Chapter 3 - Planning with Personal Financial Statements Flashcards
Half of this seems like common sense. But hey, I guess its not that common if most Canadians are swimming in debt
What is a Personal Cash Flow Statement? What’s included in the Personal Cash Flow Statement?
- A personal cash flow statement displays your income, fixed expenses, and savings over a given period of time, whereas a personal balance sheet provides an overall snapshot
- Income, Fixed Expenses, Savings
What are fixed expenses in the Personal Cash Flow Statement?
Fixed expenses are the predictable expenses that you have every period. Fixed expenses are both large, such as your monthly mortgage/rent payment, car payment, and utilities; and small, such as your transit pass, gym membership fees, and banking fees.
What are Savings in the Personal Cash Flow Statement?
Savings are the amounts that you need to set aside each period to meet your short-, medium-, and long- term goals. Creating an emergency savings account is a common short-term goal. Medium-term goals include saving money for large purchases, such as purchasing a car. Long term goals are goals that may not have an immediate impact on your lifestyle today, but that will impact your future. This includes stuff like paying down your mortgage
What are factors that can affect your income?
- Stage in your Career Path
2. Type of Job
3. Number of Income Earners in Your Household
What are some factors affecting expenses?
- Size of Family
- Age
- Personal Consumption Behaviour
What is a great way of being prepared for cash shortages?
Setting aside funds in a savings account that can serve as an emergency fund in the event of a cash shortage
What are some budgeting strategies?
There are two methods: pay yourself first method, and the envelope method
The pay- yourself- first method relies on taking money out of your bank account before you have a chance to spend any of it. Using this 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 envelope method was popular when cash was the primary method of payment. The “envelope budgeting strategy” is a method of managing finances by physically dividing your monthly income into separate envelopes, each labeled for a specific spending category like groceries, entertainment
What is a Personal Balance Sheet?
A personal cash flow statement displays your income, fixed expenses, and savings over a given period of time, whereas a personal balance sheet provides an overall snapshot.
The Balance Sheet summarizes your assets (what you own), your liabilities (what you owe), and your net worth (assets minus liabilities).
What type of assets are included on the personal balance sheet? And give a short definition of each
Liquid Assets
Liquid assets are financial assets that can be easily converted into cash without a loss in value. They are especially useful for covering upcoming expenses. Some of the more common liquid assets are cash, chequing accounts, and savings accounts.
Household Assets
Household assets include items normally owned by a household, such as a car and furniture. The market value of an asset is the amount you would receive if you sold the asset today
Investments
Some of the more common investments are in stocks, bonds, mutual funds, and rental property. These are NOT Liquid assets!
Define the two types of liabilities that are present on the personal balance sheet?
Current Liabilities
Current liabilities represent personal debts that will be paid in the near future (within a year). The most common example of a current liability is a credit card balance.
Long Term Liabilities
Long-term liabilities are debts that will be paid over a period longer than one year. A common long-term liability is a student loan, which reflects debt that a student must pay to a lender over time after graduation.
Define Net worth
Net Worth=Value of Total Assets−Value of Total Liabilities
Your net worth is the difference between what you own and what you owe.
Why do we need financial ratios?
Financial ratios help you monitor your level of liquidity, your amount of debt, and your ability to save.
What is the liquidity Ratio? What does it tell you?
Current Ratio=Liquid Assets/Current Liabilities
A high current ratio indicates a higher degree of liquidity. Note that long term debts and stuff like that is not considered in this calculation
We also have the following ratio: Liquidity Ratio=Liquid Assets/Monthly Living Expenses
This ratio tells you how many months of living expenses you can cover with your present level of liquid assets. This ratio is particularly important if you have an emergency, such as a loss of income due to a short term disability
In general, the liquidity ratio should be between 3.0 and 6.0.
What is the Debt Level Financial Ratio?
Debt-to-Asset Ratio = Total Liabilities/Total Assets
Your debt level should be measured relative to your assets, as shown. A high debt-to-asset ratio indicates an excessive amount of debt. This debt should be reduced over time to avoid any debt repayment problems.
What is the Savings Financial Ratio?
To determine the proportion of disposable income that you save, you can measure your savings over a particular period in comparison to your disposable income (income after taxes are taken out) using the following formula: Savings Ratio = Savings during the Period / Disposable Income during the period
Emergency funds are optional. T/F
Tip: What does our prof think of emergency funds?
Emergency funds are a Must - Ans: False
Is it better to keep an emergency fund in a savings account or in stocks?
Its definetly better to keep your emergency fund in a savings account since during a crisis when you need the money stocks fall!
How big should your emergency fund be? Tip: Its not a value, it depends on 3 factors
- How risky is your job?
- How quickly can you get a new job if you lose your current one?
- How volatile is your income? (Volatile income is the amount of variation in a person’s income over a period of time)
Should you wait to build your emergency fund and instead invest, pay down your mortgage, etc?
No, you should start building it as soon as possible, even if its adding a bit each month
Should you use a line of credit to meet your cash needs if you don’t have an emergency fund?
No! This is not a good idea! A line of credit is not a substitute for an emergency fund
This is because a bank can remove a line of credit at any time!
Should you use your emergency fund for anything you want?
No! Its for emergencies only!
This includes:
1. Job Loss
2. Major Illness
3. Tax Problems
4. Unexpected house/car repairs not covered by insurance
What should you do after paying off all your debt and building your emergency fund?
- Start Saving for Retirement - min 10% of income in your 20s
- Save for other large purchases (car, wedding, house)
- Save for any other one of your goals
How do you use a budget if you want to buy expensive stuff?
Make a budget and only spend the money you have left over AFTER meeting your goals and needs!
How should you budget your money?
You should budget in this order:
1. Basic Accommodation/Transportation
2. Food/Utilities/Clothing
3. Debt/Emergency Fund/investing
4. House/Nice Car/Life
Essentially, luxury and nice things should be last! Not FIRST!
What is the rule of thumb that the prof liked regarding the budget for transportation? Tip: Its a % of the budget
Limit transportation to a budget of 15% or less
This is because they suck money out of your life! The only thing that’s worse is children lol
Is it better to start early or later to start saving for retirement?
The EARLIER the better! This is because the later you start, the more of your income you will have to put into retirement savings which will be insanely difficult
What does Barry say about the budget? Tip: In what order should we build our budget?
Barry says, “First figure out how much of your budget you need to allocate to paying down debt, building your emergency fund, and building long term investing and THEN adjust the rest of your budget afterwards”.
If your budget does not balance, and you need to cut something. What do you cut?
If you can’t make your budget balance….cut discretionary
spending, or make more money…but DON’T cut down your
long term investing!
Is a budget the only thing you need to ensure you have control of your spending? T/F
Tip: We have the budget made, now what do we do to ensure we don’t overspend?
ANS: False
Track your spendings
A sinking fund is a __________ strategy
Ans: Budgetary
How are sinking funds used? Tip: jars
Putting money aside every month for large expenses you know are coming up:
House repairs
RESP Contriburtions
Car Repairs
Property Taxes
Here’s an easy question just cause I’m feeling generous
At what time is the Personal Finance Lecture?
This is probably the only lecture time that Arjun knows of 🤣
Ans: 9:30am - 12:30pm
