Chapter 2: Money Management Skills Flashcards
What is a balance sheet (net worth statement?
A financial statement that reports what an individual or family owns and owes at a specific date
What is the general formula for a balance sheet?
Items of value (what you own)-amounts owed (what you owe, debt)=net worth (your wealth)
What three components are included in the balance sheet?
- Assets
- Liabilities
- Equity
What are assets?
How much money you have; Liquid assets, real estate, personal possessions, investment assets
What does “liquid” asset mean?
Anything that can become cash quickly without losing value
What is a liability?
Debt
What’s a current liability?
Less than a year old, like a credit card
What is a long term liability?
Things that will take several years to pay of, like a mortgage, car loans or school loans
What is equity?
Your net worth;
Assets-liabilities=equity
What is meant by insolvency?
Inability to pay debts when due
What is the cash flow statement (personal income statement)?
Personal income and expenditure statement; summary of cash receipts and payments for a given period
What is a surplus?
Made more money than spent; balance sheet will go up
What is a deficit?
Spent more money than made; balance sheet will go down
How do you calculate debt ratio?
Liabilities/net worth
How do you calculate current ratio?
Liquid assets/current liabilities
How do you calculate liquidity ratio?
Liquid assets/monthly expenses
How do you calculate debt payments ratio?
Monthly credit payments/take-home pay
How do you calculate savings ratio?
Amount saved each month/gross income
How much should you save from each paycheck for retirement?
10% for the same level of living while working
15% for a higher level than working
20% for a wealthy compared to working
What is a budget-spending plan?
Helps you to:
- Live within your income
- Spend money wisely
- Reach financial goals
- Prepare for financial emergencies
- Develop wise financial management habits
What should a good budget be able to help you do?
- Achieve short term goals
- Eliminate impulse spending
- Allocate money to investments
- Eliminate debt
What is the budgeting process?
- Set goals
- Estimate income
- Budget for emergencies
- Budget fixed expenses
- Budget variable expenses
- Record everything
- Review and revise
- Review financial progress
- Revise goals and budget allocations
What is a solution to a budget shortfall?
Cut variable expenses
