Chapter 3 Flashcards
Money Management Strategy: Financial Statements and Budgeting
Day-to-day financial activities necessary to manage current personal economic resources while working toward long-term financial security
money management
Money management trade-offs include …
- Current spending vs. long-term saving and investing
- Using credit vs. future income availability
- Immediate purchases vs. lost interest on savings
- Comparison shopping vs. time
Components of money management include …
- Financial documents
- Financial statements
- Budgeting
A personal financial records system includes …
- Handling daily business activities
- Measuring financial progress
- Completing tax forms
- Making investment decisions
- Determining resources for spending
CLARK Method
- Calculate income
- List expenses
- Analyze spending; set goals
- Record
- Knock out debt; build savings
A private storage area at a financial institution with maximum security for valuables
safe deposit box
Goals of personal financial statements include …
- Report your current financial position based on the value of items you own and amounts you owe.
- Measure your progress toward financial goals.
- Maintain information about your financial activities.
- Provide data for preparing tax forms or applying for credit.
A financial statement that reports what an individual or a family owns and owes; also called a net worth statement
balance sheet
Three steps to creating a personal balance sheet
- List items of value
- Determine amounts owed
- Compute net worth
Cash and other property with a monetary value
assets
Cash and items of value that can easily be converted to cash. (Checking and savings accounts, cash value of life insurance)
liquid assets
Amounts owed to others
liabilities
Debts that must be paid within a short time, usually less than a year
Current liabilities
Debts that are not required to be paid in full until more than a year from now
Long-term liabilities
The difference between total assets and total liabilities
net worth
The inability to pay debts when they are due because liabilities far exceed the value of assets
insolvency
Net worth can be increased by …
- Increasing savings
- Reducing spending
- Increasing value of investment
- Reducing liabilities
The actual inflow and outflow of cash during a given time period
cash flow
A financial statement that summarizes cash receipts and payments for a time period.(personal income and expenditure statement)
cash flow statement
Inflows of cash to an individual or a household
income
Earnings after deductions for taxes and other items; also called net pay. (opposed to gross pay or gross income - real monthly salary before deductions)
take-home pay
Money left over after paying for housing, food, and other necessities. (disposable income)
discretionary income
Payments that do not vary from month to month (Rent, mortgage payments, loan payments, wifi service fees, etc.)
Fixed expenses
Payments that change from month to month (food, clothing, utilities, recreation, medical expenses, gifts, donations, etc.)
Variable expenses
Ways to reduce financial stress include …
- Have low debt-to-income ratio
- Delay, reduce, or eliminate unnecessary expenses
- Build up emergency savings
- Seek additional income
A specific plan for spending income
budget
Four Phases of Budgeting
- Assess
- Plan
- Implement
- Evaluate
The difference between the amount budgeted and the actual amount received or spent.
budget variance
The amount by which actual spending exceeds planned spending.
deficit
The amount by which actual spending is less than planned spending.
surplus
Characteristics of Successful Budgeting
- Well planned
- Realistic
- Flexible
- Clearly communicated
Types of Budgeting Systems
- Mental
- Physical
- Written
- Digital
Reasons for saving include …
- Create emergency fund
- Replacement items
- Expensive items
- Long-term expenses
- Earn income from interest
Ways to expand savings
- Use a payroll deduction
- Regularly save 5-10%
- Take advantage of employer matching retirement funds
