CHAPTER 2 - BASIC IDEAS OF FINANCE

It is about creating productive assets that is, resources that can be used to create future economic benefit, such as increasing income, decreasing expenses or storing wealth, as an investment, and about protecting existing and expected value in those assets.

Basic Ideas of Finance

Answer explanation

1. Income and Expenses

2. Assets

3. Debt and Equity

4. Income and Risk

Personal finance is the process of paying for or financing a life and a way of living.

Where Does Income Come From?

Answer explanation

1. Income is what is earned or

received in a given period.

2. Deposit accounts

3. Owning stock

4. Owning a piece of a partnership

Income from

Market-based Economy

Where Does Income Go?

Answer explanation

1. Expenses are costs for items or resources that are used up or consumed in the course of daily living.

2. Income is less than expenses

(budget deficit)

3. Income is greater than expenses

(budget surplus)

E.g., Suppose you can afford a new jacket or new boots, but not both, because your resources the income you can use to buy clothing — are limited. If you b uy the jacket, you cannot also buy the boots. Not getting the boots is an opportunity cost of buying the jacket; it is cost of sacrificing your next best choice.

The money you spent on your jacket is a sunk cost. If it snows next week and you decide you r eally do need boots, too, that money is gone, and you cannot use it to buy boots. If you really want the boots, you will have to find another way to pay for them.

Any item with economic value that can be converted to cash.

Examples of Assets?

Answer explanation

• Car

• Savings account

• Money market account

• Shares of stock

• Forty acres of farmland

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