Inflow or Outflow?)

1. Inflow 2. Inflow 3. Outflow 4. Outflow 5. Outflow 6. Inflow

The last step in the financial decision-making process is to pick and implement the best plan among the options you have analyzed. T/F

F

Websites such as eBay and Amazon are NOT good options to use when comparison shopping. T/F

F

Monthly rent * Fixed expense Variable expense

Fixed

Which of the following questions would you be MOST likely to ask when creating a plan for investing?

How much risk can I tolerate?

The step-by-step decision-making process: Step 4- Pick the best plan

Risk: the likelihood of loss; financial loss *Choose the goal that is more realistic.* -Your tolerance for risk and your self- discipline often determine which plan is the best option for achieving a specific goal. • Some people choose plans with a higher level of risk of loss. • These plans often have a higher potential payoff. • Others choose plans with lower risk and a greater likelihood of accomplishing the ultimate goal. • Risk - Reward Payoff

What is the correct order for making finanical decisions?

Set specific goals, put goals in writing, have a plan of action, rethink goals if necessary

Money spent on entertainment each month * Fixed expense Variable expense

Variable

Money spent on gas each month * Fixed expense Variable expense

Variable

Dewanna need to save $1,500 by August to pay for her tuition. SHe only has 12 weeks remaining before school starts, and her boss is letting her work 20 hours a week. She makes $9 an hour after taxes are withdrawn from her check. Is it possible for her to save the $1,500?

Yes, it is possible -She makes $9 an hr x 20 hrs per wk = $180 per wk x 12 wks = $2, 160 she will make prior to school starting

For individuals, ____________ is referred to as income.

cash inflow

A psychological factor affecting spending that is typically used to create happiness is _______

retail therapy

Michele wants to minimize any possibility of loss and be certain that following her financial plan will lead to the achievement of her short-term and long-term goals. Michele has a low tolerance for ____

risk

Which of the following is the best example of a long-term goal?

saving enough to fully pay for your children's college educations

Financial goals that you plan to accomplish within the next year should be categorized as ________ goals

short term

Lesia's original financial plan required that she save $100 a month for two years in order to have $2,400 for the down payment on a car. However, after one year she has only managed to save $1,000. What will Lesia need to do in order to accomplish her original goal?

• Lesia needs to save another $1,400 to reach her original goal or $2,400 - $1,000 she has saved = $1,400. • To accomplish that goal in 12 months she will need to save $1,400/12 = $116.67 per month. • She will have to increase her savings to $116.67 per month to accumulate the original $2,400 by the end of next year.

1) If you wanted to find the best price for a 50" Samsung flat screen TV, how would you do it? 2) What are non-economic factors that affect spending? 3) How can you make better spending decisions?

1) -Local stores -Newspaper sale advertisements -Internet sources; Amazon, eBay, Overstock.com -How do you decide where to purchase the TV? Price, reviews,... 2) Psychology 3) -Postpone purchases - avoid impulse buying, wait for seasonal sales -Use coupons to your advantage -Research online to comparison shop

Math solution

Cash inflow: $40 per wk x 20 customers x 20 wks - $16,000 Cash outflow: Riding mower - $1000 Gas - $2000 Gas (driving) - $500 Supplies & repairs - $300 Trimmer - $200 _------------------- Total Outflows $4,000 -------------------------- Cash Inflow - $16000 - Cash Outflow - $4,000 ___________________________________ Difference (profit) $12,000

Which of the following is MOST important to creating a successful financial plan?

Establishing clear goals

For individuals, cash inflows are referred to as income and cash outflows are referred to as liabilities. T/F

F

The SMART method of setting goals does not recommend identifying a timeframe for completing specific goals. T/F

F

Money spent on a car loan payment each month * Fixed expense Variable expense

Fixed

The amount of money you have left over after expenses each month is most directly related to your plans to manage ________

Liquidity

Which of the following is NOT a strategy for smart spending? Making an impulse purchase Using coupons Postponing a purchase Comparison shopping

Making an impulse purchase

A good strategy for reducing impulse purchases is to wait thirty days and then decide if you still want the item: T/F

T

A realistic forecast for cash outflows will include both fixed and variable expenses. T/F

T

After you begin implementing a financial plan, you should regularly monitor your progress toward your financial goals. T/F

T

Before identifying and evaluating options for accomplishing your financial goals, you should evaluate your current financial position. T/F

T

Before setting a plan in motion to achieve your financial goals, it is wise to identify and evaluate multiple plans for achieving those goals T/F

T

Evaluating your financial plan options can be a complex task because just one financial decision can have a major impact on your whole financial plan. T/F

T

Fixed expenses remain the same from time period to time period T/F

T

Long-term goals are those that will take more than 5 years to accomplish T/F

T

T/F : Psychological factors can affect your spending habits.

T

Shira wants to forecast her cash inflow for the next four weeks from her job as a cashier at the supermarket. She earns $8.50 per hour after taxes and works two six-hour shifts per week. To make an accurate forecast, she could calculate the following: $8.50 × 2 × 6 × 4 T/F

T - $408

Which of the following statements about accomplishing financial goals is true?

There are often multiple ways for an individual to achieve his or her financial goals.

A(n) ________ expense is an expense that changes from one time period to the next.

