Chapter 3 Review

Chapter 3 Review

Money Management Strategy

Money Management

• Money management is planning how to get the most from your money.

• The first step in effective money management is to organize your personal financial documents.

• Personal financial documents include a variety of materials, such as bank statements, paycheck stubs, automobile ownership titles, birth certificates, and tax forms.

• You can keep your financial documents in a home file, a safe-deposit box, or on a computer. A safe-deposit box is a small secure storage compartment that you can rent in a bank.

Fill in the Blank

A ________ _______ _____, also called a net worth statement, is a financial statement that lists items of value owned, debts owed, and a person's net worth.

Personal Balance Sheet

• Personal financial statements are documents that provide information about an individual's current financial position and present a summary of income and spending.

• A personal balance sheet, also called a net worth statement, is a financial statement that lists items of value owned, debts owed, and a person's net worth.

• Your net worth is the difference between the amount that you own and the debts that you owe.

• Net Worth = Assets - Liabilities

Multiple Choice

What is the first step of creating a personal balance sheet?

• Determine Your Liabilities

• Calculate Your Net worth

• Determine Your Assets

Creating a Personal Balance Sheet

• Step 1: Determine Your Assets. Assets are any items of value that an individual or company owns. This includes the four categories of wealth: liquid assets, real estate, personal possessions, and investment assets.

• Step 2: Determine Your Liabilities. Liabilities are the debts that you owe.

• Step 3: Calculate Your Net Worth. To determine your net worth, subtract your liabilities from your assets. Insolvency is a financial state that occurs if liabilities are greater than assets.

• Step 4: Evaluate Your Financial Situation. You can use a balance sheet to track your financial progress.

Multiple Select

How can you increase your net worth? Select all that apply.

• Increase Assets

• Decrease Assets

• Increase Liabilities

• Decrease Liabilities

Increasing Your Net Worth

As a rule, you can increase your net worth by increasing your assets (increase savings, increase investments), or by reducing your liabilities (reduce expenses, reduce debts).

Multiple Choice

Sebastian owns a car that is worth $4,500, a coin collection worth $250, and has $2,500 in his checking account. He owes $1,500 on his credit card and $2,000 for a medical bill. What is Sebastian's net worth?

• $10,750

• $3,750

• $7,750

Sebastian's Net Worth

Net Worth = Assets - Liabilities

Assets = $4,500 + $250 + $2,500 = $7,250

Liabilities = $1,500 + $2,000 = $3,500

Net Worth = $7,250 - $3,500 = $3,750

Fill in the Blank

____ ____ is the money that goes into and out of your wallet and bank account. It is divided into two parts: cash inflow and cash outflow.

Cash Flow Statement

• Cash flow is the money that goes into and out of your wallet and bank account.  It is divided into two parts: cash inflow and cash outflow.

• Cash inflow is the money you receive, or your income. This may include a paycheck from a job, allowance from your parents, or interest earned in a savings account.

• Cash outflow includes all of the money you spend.

• A cash flow statement is simply a summary of your cash flow during a span of time, usually a month or a year.

Multiple Choice

If your net cash flow is positive, you have a _____.

• Surplus

• Deficit

Creating a Cash Flow Statement

• Step 1: Record Your Income. List all of your sources of income during a given month, and record the amount as your cash inflow.

• Step 2: Record Your Expenses. Expenses can be either fixed or variable.  Fixed expenses are expenses that are more or less the same each month. Variable expenses may change from month to month.

• Step 3: Determine Your Net Cash Flow. To determine your net cash flow, subtract your expenses from your income. If your net cash flow is positive, you have a surplus. If your net cash flow is negative, you would have a deficit.

Multiple Select

Select all true statements.

• Discretionary income is the money left over after paying for essentials.

• Your take-home pay is the amount of income left after taxes and other deductions are taken out of your gross pay.

• A a surplus is extra money that can be spent or saved.

• A deficit occurs when more money is spent that is earned or received.

Multiple Choice

Nick works 40 hours a week at his full-time job. His take-home pay is $22 an hour. He pays $1,200 a month for rent, $200 a month for entertainment, and $250 a month towards paying off his car. Will he end this month with a surplus or a deficit?

• Surplus

• Deficit

Nick's Cash Flow

Your Financial Position

• Every time you create a deficit by spending beyond your means, your net worth decreases. To make up for the deficit, you can either borrow money (increasing your liabilities) or draw from your savings (decreasing your assets).

• If you end a month with a surplus, your net worth will most likely go up. You can choose to save the money (adding to your assets) or you can use it to pay off previous debts (reducing your liabilities).

• As a general rule, if you have a surplus cash flow, your net worth increases; if you have a deficit, your net worth decreases.

Fill in the Blank

A ______ is a plan for using money to meet wants and needs. Having this plan is necessary for successful financial planning as it can help you control your spending habits.

A Practical Budget

• A budget is a plan for using money to meet wants and needs.

• Having a budget is necessary for successful financial planning.

• By using a budget, you will learn how to live within your means and how to spend your money wisely. 

• You will also develop good money management skills that will help you reach your financial goals.

Creating a Practical Budget

• Step 1: Set Your Financial Goals

• Step 2: Estimate Your Income

• Step 3: Budget for Unexpected Expenses

• Step 4: Budget for Fixed Expenses

• Step 5: Budget for Variable Expenses

• Step 6: Record What You Spend

• Step 7: Review Spending and Saving Patterns

Multiple Select

What can affect the prices of goods and services? Select all that apply.

• Supply and demand

• Prices of raw materials

• Inflation

• Interest rates

• Local salaries and wages

Consumer Price Index

• The consumer price index (CPI) is a measure of the changes in prices for commonly purchased goods and services in the United States. 

• Comparing the CPI to your actual budget can indicate when you are spending too much on various items.

• Many things can affect the cost of goods and services. This includes interest rates, inflation, salaries and wages, price of raw materials, and supply and demand.

Multiple Select

Select all fixed expenses.

• Rent

• Electricity

• Car Insurance

• Mortgage

• Paycheck

Fixed Expenses

Fixed expenses are expenses that do not change from month to month. This includes rent, mortgage, car insurance, and student loan payments.

Multiple Choice

What is budget variance?

• Money that is left over after deductions and taxes have been taken out.

• A measure of the changes in prices for commonly purchased goods and services in the United States.

• The difference between the budgeted amount and the actual amount that you spend.

Budget Variance

The budget variance is the difference between the budgeted amount and the actual amount that you spend. This figure can either be a surplus or a deficit. It is a surplus if you spend less money than you had expected, and it is a deficit if you spend more.

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Variance = Budgeted Amount - Actual Amount

Multiple Select

What makes a budget good? Select all that apply.

• It is planned quickly

• It is practical

• It is rigid

• It is written and easily accessible

Planning a Good Budget

• A good budget is carefully planned. Your estimates should be carefully thought out, and your spending categories must cover all expenses.

• A good budget is practical. Your budget should align with your current financial situation.

• A good budget is flexible.  Your budget should be easy to revise when life changes occur.

• A good budget must be written and easily accessible. Use a notebook, folder, or computer to store your budget.

Multiple Select

What are good strategies for saving money? Select all that apply.

• Spend less

• Use a payroll deduction

• Take out a loan

• Set aside money for savings before paying bills

Saving Strategies

• Set aside a fixed amount as savings before you sit down to pay your bills.

• A payroll savings deduction is a portion of your earnings that is automatically taken out of your paycheck and put into your savings or retirement account.

• Make an effort to spend less each day.