Chapter 2: Money Management Skills

Question 1

What is a balance sheet (net worth statement?

Answer 1

A financial statement that reports what an individual or family owns and owes at a specific date

Question 2

What is the general formula for a balance sheet?

Answer 2

Items of value (what you own)-amounts owed (what you owe, debt)=net worth (your wealth)

Question 3

What three components are included in the balance sheet?

Answer 3

1. Assets
2. Liabilities
3. Equity

Question 4

What are assets?

Answer 4

How much money you have; Liquid assets, real estate, personal possessions, investment assets

Question 5

What does “liquid” asset mean?

Answer 5

Anything that can become cash quickly without losing value

Question 6

What is a liability?

Answer 6

Debt

Question 7

What’s a current liability?

Answer 7

Less than a year old, like a credit card

Question 8

What is a long term liability?

Answer 8

Things that will take several years to pay of, like a mortgage, car loans or school loans

Question 9

What is equity?

Answer 9

Your net worth;

Assets-liabilities=equity

Question 10

What is meant by insolvency?

Answer 10

Inability to pay debts when due

Question 11

What is the cash flow statement (personal income statement)?

Answer 11

Personal income and expenditure statement; summary of cash receipts and payments for a given period

Question 12

What is a surplus?

Answer 12

Made more money than spent; balance sheet will go up

Question 13

What is a deficit?

Answer 13

Spent more money than made; balance sheet will go down

Question 14

How do you calculate debt ratio?

Answer 14

Liabilities/net worth

Question 15

How do you calculate current ratio?

Answer 15

Liquid assets/current liabilities

Question 16

How do you calculate liquidity ratio?

Answer 16

Liquid assets/monthly expenses

Question 17

How do you calculate debt payments ratio?

Answer 17

Monthly credit payments/take-home pay

Question 18

How do you calculate savings ratio?

Answer 18

Amount saved each month/gross income

Question 19

How much should you save from each paycheck for retirement?

Answer 19

10% for the same level of living while working
15% for a higher level than working
20% for a wealthy compared to working

Question 20

What is a budget-spending plan?

Answer 20

Helps you to:

1. Live within your income
2. Spend money wisely
3. Reach financial goals
4. Prepare for financial emergencies
5. Develop wise financial management habits

Question 21

What should a good budget be able to help you do?

Answer 21

1. Achieve short term goals
2. Eliminate impulse spending
3. Allocate money to investments
4. Eliminate debt

Question 22

What is the budgeting process?

Answer 22

1. Set goals
2. Estimate income
3. Budget for emergencies
4. Budget fixed expenses
5. Budget variable expenses
6. Record everything
7. Review and revise
8. 1. Review financial progress
9. 2. Revise goals and budget allocations

Question 23

What is a solution to a budget shortfall?

Answer 23

Cut variable expenses