PERSONAL FINANCE

Chapter 3

Section 3.1 and 3.2

OPPORTUNITY COSTS Money Management

Spend your money on clothes or save it?

Shopping around for better deal on mp3 player?

ORGANIZING FINANCIAL DOCUMENTS Helps you to….

STORING FINANCIAL DOCUMENTS Home Files

Safe Deposit Box

Home Computers

PERSONAL FINANCIAL STATEMENT

PERSONAL BALANCE SHEET STEP 1 Determine Your Assets

Any items of value that you own, including cash, property, personal possessions, and investments.

Four categories of wealth to determine assets

PERSONAL BALANCE SHEET STEP 2 Determine Liabilities

Debts that you owe.

Current Liabilities

Long-Term Liabilities

Not Liabilities

PERSONAL BALANCE SHEET STEP 3 Calculate Your Net Worth

PERSONAL BALANCE SHEET STEP 4 Evaluate Your Financial Situation

CASH FLOW STATEMENT Cash Flow

CASH FLOW STATEMENTSTEP 1 Record Your Income

CASH FLOW STATEMENTSTEP 2 Record Your Expenses

Fixed expenses – the same each month

Variable expenses – can change from month to month.

The total of your fixed and variable expenses is your cash outflow.

CASH FLOW STATEMENTSTEP 3 Determine Your Net Cash Flow

EVALUATING YOUR FINANCIAL PROGRESSRatio Calculation Example Meaning

Debt Ratio

Liabilities divided by net worth

25,000/50,000 = 0.5

Low debt ratio is desirable.

Liquidity Ratio

Liquid assets divided by monthly expenses

10,000/4,000 = 2.5

Number of months you can pay your expenses.

Debt-Payments Ratio

Monthly credit payments divided by take home pay.

540/3,600= 0.15 or 15%

How much of earnings goes to pay debts. 20% or less is goal.

Savings Ratio

Amount saved each month divided by gross monthly income.

600/5,000= 0.12 = 12%

At least 10% is goal. 15% is better.