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Unit 2: Financial Planning

Terms in this set (33)

Why is it important to organize your financial documents?
The first step in effective money management is to organize your personal financial documents, which include bank statements, paycheck stubs, receipts, automobile ownership titles, birth certificates, and tax forms. Creating an organized system for handling your personal financial documents helps you plan and measure your financial progress, handle routine money matters, such as paying bills on time, determine how much money you will have now and in the future, and make effective decisions about how to save money
What are personal financial statements?
A document that provides information about an individual's current financial position and presents a summary of income and spending.
Describe the parts of a personal balance sheet and what you learn from it.
A personal balance sheet lists items of value owned, debts owed, a person's net worth. These personal financial statements can help you determine what you own and what you owe, measure your progress toward your financial goals, track your financial activities, and organize information that you can use when you file your tax return or apply for credit.
Describe the parts of a cash flow statement and what you learn from it.
Cash flow is the money that actually goes into and out of your wallet and bank accounts. Cash flow is divided into Cash inflow—your income and Cash outflow which is all of the money you spend. To create a cash flow statement, you should record your income, record your expenses, and determine your net cash flow.This summary gives you important information and feedback on your income and spending patterns. You can determine your net cash flow by subtracting your expenses from your income. If your cash net flow is negative, you will have a deficit.
What are the steps in creating a budget?
Step 1: Set Your Financial Goals. Make your financial goals as specific as possible have a definite time frame for your goals, and separate your goals into short-term, intermediate, and long-term goals
Step 2: Estimate Your Income. When you have set your goals, you can begin working on a budget that is practical for you.
Step 3: Budget for Unexpected Expenses. You can create special savings accounts to help you meet unexpected expenses and reach your financial goals
Step 4: Budget for Fixed Expenses. Your fixed expenses are those that do not change from month to month.
Step 5: Budget for Variable Expenses. Planning for variable expenses is not as easy as budgeting for fixed expenses. You should make your best guesses based on costs from previous months.
Step 6: Record What you Spend. To find out how practical your budget is, you will need to keep track of your expenses during an entire month and then revise your budget if necessary.
Step 7: Review Spending and Saving Patterns. Even if your budget generally seems to be on target, it is a good idea to prepare an occasional budget summary to review your progress.
What is the difference between a fixed and variable expense?
Your fixed expenses are those that do not change from month to month. Variable expenses can change from month to month. Planning for variable expenses is not as easy as budgeting for fixed expenses. You should make your best guesses based on costs from previous months.
What is the connection between creating a budget and achieving financial security?
living within means, not running out of money, saving towards our goals
How can we use a budget to manage cash flow?
budget has your income and expenses for the month
What factors influence buying decisions?
-Economic (prices, interest rates, warranty)
-Social (lifestyle, interests, hobbies, culture)
-Personal (gender, age, income, education, occupation).
What steps are involved in the research-based approach for making a purchase?
-timing of purchase, store selection, warranty evaluation
1. Establish Your Criteria: What are the features you absolutely must have in your next major purchase? And which features would you like it to have? Separating wants from needs is an important step in making any purchase.

2. Choose Two to Three Good Options: It's elimination time. Remove any options without your must-have features. Narrow down your list to just two or three different choices.

3. Identify the Pros and Cons: Make a chart so you can quickly compare the features and prices of each of your top two or three choices. For example, "Option 1 has all the features I want, it is in my budget, but it isn't the color I want. Option 2 is not the color I want and costs $200 more than I want to spend."

4. Decide What's Best: Choose the purchase option that best matches your criteria.

5. Evaluate the Purchase: Did you stay within budget? Do you feel good about the purchase? Begin saving for the item as far in advance as possible.
What strategies can we use to make wise buying decisions?
Store selection, timing of purchases, brand comparison, label information research, price comparison, warranty evaluation
What are some ways to solve consumer problems?
Return to the place of purchase, contact company headquarters, consumer agency assistance
What are the costs involved in renting a residence?
Location, living space, utilities (electricty, gas, water, trash), security deposit, and renter's insurance.
What are the costs involved in owning a home?
electricity bill, property taxes, property insurance, furniture, utilities, appliances, house repair and maintenance,
What are advantages and disadvantages of renting a residence?
Advantages:
Greater mobility
Fewer responsibilties
Lower Initial Costs

Disadvantages:
Offers few financial benefits
Can contribute to a more restrcitive lifestyle.
May involve various legal issues for tenants.
What are advantages and disadvantages of owning a residence?
Advantages:
a sense of stability and permanence
tax deductions
freedom to decorate, change your own home, and have pets

Disadvantages:
high expenses
financial risk
limited mobility
What is the purpose of a rental agreement? What conditions should you be aware of before signing it?
What is the purpose of a lease?
-A lease is designed to protect the rights of both the landlord and the tenant.

What is typically included in a lease agreement?
- The conditions of the rental agreement between the tenant and landlord. When you sign a lease, make sure to understand and agree with everything that it says, pay special attention to the amount and due date of the monthly rate and the length of the rental period, and check to see whether you have the right to sublet the property if you want to move out before the lease expires.
Unit Price
price / unit of measurement
goals
the things you want to accomplish
values
the beliefs and principles you consider important, correct, and desirable
liquidity
the ability to easily convert financial assets into cash without loss in value
Federal Reserve System
the central banking organization of the U.S.
time value of money
the increase of an amount of money due to earned interest or dividends
future value (compounding)
the amount your original deposit will be worth in the future based on earning a specific interest rate over a specified period of time
Explain personal financial planning and its importance
.
arranging to spend, save, and invest money to live comfortably, have financial security, and achieve goals. Important because it will help you to reach your goals
Describe the six strategies of financial planning
1. determine your current financial information
2. develop your financial goals
3. identify your options
4. evaluate your alternatives
5. create and use your financial plan of action
6. review and revise your plan
Time involved in achieving various goals
short term - less than a year
intermediate - 1-5 years
long term - more than 5 years
Describe the factors that affect personal financial decisions
life situations, personal values, and economic factors
personal opportunity costs
an opportunity cost if what is given up when making one choice instead of another. Personal opportunity cost examples include health, knowledge, skills, time etc.
financial opportunity costs
an opportunity cost if what is given up when making one choice instead of another. Financial opportunity cost examples include loss of money due to interest, future value, or present value
Strategies for achieving your financial goals
obtain financial resources
plan how you will spend your money
spend wisely (spend less than you earn)
save on a regular basis
borrow wisely and only when necessary
invest your money
manage risk with insurance
plan for retirement
Explain when you may need to adjust your financial plan
change in life such as a new job, loss of a job, marriage, having children, etc.
How can financial planning help us reach our goals and achieve financial security?
Arranging to spend, save, and invest money based on our goals will help to achieve them. Also by saving and investing we will achieve financial security.
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