Chapter 1 - Flashcards
What is personal finance?
the process of planning your spending, financing, and investing activities while considering uncontrollable events such as death or disability. to maximize financial situation over time
what is personal financial plan?
a plan that specifies your financial goals, describes the spending, financing, and investing activities that are intended to achieve those goals and the risk management strategies that are required to protect against uncontrollable event
Benefits of understanding personal finance include?
- make informed financial decisions
- judge the advice of financial advisors
- become a financial advisor
Five key components of a financial plan include?
- budget and tax planning
- financing your purchases
- protecting your assets and income (insurance)
- investing your money
- planning your retirement and estate
what is budget planning?
the process of forecasting future income, expenses and saving goals
In order to budget plan effectively, you need to evaluate your current financial position. How do you do so?
- Income and expenses
- assets
- liabilities (most common credit card debt, line of credit, mortgage)
- Net Worth
define the term Money management?
decisions regarding how much money to retain in liquid form and how to allocate the funds among short term investments
ways to manage your financial resources?
Emergency fund (Path a) Money management (path b) credit management loans often needed for large expenditure Managing loans
What is emergency fund:
A portion of savings allocated to short term needs such as unexpected expenses to maintain liquidity
What is credit management
decisions regarding how much credit to obtain to support your spending and which sources of credit to use
How do you manage financial resources using money management?
keep some money available in case - access to money or credit - cover expenses that cannot be paid out with current income
how do you manage financial resources using credit management
ensure access to credit in case it is needed - cover expenses that cannot be paid out with current income
What is risk?
Exposure to events than can cause a financial loss
What is risk Management?
Decisions about whether and how to protect against risk
Define the term insurance planning?
Determine the types and amount of insurance needed to protect your assets and/or income
what part of your savings should be invested?
Any savings you have beyond what you need to maintain liquidity should be invested to earn a return
what is risk tolerance?
your ability to accept a potential loss (depends on what age stage you are in as well)
What is retirement planning?
determining how much money should be set aside each year for retirement and how those funds should be invested
define the term estate planning?
Determining how your wealth will be distributed before or after your death
Retirement planning focuses on building wealth in your retirement account. T OR F
True
Financial management focuses on only deposition funds to establish an emergency fund. T OR F
False. it also focuses on obtaining credit for your purchases
Budgeting focuses on income and spending - but it must be equal. T OR F
False, it should be equal at least but it is not a must
what are the 6 steps in developing your financial plan
- establish your financial goals
- Consider your current financial position
- Identify and evaluate alternative plans
- select and implement the best plan
- evaluate your financial plan
- Revise your financial plan
What are ways to establish your financial goals?
Use the SMART approach
- specify goals
- measure goals
- act on your goals
- set realistic goals
- timing of goals
what classifies a long term goal?
Beyond five years
what classifies a medium term goal
between one and five years
What classifies a short term goal
within a year