Variable

Money spent on clothing each month * Fixed expense Variable expense

Variable

Which of the following does not show a correct match? a. Cash inflow: scholarship award b. Cash inflow: interest paid on a loan you took out c. Cash outflow: insurance premium d. Cash outflow: tuition

b. Cash inflow: interest paid on a loan you took out

A financial plan should...

be evaluated periodically and revised as needed

Before you can effectively make plans for your financial future, you need to ________.

evaluate your current financial position

A(n) ________ is anything that an individual spends money on.

expense

An Individual's cash outflow

expense

A projection about what will happen in the future

forecast

After keeping track of his income and expenses for two months, Ellis made predictions about his monthly cash inflows and outflows for the next year. Ellis made a(n) _______

forecast

An Individual's cash inflow

income

Interest from savings accounts, scholarships, and jobs are all potential sources of _____

income

Financial goals that will take from one to five years to accomplish should be categorized as ________ goals.

intermediate term

Risk is defined as the likelihood of __

loss

Which of the following is the best example of a variable expense?

monthly grocery costs

A person's cash outflow includes...

payments by a person to a retirement account

The best description of cash inflow is money...

received from different sources, such as salary and interest earned on bank accounts

The likelihood of loss

risk

The Step-by-Step Decision-Making Process: Step 6 - Revise Your Financial Plan As Necessary

• If the plan becomes unachievable or too restrictive, adjust it. • If you need to revise one part of your plan, other aspects might also need to be revised.

The Step-by-Step Decision-Making Process: Step 5 - Periodically Evaluate Your Plan

• Periodically evaluate your plan. • Monitor your progress. • Sometimes plans may get off track. • Monitoring will help you notice if there is a problem or if you should make adjustments.

ShayAnn is a high school junior who is working on saving money for college. At the beginning of her sophomore year, she made the goal of saving $2,000 each school year for a total of $6,000 by the beginning of her freshman year of college. Six months into her junior year of high school, ShayAnn is evaluating the progress she has made toward her goal. So far, she has saved $2,000. To make her original goal of $6,000, how much does ShayAnn need to save each month for the next 18 months? $___________

$222.22

Establish ur finanical goals:

*Short-term goals* : are those u plan to accomplish within the next year. *Intermediate-term goals*: are those u plan to achieve within the next 1 to 5 yrs. *Long-term goals*: will take more than 5 yrs to accomplish

Cash Flow Statement

- A cash flow statement shows how much money has come in an income, and how much money has left in expenses -Fixed expenses recur at specific intervals. Rent and car payments are examples of fixed expenses. Variable expenses change over time. Examples of variable expenses are food and utilities. -Once u have completed entering ur income n expenses, u will need to determine if u have a monthly surplus (income exceeds expenses) or a deficit (expenses exceed income). -Having a budget and using a cash flow statement can help u anticipate shortages and surpluses.

Spending Decisions

-Factors that affect spending can include peer pressure or retail therapy. -A strategy for smart spending can be to postpone a purchase: postpone purchase of depreciating assets not appreciating assets. -Coupons are one way advertisers convince us to try products. -Researching the product or service on the Internet can allow an individual to comparison shop

Surplus/Deficit

-If cash inflow exceeds cash outflow, a person has a surplus to save or invest. -If cash outflow exceeds cash inflow, a person has a deficit.

Evaluate ur current finaicnal position

-ur decisions on how much money to spend or to save depend on ur current situation -financial goals are tied to ur income -better income = ability to set and attain loftier goals - set realistic goals based on income and cost

1) Impulse Buying 2) Why do people buy on impulse? 3) Why is impulse buying so easy?

1) Buying without planning to do so in advance, as a result of a sudden whim or impulse 2) -Advertising & Promotions -Whim -Raised in a family of impulse buyers -Emotions - makes us feel good -Retailer psychology, i.e., research of consumer purchasing behavior 3) -Convenience - web stores; promotional emails from online stores -Displays in check out lines (candy, magazines, small items, promotional items) -Coupons -Credit & Debit cards

1) Forcast 2) Income 3) Expense

1) Projection about what will happen in the future 2) Cash inflows to individuals 3) Anything on which we spend money/ expenses are cash outflows -People also have to consider cash outflows (expenses). -Ex. include phone bill or car payment -Expenses can be fixed or variable

1) Fixed expense 2) Variable expense

1) Remains the same from period to period 2) Changes from one period to the next *Expenses can be fixed (monthly expense that u have to pay every month such as mortgage, rent, ) or variable ( the expense changes every month such as water bill, electricity, phone bills, gasoline, grocery)* -an ex. of a fixed expense is a monthly payment for car loan -an ex. of a variable expense is a phone bill based on usage

1) Income: 2) Expenses: 3) Fixed Expense: 4) Variable Expense: 5) Surplus 6) Deficit

1) cash inflows from any source) that can be spent, saved, or invested) 2) cash outflows for expenses, savings, or investments 3) a recurring expense of the same amount each period 4) an expense that may be regularly recurring or not regularly recurring and is different each period. 5) when income exceeds expenses 6) when expenses exceed income *Accountants show deficits in RED or in (RED inside brackets)

1) Cash inflow 2) Cash outflow

1) money received from various/all sources eg. gift cards, income, tips 2) Money paid out or spent/ going out -Cash flows are important to each component of a financial plan -Each component of the plan reflects decisions about how you get or use cash

What are the six steps of the Financial Decision Making Process? (correct sequence)

1. Establish ur financial goals 2. Evaluate ur current Financial position 3. Identify and Evaluate options for accomplishing ur goals 4. Pick the best plan 5.Periodically Evaluate ur plan 6. Revise ur financial plan as necessary