Personal Finance: Chapter 2 Notes
Personal Finance: Chapter 2 Notes FIN 100
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This 3 page Class Notes was uploaded by Lindsay Fialli on Tuesday October 4, 2016. The Class Notes belongs to FIN 100 at Salem State University taught by Terrance Doyle in Fall 2016. Since its upload, it has received 5 views. For similar materials see Personal Finance in Finance at Salem State University.
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Date Created: 10/04/16
Chapter 2: Planning with Personal Financial Statements Assessing your financial position allows you to estimate how much you need to save each period to make specific purchases in the future with cash instead of borrowing money o Some people are afraid to do so and put it of Personal Cash Flow Statement: a financial statement that measures a person's cash inflows and cash outflows o Allows you to monitor your spending Deposits in various types of savings accounts can generate cash inflows in the form of interest income Recording transactions in your checkbook when you write checks helps you identify how you spent your money Credit or debit cards record your transactions Net Cash Flows: cash inflows minus cash outflows Cash inflows tend to increase as you gain job experience and progress within your chosen career For women, some put their careers on hold for months or years when they have children When in retirement, you make less than while working and is the same fixed amount Job type influences income o Jobs that require specialized skills pay higher salaries o The demand for job afects job types available More income earners in a household = larger income Factors afecting cash outflows o Size of family o Age Budget: a cash flow statement that is based on forecasted cash flows for a future time period Put aside money for unanticipating cash shortages Identify parts of your budget that you can improve over time Personal Balance Sheet: a summary of your assets, your liabilities, and your net worth Assets Liquid Assets: financial assets that can be easily sold without a loss in value o Useful for covering upcoming expenses Cash, checking accounts, savings accounts Cash for small purchases Checking account for larger purchases Savings accounts ofer interest Household Assets: items normally owned by a household, such as a home, car, and furniture o Make up larger portion of assets than liquids assets The market value of an asset is the amount you would receive if you sold the asset today Investments o Bonds: certificates issued by borrowers to raise funds o Stocks: certificate representing partial ownership of a firm Consider if you have excess funds Can make return if firm pays dividends to shareholders Long-term investment o Mutual Funds: investment companies that sell shares to individuals and invest the proceeds in investment instruments such as bonds or stocks Managed by portfolio manager and make investment decisions for customers o Real Estate: rental property and land o Rental Property: housing or commercial property that is rented out to others Generates additional income Liabilities Current Liabilities: debt that will be paid within a year o Credit card balance o No interest charged if you pay in full Some people create credit card problems because they are afraid to use any of their cash or other assets Large accumulation of current liabilities = credit problems Long-Term Liabilities: debt that will be paid over a period longer than one year o A student loan o Interest expense must be paid periodically Limit liabilities so you can limit amount of interest owed o Car loan o Mortgage If you sold enough of your assets to pay of all of your liabilities, your net worth would be the amount of assets you would have remaining Not being able to repay your debit if all assets were sold could lead to bankruptcy Economic conditions afects the value of your assets Demand = Value You need to monitor your liquidity over time to ensure that you have sufficient funds when they are needed Liquidity Ratio = Liquid Assets/ Current Liabilities Monitor your debt level to ensure that it does not become so high that you are unable to cover your debt payments Debt-to-Asset Ratio = Total Liabilities/ Total Assets Savings Rate = Savings During the Period/ Disposable Income During Period Strong Demands --> Values of ---> for Homes Homes Increase ---> Strong Values of Assets Economic Increases Conditions --> --> Corporations have --> Values of Stocks high sales Increase
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