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