Personal Finance- Chapter 5 Review

money management

the day-to-day financial activities necessary to get the most from your money

resolve

reach a decision about

safe-deposit box

a small, secure storage compartment that you can rent in a bank, usually for $100 or less

secure

safe

personal financial statement

gives information about your current financial position and presents a summary of income and spending

evaluate

determine the value of

personal balance sheet

a financial statement that shows what you own and what you owe; also known as a net worth statement

net worth

the difference between the amount you own and the debts you owe; a measure of your current financial position

assets

any items of value that you own, such as cash, real estate, personal possessions, and investments; an indication of your wealth

wealth

property that has a money value or an exchangeable value

liquid assets

cash and items that can be quickly converted to cash

real estate

land and any structures that are on it

market value

the price at which a property would sell

liabilities

the debts that you owe

insolvency

the inability to pay debts when they are due

cash flow

the movement of cash in and out of your wallet or your bank account

income

cash inflow or money received from an employer

take-home pay

net pay; the amount of income left after taxes and other deductions are subtracted from your gross pay

discretionary income

the money you have left after paying for your essentials, such as rent, utilities, clothing, transportation, and medications

surplus

extra money that you can spend or save; positive net cash flow; when you receive more money than you spend

deficit

negative net cash flow; when you spend more money than you receive

foundation

basis

budget

a plan for spending and investing your money to meet your wants and needs; helps you live within your income and spend wisely

budget variance

the difference between the budgeted amount and the actual amount spent

cultivate

promote the growth of

encounter

to experience something unexpectedly

four characteristics of a successful budget

carefully planned, practical, flexible, and easily accessible

examples of non-liquid assets

gold, stocks, insurance, investments, and real estate

alternative

a different option

opportunity cost

trade-off

where mortgage papers should be kept

a safe-deposit box

where birth certificates should be filed

safe-deposit box

category of wealth that cars fall into

personal possessions

what is greater than your assets when insolubility occurs

liabilities

examples of cash inflow

an allowance, interest on savings

examples of fixed expenses

car payment, auto insurance premiums

example of cash outflow

a credit payment

examples of personal financial documents

pay stubs, bank statements, broker reports, and credit card statements; marriage licences, vehicle titles, tax forms, contracts, certificates of deposit, leases, mortgage loan papers, stock certificates, and birth certificate

key to establishing a sound financial future

increase your savings

when making decisions about opportunity cost, you must consider

your values, current financial situation, and goals

first step to effective money management

organize your personal financial documents

an organized system of personal financial documents helps you...

determine your current financial status, pay your bills on time, complete required tax reports, plan for the future, and make sound financial decisions related to your investments

places to store financial documents

home filing cabinet, safe-deposit box, and home computers

steps to making a home filing system

locate and sort your documents, put them in labeled filed folders, cultivate the habit of promptly placing financial documents in the folders

documents to store in a home filing system

resumes, budgets, balance sheets, checkbooks, bank statements, canceled checks, tax records and returns, receipts, warranties, insurance records, investment records, brokerage statements, wills, retirement records

documents to not store in a home filing system

difficult-to-replace documents like mortgage papers, car titles, and insurance policies

documents to store in a safe-deposit box

car titles, mortgage loan papers, birth and marriage certificates, leases, stock certificates, bonds, certificates of deposit, contracts, adoption papers, valuable collectibles, fine jewelry, and pictures of your home and belongings

how to use home computers to keep track of your financial transactions

save back-up copies of important documents, financial software programs to summarize your spending and deposits, and online banking

what a personal financial statement helps you do

helps you determine what you owe and own, measure your progress toward your financial goals, track your financial activities, and organize information required to file your tax return or apply for credit

steps to making a personal balance sheet

determine your assets, determine your liabilities, calculate your net worth, evaluate your financial position

four categories of wealth

liquid assets (money in savings and checking accounts, life insurance policy with a cash value that can be borrowed), real estate (land and structures on it), personal possessions (cars, laptop computers, bicycles, rare coins, fine jewelry, and other valu

current liabilities

short-term debts that must be paid within one year; balances on a charge account, insurance premiums, current taxes, utility bills, and medical bills

long-term liabilities

debts that do not have to be fully repaid for at least a year; loans for home improvement, vehicles, college tuition, and mortgage loans

even when you have a high net worth, this can still happen because your assets are not liquid

insolvency

how to increase your net worth

reduce your expenses, reduce your spending and debts, increase your savings, increase your investments

cash flow statement

summary of your cash inflow and outflow during a particular period of time; shows where you received income and where you spent money

steps to create a cash flow statement

record all your sources of income (your net pay/take-home pay after deductions from your gross pay), record all your expenses (fixed and variable), calculate your net cash flow (surplus or deficit)

fixed expenses

do not vary from month to month; rent, cable, internet charges, bus fare

variable expenses

may change from month to month; food, utilities, clothing, medical costs, recreation

positive cash flow does what to net worth

increases it

negative cash flow does what to net worth

decreases it

net cash flow and net worth do this

change from month to month

steps to prepare a budget

set your financial goals, estimate your income, budget for unexpected expenses, budget for fixed expenses, budget for variable expenses, record what you spend (your budget variance may be a surplus or deficit), review spending and saving patterns (keep re

financial goals

depend on your lifestyle, values, and plans for the future; should be specific with a definite time frame

how to save more

put money in savings first, use payroll savings, spend less