Money in Review Chapter 3 Flashcards

Budgeting Basics

• A Budget is a written cash flow statement that details income and expenses.
• Reconciliation involves matching bank statements with checkbook records to ensure accuracy.

Types of Budgets

• A Zero-Based Budget allocates every dollar of income to expenses, resulting in a balance of zero after expenses are subtracted.
• The Envelope System organizes cash into envelopes for different spending categories (e.g., food, entertainment), helping manage monthly expenses effectively.

Spending Behavior

• An Impulse Purchase refers to an item bought spontaneously without prior planning, potentially leading to long-term financial effects.
• Overdrawing an account results in an Overdraft, when withdrawals exceed the available balance, leading to fees and potential financial stress.

Financial Statements

• A Cash Flow Statement summarizes total income and expenditures over a specific period.
• A Carbon Check serves as a duplicate of each check issued, providing a record of payments made.

Financial Management Insights

• Financial disagreements, especially regarding money, remain a leading cause of divorce in North America.
• Managing spending is made easier with systems like the envelope method for variable expenses that lack fixed costs.

Consequences of Financial Mismanagement

• Overdrawing an account incurs multiple fees: overdraft fees from banks and bounced check fees from merchants.
• Doing a budget does not inherently make overspending more likely; rather, it aids in financial discipline.

Key Budget Components

• A comprehensive monthly budget encompasses fixed expenses (consistent payments), variable expenses (changeable costs), and discretionary expenses (non-essential spending).
• Cash flow plans may fail due to unplanned variable expenses and impulsive purchases within discretionary spending.

Importance of Cash Flow Management

• A zero-based budget is considered the most effective method as it ensures every dollar is accounted for and assigned to a specific expense.
• Maintaining a cash flow plan is crucial; it acts as a blueprint for budgeting and accumulating wealth.

Checking Account Options

• Checking accounts commonly offer various payment options, including Debit Cards and the ability to Write Checks.

Record Keeping

• Keeping a file with both paper and electronic financial records is vital for understanding financial obligations and ensuring timely payments.