Personal Finance Chapter 3
4. Budget for Variable Expenses
- Always have more money than you need - Determine reasonable expense levels - Fixed expenses: predictable (stay the same each month) - Variable Expenses: changes over time
1. Set financial goals
- Be specific - Have a time frame - Separate goals by their times frames (short, intermediate, long)
3. Budget for Unexpected Expenses
- Create a special savings account - This money will help pay for expensive fixes, home disasters, healthcare, etc
Benefits of Organizing Financial Documents
- Plan and measure financial progress - Handle routine money matters - Predict how much money you will have in the future - Effective decisions on how to save money
5. Record what you spend
- Practicality of your budget (test for a month) - Surplus (extra money)-> place towards unexpected expenses
2. Estimate your Income
- Record estimated income for the next month (include all sources of income) - Do not include money you may or may not get
Ways to Increase Savings
- The key to stabilizing your financial future - Fixed amount to save (pay yourself first - some banks will do this automatically)
How to budget successfully
1. Practical 2. Flexible 3. Carefully Planned 4. Easily Accessible 5. Must be written (eh...)
Preparing a Budget (Steps)
1. Set financial goals 2. Estimate your Income 3. Budget for Unexpected Expenses 4. Budget for Variable Expenses 5. Record What you Spend 6. Review Spending and Saving Patterns
Personal Financial Statement
A document that provides information about an individual's current financial position and presents a summary of income and spending
Insolvency
A financial state that occurs if liabilities are greater than assets
Personal Balance Sheet (Net Worth Statement)
A financial statement that lists items of value owned, debts owed, and a person's net worth
Safety Deposit Boxes
A locked box in a bank where you can keep your valuables or papers; not easily accessible; banks usually have insurance to cover contents
Consumer Price Index (CPI)
A measure of the changes in prices commonly purchased goods and services in the US
Budget
A plan on how to spend money
Home files
Anything created to organize paper copies of financial documents; susceptible to natural disasters or burglary
Assets
Are any items of value that an individual or company owns, including cash, property, personal possessions, and investments
Liquid Assets
Cash and items that can be quickly converted to cash
Home computer
Convenient, speedy, mobile, easy to use; limited security
Money Management
How someone plans to save, spend or invest their money
Wealth
Is an abundance of valuable material possessions or resources
Real Estate
Land and any other structures that are on it
Cash Flow
Money that actually goes into and out of your wallet and bank accounts
Financial Documents
receipts, bills, agreements, titles/proof of ownership, taxes - ANYTHING that has to do with money
Where to keep financial documents?
Safe-deposit boxes, home files, or home computer
Take-home Pay (Net Pay)
The amount of income left after taxes and other deductions are taken out of your gross pay
Liabilities
The debts you owe
Net Worth
The difference between the amount that you own and the debts that you owe
Budget Variance
The difference between the budgeted amount and the actual amount that you spend
Deficit
The financial situation that occurs when more money is spent than is earned or received
Discretionary Income
The money left over after paying for the essentials
Income
The money you receive
Market Value
The price at which property would sell