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Learning Objectives
1. Calculate your level of net worth or wealth using a balance sheet.
2. Analyze where your money comes from
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Learning Objectives
4. Set up a record-keeping system to track your income and expenditures. 5. Implement a financial plan or budget
that will provide for a level of savings needed to achieve your goals. will play a role in your financial affairs.
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Introduction
Where does all your money go? Planning and budgeting requires control
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Figure 2.1
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Figure 2.2
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Retirement plans
Tangible assetsphysical assets
house, vehicles, furniture, jewelry, collectibles,
etc.
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future.
year.
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Table 2.1
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Figure 2.3
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your money has come from and where it has gone over some period of time.
Income and expenditure, net income statement Cash basisbased on actual cash flows Income expenses (over given time period)
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Figure 2.4
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commissions before tax or automatic investments Other sources: family income, government payments (veterans benefits, welfare), investment income.
Subtract federal, state, social security taxes from earnings to calculate your takehome pay.
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trail.
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Figure 2.5
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Figure 2.6
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Figure 2.6
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Ratios help you understand how you are managing financial resources.
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by current liabilities
Aim for above 2.0
Months Living Expenses Covered Ratio: monetary assets divided by annual living expenditures divided by 12
Should aim for 3 to 6 months of liquid assets Less if enough credit and insurance
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Long-term Debt Coverage Ratio: total income available for living expenses divided by total long-term debt payments
Less than 2.5 is a red flag
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Record Keeping
Without records difficult to prepare
taxes.
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track, but cash expenditures must be tracked as they occur. After tracking, record transactions in a ledger.
2. File and store your financial records so they are readily accessible.
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Develop a plan of action and cash budget using the income statement
Monitor your progress using the balance sheet and income statement.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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outflows.
spending categories
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take home pay from most recent annual personal income statement.
expenses
Compare actual expenditures in each category with budget amounts at the end of the month
Evaluate whether you change budget estimates or exert self-control? Stick your desired budget for a month with an envelope system
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Figure 2.7
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Hiring a Professional
Three options for working with professionals
1. Go it alone and have your plan checked by a professional. 2. Work with a professional to develop a plan. 3. Leave it all in the hands of a pro.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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What Planners Do
More unique financial situations need
professional help.
They give advice. You still need to know the basics and still bear ultimate responsibility
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Summary
Use a balance sheet to determine the level
Use an income statement to understand where your money comes from and goes to be able to save enough to meet goals.
Use financial ratios as targets or standards in managing financial resources.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Summary
A sound record-keeping systems makes
Use a budget to plan and evaluate spending and saving. Professional financial planners can help by validating your plan or developing a plan.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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