Personal Finance chapter 2
3 to 6 months of living expenses
When saving for an emergency, a fund of how many months should be set aside?
Liabilities
Amounts owed to others but do not include items not yet due, such as next month's rent
Total assets - total liabilities = net worth
Balance sheet equation
7 years
Copies of tax returns should be retained for at least
Long-term liabilities
Debts that are not required to be paid in full until more than a year from now
Long term liabilities
Debts that have more than 1 year before they must be paid
Current liabilities
Debts that must be paid within a short time, usually less than a year
Variable expenses
Expenses that change month to month
Fixed Expenses
Expenses that stay the same every month
Measuring changes in your financial situation
Financial ratios are guidelines for what?
Assets - liabilities
How do you calculate net worth?
Liabilities divided by net worth
How to find Debt Ratio
Monthly credit payments divided by take-home pay
How to find debt payment ratio
Liquid assets divided by monthly expenses
How to find liquidity ratio
amount saved each month divided by gross income
How to find savings ratio
Net income - (Fixed expenses + variable expenses)
How to find the monthly cash surplus (Deficit)
total liabilities + net worth
How to find total assets
Current Ratio
How well a person will be able to pay upcoming debts
Insolvency
Inability to pay debts when they are due
Insolvency
Inability to pay debts when they are due; it occurs when a person's liabilities far exceed his or her available assets
Real Estate
Includes a home, condo, vacation property, or other land that a person owns
Income
Inflows of cash to an individual or a household
Debt Ratio
May be used to indicate a person's financial situation.. A low ____ ____ is desired
Discretionary income
Money left over after paying for housing, food, and other necessities
Fixed expenses
Payments that do not vary from month to month
Debt Payment ratio
Provides an indication of how much of a person's earnings goes for debt payments (excluding a home mortgage)
Cash flow statement
Summary of cash receipts and payments for a given period, such as a month or a year
Cash flow
The actual inflow and outflow of cash during a given time period
Net worth
The amount you would have left if all assets were sold for the listed values, and all debts were paid in full
Budget Variance
The difference between amount budgeted and the actual amount received or spent
Assets
The first item on a balance sheet, are cash and other property that has a monetary value
Current liabilities and Long term liabilities
What are the 2 types of liabilities?
Identify the main components of wise money management
What is the first money management objective?
Pay yourself first
What is the ideal way to build a budget?
Create a personal balance sheet and a cash flow statement
What is the second money management objective?
Develop and implement a personal budget
What is the third money management objective?
Deficit
When actual spending exceeds planned spending
Surplus
When actual spending is less than planned spending
Well planned, realistic, flexible, Clearly communicated
4 characteristics of a good budget?
1. Increasing their savings 2. Reducing spending 3. Increasing value of investments and other possessions 4. Reducing amount owed
4 ways to increase net worth
Money Management
Day to day activities necessary to manage personal resources, while working toward long term financial security
Liquid Assets
Cash and items of value that can easily be converted into cash
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
Plan for effective budgeting
Liquid Assets, Real estate, Personal Possessions, Investments and retirement Assets
What are the 4 types of assets?
Connect money management activities with savings for personal financial goals
What is the fourth money management objective?
Balance Sheet
Also known as net worth statement, specifies what you own and what you owe
Net worth
Difference between total assets and total liabilities
Take-home pay
Earnings after deductions for taxes and other items, also called DISPOSABLE INCOME
Liabilities
Everything a person owes
Assets
Everything a person owns
Variable expenses
Flexible payments that change from month to month
liquid assets divided by current liabilities
How to find current ratio
Liquidity Ratio
Indicates the number of months that expenses can be paid if an emergency arises