Questions and Answers
What is a set of goals for spending, saving, and investing the money you receive?
What is a spending and saving plan based on your expected income and expenses?
Match the steps in preparing your budget to their descriptions.
Estimate your income = Assess the total money you expect to receive Estimate your expenses = Calculate your expected costs Decide how much to save = Determine the amount to be set aside for savings Balance your budget = Ensure that your income matches or exceeds your expenses
What are costs that do not change from month to month?
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What are costs that vary in amount and type, depending on the choices you make?
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What makes budgeting and long-range planning easier?
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How long should taxpayers keep their copies of tax records after tax returns?
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A major reason for financial planning is to prevent careless spending.
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To prepare your budget, you should first list sources of money you expect to receive known as income.
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Receipts and documents showing income and expenses should be kept in a safe place because they are proof for evidence to use in the event of an audit.
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When your assets are less than liabilities, you are said to be solvent which is a good financial position.
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A written agreement between two or more persons is known as an implied contract.
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An express contract can only be written and not oral.
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How much disposable income should you set aside per month?
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What is the difference when you subtract liabilities from your assets?
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Study Notes
Financial Planning
- A financial plan outlines goals for spending, saving, and investing money.
- Budgeting involves creating a spending and saving plan based on expected income and expenses.
Budget Preparation Steps
- Estimate your income and expenses.
- Determine the amount to save and ensure your budget is balanced.
Expense Categories
- Fixed expenses remain constant each month, e.g., rent or mortgage.
- Variable expenses fluctuate based on personal choices, e.g., groceries or entertainment.
Importance of Record Keeping
- Good personal records simplify budgeting and long-term planning.
- Essential records include: income and expense reports, net worth statement, personal property inventory, tax documents, and miscellaneous items.
Types of Records
- Income records consist of W-2 forms, bank statements, and investment reports.
- Expense records include receipts and medical bills, critical for financial tracking.
Understanding Net Worth
- A net worth statement indicates a person’s financial position based on total assets and liabilities.
- Assets are valuable items owned, while liabilities represent debts owed.
Calculating Net Worth
- Net worth is calculated by subtracting liabilities from assets using the equation: Assets - Liabilities.
Personal Property Inventory
- A personal property inventory lists valuable items, their purchase prices, and approximate current values.
Tax Records
- Tax records should be kept for a minimum of 3 years following return submissions.
Contract Fundamentals
- A contract is a legally enforceable agreement between parties.
- Common agreements include credit accounts, mortgages, and rental agreements.
Types of Contracts
- Contracts can be express (oral or written) or implied by actions.
- Essential elements of a contract include agreement, consideration, contractual capacity, and legality.
Importance of Notarization
- Documents are verified through a notary public, signifying they are notarized.
Statute of Fraud Basics
- Certain contracts must be in writing to be legally binding, e.g., property sales or agreements over $500.
Negotiable Instruments
- A negotiable instrument is an unconditional written promise to pay a sum of money, commonly represented by checks and promissory notes.
Promissory Notes
- A promissory note is a written promise to pay a specific sum by a specified date.
Key Parties in Promissory Notes
- The maker is responsible for repayment, while the payee receives the payment. A co-signer agrees to back the debt.
Warranties
- A warranty guarantees the quality and performance of a product or service, which can be implied or written.
Benefits of Electronic Record Keeping
- Advantages include easy updates, efficient storage and retrieval, and quick calculations.
Technology in Financial Management
- Spreadsheets organize data in rows and columns for calculations, while databases facilitate easy data management.
Competent Parties
- Competent parties are legally capable individuals who can enter enforceable agreements.
Disposable Income and Financial Health
- Disposable income is the amount left after taxes, available for spending or saving.
- A cash surplus occurs when income exceeds expenses, indicating positive financial health.
Financial Planning Steps
- Key steps involve understanding available resources and effective budget planning.
Common Misconceptions
- Financial planning aims to reduce careless spending.
- Accumulating receipts and income documents is essential for audits.
- A financial position is unfavorable if liabilities exceed assets.
Key Savings Recommendations
- It's suggested to allocate 10% of disposable income each month for savings.
Purpose of Net Worth Statement
- A primary use of a net worth statement is in loan or credit applications, reflecting financial stability and creditworthiness.
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Description
Test your knowledge of personal finance concepts with these flashcards based on Chapter 8. Learn key terms such as financial plans and budgeting techniques that will help you manage your money effectively. Prepare to enhance your understanding of financial management strategies.
