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Personal finance > Chapter 2 > Flashcards

Chapter 2 Flashcards

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1
Q

What are the steps used in the budgeting and planning process?

A
  1. Evaluate your financial health
  2. Define your financial goals
  3. Develop a plan of action
  4. Implement your plan
  5. Review your progress, reevaluate, and review your plan of action
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2
Q

A balance sheet is used to measure what?

A

Your wealth

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3
Q

A balance sheet details what?

A
  1. Assests you own
  2. Debt or liabilities you owe
  3. Your net worth or equity
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4
Q

What are assets?

A

They are your possessions even if you owe money on them (should list assets using their current fair market value)

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5
Q

What are the different types of assets?

A
  1. Monetary assets
  2. Investments
  3. Retirement plans
  4. Tangible assets
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6
Q

Monetary assets

A

Cash or other liquid assets

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7
Q

Investments

A

Including common stock, mutual fund, & bonds

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8
Q

Retirement plans

A

IRAs, 401(k) or 403(b) plans, company pension plans

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9
Q

Tangible assets

A

Physical assets (house, vehicle, furniture, jewelry, collectibles, etc)

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10
Q

A liability is ______ that must be repaid in the future

A

Debt

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11
Q

With liabilities, should only list unpaid balances for what?

A
  1. Current liabilities (utility bills, insurance premiums)
  2. Long term liabilities (home, car, or student loan)
  3. Other loans (bank loans, insurance, policy loans, etc)
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12
Q

Net worth is a measure of your ________

A

Wealth

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13
Q

Net worth calculated how?

A

Total assets- total liabilities

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14
Q

If liabilities are greater than assets then have a ________ net worth & insolvent

A

Negative

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15
Q

If liabilities are less than assets, then net worth is _________

A

Positive

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16
Q

Good level of net worth depends on your goals and your place in the financial ________ cycle

A

Life

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17
Q

Can use an income statement to trace your ____

A

Money

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18
Q

Financial motion picture

A

Tells your where your money has come from & where it has gone over some period of time

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19
Q

Income is where your money comes _______

A

From

20
Q

Income or cash inflows

A

Wages, salary, bonuses, tips, royalties, & commissions

21
Q

Subtract federal, state, & social security taxes from earnings to calculate your ________

A

take-home pay

22
Q

Expenditures

A

Where your money goes

23
Q

Financial ratios

A

Allow you to analyze raw data in the balance sheet or income statement & then compare it to targets

24
Q

Ratios help you understand how your __________ financial resources

A

Managing

25
Q

How do you know if you have enough liquidity

A

Current ratio = Monetary assets/current liabilities
(should be greater than 1 & should aim above 2)

26
Q

Month’s living expenses covered ratio

A

Monetary assets/(annual living expenditures/12)
(should aim for 3 to 6 months of liquid assets) (use to calculate liquidity to meet emergencies)

27
Q

What are the two ratios to determine debt obligations

A
  1. Debt ratio
  2. Long term debt coverage ratio
28
Q

Debt ratio

A

Total debt or liabilities/ total assets
(red flag if less than 2.5)

29
Q

Long term debt coverage ratio

A

Total income available for living expense/total long term debt payments
(red flag if less than 2.5)

30
Q

What are the equation to use to determine if you are saving effective?

A

Saving ratio

31
Q

Saving ratio

A

Income available for saving & investment/income available for living expenditures

32
Q

Why should you keep records?

A

Without them its difficult to prepare taxes, you know how much & where you spent, & its easy for someone to step in during an emergency & understand your financial situation

33
Q

What are the steps in record keeping?

A
  1. Track your financial dealings
  2. File & store your financial records so they are readily accessible to
34
Q

Budgeting can be done how?

A
  • Evaluate your financial health by using the balance sheet & income statement
  • Develop a plan of action & cash budget using the income statement

-Monitor your progress using the balance sheet & income statement

35
Q

What are the benefits of developing a cash budget?

A

-Plan for controlling cash inflows & outflows

  • Allocate dollar amounts for different spending categories
36
Q

How do you prepare a cash budget?

A
  • Estimate anticipated after-tax income or take home pay from most recent annual personal income statement
  • Estimate fixed & variable living expenses
  • Estimate income available for saving & investing (subtract anticipated living expenditures from anticipated take home pay)
37
Q

What do financial planner do?

A
  • More unique financial situations need professional help
  • They give advice
38
Q

How do you choose a professional planner

A
  • Check accreditation (like PFS, CFP, ChFC)
  • Check experience
  • Referrals
39
Q

What are the different ways financial planners are paid?

A
  • Fee-only planners
  • Fee & commission planners
  • Fee offset planners
    -Commission based planners
40
Q

Use a balance sheet to determine the level of wealth that you or your family has ____________ on a given date

A

Accumulated

41
Q

Use an ___________ to understand where your money comes from & goes to be able to save enough to meet goals

A

Inceome statement

42
Q

Use ___________ as targets or standards in managing financial resources

A

financial ratios

43
Q

A sound __________ makes tax preparation & tracking of spending easier

A

record keeping system

44
Q

Use a ________ to plan & evaluate spending & saving

A

Budet

45
Q

_________ planner can help by validating your plan or developing a plan

A

Professional financial

Personal finance (4 decks)

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