Chapter 2 Flashcards
What are the steps used in the budgeting and planning process?
- Evaluate your financial health
- Define your financial goals
- Develop a plan of action
- Implement your plan
- Review your progress, reevaluate, and review your plan of action
A balance sheet is used to measure what?
Your wealth
A balance sheet details what?
- Assests you own
- Debt or liabilities you owe
- Your net worth or equity
What are assets?
They are your possessions even if you owe money on them (should list assets using their current fair market value)
What are the different types of assets?
- Monetary assets
- Investments
- Retirement plans
- Tangible assets
Monetary assets
Cash or other liquid assets
Investments
Including common stock, mutual fund, & bonds
Retirement plans
IRAs, 401(k) or 403(b) plans, company pension plans
Tangible assets
Physical assets (house, vehicle, furniture, jewelry, collectibles, etc)
A liability is ______ that must be repaid in the future
Debt
With liabilities, should only list unpaid balances for what?
- Current liabilities (utility bills, insurance premiums)
- Long term liabilities (home, car, or student loan)
- Other loans (bank loans, insurance, policy loans, etc)
Net worth is a measure of your ________
Wealth
Net worth calculated how?
Total assets- total liabilities
If liabilities are greater than assets then have a ________ net worth & insolvent
Negative
If liabilities are less than assets, then net worth is _________
Positive
Good level of net worth depends on your goals and your place in the financial ________ cycle
Life
Can use an income statement to trace your ____
Money
Financial motion picture
Tells your where your money has come from & where it has gone over some period of time
Income is where your money comes _______
From
Income or cash inflows
Wages, salary, bonuses, tips, royalties, & commissions
Subtract federal, state, & social security taxes from earnings to calculate your ________
take-home pay
Expenditures
Where your money goes
Financial ratios
Allow you to analyze raw data in the balance sheet or income statement & then compare it to targets
Ratios help you understand how your __________ financial resources
Managing
How do you know if you have enough liquidity
Current ratio = Monetary assets/current liabilities
(should be greater than 1 & should aim above 2)
Month’s living expenses covered ratio
Monetary assets/(annual living expenditures/12)
(should aim for 3 to 6 months of liquid assets) (use to calculate liquidity to meet emergencies)
What are the two ratios to determine debt obligations
- Debt ratio
- Long term debt coverage ratio
Debt ratio
Total debt or liabilities/ total assets
(red flag if less than 2.5)
Long term debt coverage ratio
Total income available for living expense/total long term debt payments
(red flag if less than 2.5)
What are the equation to use to determine if you are saving effective?
Saving ratio
Saving ratio
Income available for saving & investment/income available for living expenditures
Why should you keep records?
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
What are the steps in record keeping?
- Track your financial dealings
- File & store your financial records so they are readily accessible to
Budgeting can be done how?
- 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
What are the benefits of developing a cash budget?
-Plan for controlling cash inflows & outflows
- Allocate dollar amounts for different spending categories
How do you prepare a cash budget?
- 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)
What do financial planner do?
- More unique financial situations need professional help
- They give advice
How do you choose a professional planner
- Check accreditation (like PFS, CFP, ChFC)
- Check experience
- Referrals
What are the different ways financial planners are paid?
- Fee-only planners
- Fee & commission planners
- Fee offset planners
-Commission based planners
Use a balance sheet to determine the level of wealth that you or your family has ____________ on a given date
Accumulated
Use an ___________ to understand where your money comes from & goes to be able to save enough to meet goals
Inceome statement
Use ___________ as targets or standards in managing financial resources
financial ratios
A sound __________ makes tax preparation & tracking of spending easier
record keeping system
Use a ________ to plan & evaluate spending & saving
Budet
_________ planner can help by validating your plan or developing a plan
Professional financial
