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Personal Finance 218, Week 2 Notes

by: Parker Moore

Personal Finance 218, Week 2 Notes FIN 218

Parker Moore
GPA 3.82

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Here are my notes covering chapter 2 of Personal Finance: "Turning Money into Wealth" I included visual aids as well as a key information from the chapter. I made sure to only include necessities s...
Personal Finance
David P. Bell
Class Notes
Intro to Personal Finance Planning
25 ?




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This 6 page Class Notes was uploaded by Parker Moore on Sunday October 9, 2016. The Class Notes belongs to FIN 218 at Portland State University taught by David P. Bell in Fall 2016. Since its upload, it has received 25 views. For similar materials see Personal Finance in Finance and General Business Department at Portland State University.

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Date Created: 10/09/16
Personal Finance 218, Week 2 Notes PSU: Fall term Highlight = Keyword Budgeting and Planning Process: Personal Balance Sheet: a statement of your financial position on a given date. It includes the assets you own, the debt or liabilities you have incurred, and your level of wealth, which is referred to as net worth. Assets: What you own. There are multiple types of assets including:  Monetary asset: liquid asset, one that either is cash or can be easily turned into cash with little or no loss in value  Investment: common stocks, mutual funds, bonds  Retirement Plans: IRA, 401K, company pensions  Housing  Automobiles  Personal Property  Other assets: part business, massive collection of semi valuable pez dispensers Liabilities: What you owe, your debt or borrowing. Types of liabilities include:  Current debt: comprised of the total of your unpaid bills, including utility bills, past due rent, cable TV bills, and insurance premiums you owe  Long-term debt: home, car or student loans. Net Worth or Equity: A measure of the level of your wealth. It is determined by subtracting the level of your debt or borrowing from the value of your assets.  Insolvent: condition in which you owe more money than your assets are worth Fair Market Value: What an asset could be sold for rather than what it cost or what it will be worth sometime in the future. Q: What is a balance sheet? A: A statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period. Q: What is an income statement? A: An Income Statement is more like a financial motion picture: it tells you where your money has come from and where it has gone over some period of time. Income- Where your money comes from  Some of your income may not very reach your pocketbook. Instead it may be automatically invested I a voluntary retirement plan,, used to pay for insurance you buy though work, or sent to the government to cover taxes Expenditures- Where your money goes  Variable expenditure: an expenditure over which you have control. That I, you are not obligated to make that expenditure, and it may vary from month to month.  Fixed Expenditure- An expenditure over which you have no control. You are obligated to make this expenditure, and it is generally at a constant level each month. Budget- A plan for controlling cash inflows, and cash outflows, based on your goals and financial obligations, a budget limits spending in different categories Using Ratios: Financial Thermometers Q1: Do I have enough Liquidity to meet emergencies?  Current ratio: A ratio aimed at determining if you have adequate liquidity to meet emergencies; defined as monetary assets divided by current liabilities current ratio = monetary assets / current liabilities  *NOTE: Most financial advisors look for a current ratio above 2.0  Month’s living expenses covered ratio: a ratio aimed at determining if you have adequate liquidity to meet emergencies; defined as monetary assets divided by annual living expenditures divided by 12  Month’s living expenses covered ratio = monetary assets / annual living expenditures / 12  If answer is 0.825 then you would have enough cash and liquid assets on hand to cover 0.825 months of expenditures  Emergency funds: a reserve or rainy-day fund with money set aside to be used in an emergency, when an unexpected expense is incurred or when normal income is disrupted Q2: Can I meet my debt obligations?  Debt ratio: a ratio aimed at determining if you have the ability to meet your debt obligations; defined as total debt or liabilities divided by total assets.  Debt ratio = total debt or liabilities / total assets  Long-term debt coverage ratio: a ratio aimed at determining if you have the ability to meet your debt obligations; defined as total income available for living expenses divided by total long-term debt payments  Long-term debt coverage ratio = total income available for living expenses / total long-term debt payments  In general, a debt coverage ratio of less than approx. 2.5 should raise a cation flag Q3: Am I saving as much as I think I am?  Savings ratio: a ratio aimed at determining how much you are saving; defined as income available for savings and investment divided by income available for living expenditures  Saving ratio = income available for savings and investment / income available for living expenditures  Ratio tells you the proportion of your after-tax income that you are saving Record keeping  Website Mint-  A Gallup poll says that 70% of people believe they are living within their means Hiring a professional:  What Planners do: computerized financial planning programs provide basic budgeting tools and advice  Choosing a finical planner o A personal financial specialist (PFS) is a certified public accountant who has passed certification tests in personal financial planning administered by the American Institute of Certified Public Accountants and has 3 years of personal financial planning experience. o A certified financial planner (CFP) has satisfactorily completed a 10- hour, 2-day exam and has a minimum of 3 years of experience in the field o A chartered financial consultant, of ChFC, has completed a coursework and ten exams administered by the American College How are financial planners paid?  Fee-only planners earn income only through the fees they charge, generally running from $75 - $200 per hour. They tend to work with bigger, more involved, and specialized situations.  Fee-and-commission planners charge fees and also collet commissions on products they recommend.  Fee offset planners charge a fee, but then reduce this fee by an commissions they earn.  Commission based planners work on commission basis *TIP: Read page 53-57 in textbook to get another brief summary of the chapter as well as working on Problems & activities. There are also some great discussion cases that will give you practice and better understanding of the topic.


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