Chapter 3 - Budgeting Flashcards
what is a personal cash flow statement?
a financial statement that measures a person’s income and expenses
What two personal financial statements are most important to personal financial planning?
The personal cash flow statement and the personal balance sheet are the two most important personal financial statements.
Define income and expenses and identify some sources of each. How are net cash flows determined?
- Income represents monies coming in, usually from a salary, but can be from other sources.
- Income may also come from investment income such as from interest and dividends.
- Expenses are funds paid out for items such as rent, groceries, or gas.
Net cash flows = Income - Expenses
what makes monitoring your expenses easier?
using your debit card instead of cash
how can you create a personal cash flow statement?
by recording how you received income over a given period and how you used cash for your expenses
In general, how can you modify your cash flows to enhance your wealth?
minimize spending or maximizing wealth
cut down on spending or find a way to make more money
Identify some factors that affect expenses.
Key factors that affect expenses are a person’s family status (including family size), age, and personal consumption behaviour.
what factors affect your income?
your life stage, job skills and your household income (does your spouse have an income as well?)
What is a budget? What is the purpose of a budget? How can a budget help when you are anticipating cash shortages or cash surpluses?
- A budget is a cash flow statement that is based on forecasted cash flows for a future time period.
- A budget is developed to determine whether your income will be sufficient to cover your expenses.
When a period’s budget indicates a cash shortage, you can plan to either use savings or borrow needed cash for the period. When a period’s budget indicates a cash surplus, you can determine the amount of excess cash that you will have available to invest in additional assets or reduce liabilities.
How do you assess the accuracy of your budget? How can finding forecasting errors improve your budget?
You can assess the accuracy of your budget by comparing your actual income and expenses with your budgeted amounts.
Finding forecasting errors can allow you to adjust your spending to stay within your budgeted expenses.
Alternatively, you may choose not to adjust your spending but to make your budget more realistic.
Suppose you want to change your budget to increase your savings. What could you do?
You could try to identify components of the budget that you can change to provide more cash for savings. For example, you could either attempt to increase your income or to reduce one or more expenses.
How should unexpected expenses be handled in your budget?
Unexpected expenses should be budgeted for periodically. You should assume that you are likely to incur some unexpected expenses over the course of several months, such as prescription drugs or car repairs.
Unexpected expenses might then make your budget inaccurate for a specific month, but the budget would be reasonably accurate over several months or a year.
Describe the process of creating an annual budget.
Begin with a monthly budget and extend it out over the year. Once you have created the annual budget, adjust it to reflect anticipated large changes in your cash flows.
Describe the envelope method.
The envelope method forces you to stick to a cash-only budget for some of your hard to control expense categories. With this method, you would identify expense categories and place a budgeted amount of cash in an envelope representing the category. During the month, you can spend only the money in the envelope for that particular expense category. If you have any money left over, you can carry forward that balance to the next month.
Describe the pay yourself first method.
Under the pay yourself first method, you would arrange to have an automatic transfer of money from your chequing account to your savings account for the amount that you wish to save. The transfer would coincide with when you receive your paycheque.
