Personal Finance MT Exam Pointers PDF

Personal Finance: MT Exam Pointers Virginia D. Conquilla, MBA Identification Definition of Terms 1. Personal Finance is the process of planning and managing personal financial activities such as income generation, spending, saving, investing, and protection. 2. Financial Lit...

Personal Finance: MT Exam Pointers Virginia D. Conquilla, MBA Identification Definition of Terms 1. Personal Finance is the process of planning and managing personal financial activities such as income generation, spending, saving, investing, and protection. 2. Financial Literacy is your knowledge of facts, concepts, principles, and technological tools that are fundamental to being smart about money. 3. Financial Quotient (FQ), also known as financial intelligence (FI) or financial IQ (FiQ), refers to an individual’s ability to understand and manage their finances effectively. It encompasses a range of skills and knowledge related to money management, including budgeting, investing, saving, and understanding financial risks. 4. Personal Financial Planning Process typically includes several key steps, such as gathering financial information, setting financial goals, analyzing the financial situation, developing a financial plan, implementing the plan, monitoring the plan, and making adjustments as needed. Definition of Terms 5. Career Planning is a process of systematically matching career goals and individual capabilities with opportunities for their fulfillment. 6. Protection refers to the methods people take to protect themselves from unexpected events, such as illnesses or accidents, and as a means to preserve wealth. Protection includes life and health insurance and estate and retirement planning. 7. Financial Statements are compilations of personal financial data designed to communicate information on money matters. 8. Balance Sheet describes an individual’s or family’s financial condition on a specified date. It provides a current status report and includes information on what you own, what you owed, and what the net result would be if you paid off all of your debts. Definition of Terms 9. A personal finance income statement is a document that outlines your income and expenses over a specific period, typically monthly or yearly. It helps you understand your financial position and manage your money more effectively. 10. A cash flow statement (CFS) is a financial document that provides a detailed summary of the cash inflows and outflows of a business over a specific period. It is one of the three main financial statements, alongside the balance sheet and the income statement. The CFS is crucial for understanding a company’s liquidity and financial health. 11. Personal financial ratios are quantitative measurements for evaluating a person’s financial situation and assisting them in making financially wise decisions. 12. Basic Liquidity Ratio- Also known as the emergency fund ratio, the basic liquidity ratio alerts you to whether you have adequate cash reserves to cover your monthly expenses in the event of an emergency, such as job loss (retrenchment) or unexpected expenses (urgent medical bills). Definition of Terms 13. Net worth is a financial term that represents the total wealth of an individual, company, or household. It is calculated by subtracting all liabilities (debts and obligations) from all assets (things of value owned). 14. Debt to assets ratio – this indicates how much of your assets are funded by debt and helps you understand if you have borrowed more than you should. 15. Solvency ratio offers clarity as to whether you have sufficient assets in your portfolio to service your debts. 16. Budgeting is a process of an estimation of revenue and expenses over a specified future period of time. 17. Savings refers to the portion of your disposable income that you set aside rather than spend on consumption. Essentially, it’s the money left over after you subtract your expenses from your income. Definition of Terms 18. Credit score is a valuable tool used by lenders, such as banks and financial institutions, to assess the risk of lending to you. It is a three-digit number that represents your creditworthiness, or how likely you are to repay borrowed money on time. 19. Consumer loan means a secure or unsecured loan given to individual for personal, family, or household purposes, or for consumable items such as a Home, Car, Home Appliances, Land, Home equity line of credit, etc. 20. Credit cards are a convenient financial tool that allows you to borrow money up to a certain limit to make purchases or withdraw cash. Enumeration  Areas of Personal Finance: 1. Income - is the starting point of personal finance. It is the entire amount of cash inflow that you receive and can allocate to expenses, savings, investments, and protection. Income is all the money you bring in. This includes salaries, wages, dividends, and other sources of cash inflow. 2. Spending - is an outflow of cash and typically where the bulk of income goes. Spending is whatever an individual uses their income to buy. 3. Savings refers to the portion of your disposable income that you set aside rather than spend on consumption. Essentially, it’s the money left over after you subtract your expenses from your income 4. Investing - involves purchasing assets, usually stocks and bonds, to earn a return on the money invested. Investing aims to increase an individual's wealth beyond the amount they invested. 5. Protection - refers to the methods people take to protect themselves from unexpected events, such as illnesses or accidents, and as a means to preserve wealth. Protection includes life and health insurance and estate and retirement planning. Personal Financial Planning Process: 1. Establishing Goals: Identify your short-term, medium-term, and long-term financial goals. These could include saving for a house, retirement, education, or a vacation. 2. Gathering Financial Data: Collect all relevant financial information, such as income, expenses, assets, liabilities, and any existing financial plans or investments. 3. Analyzing Personal Data: Assess your current financial situation by analyzing the collected data. This helps in understanding your financial strengths and weaknesses. 4. Developing a Financial Plan: Create a detailed plan that outlines the strategies and actions needed to achieve your financial goals. This plan should include budgeting, saving, investing, and risk management strategies. Personal Financial Planning Process: 5. Implementing the Plan: Put your financial plan into action. This may involve setting up savings accounts, investing in stocks or bonds, purchasing insurance, or adjusting your spending habits. 6. Monitoring and Reviewing the Plan: Regularly review your financial plan to ensure it remains aligned with your goals and adjust it as necessary. Life changes, such as a new job, marriage, or the birth of a child, may require updates to your plan. 7 Personal Financial Ratios: 1. Basic Liquidity Ratio – Also known as the emergency fund ratio, the basic liquidity ratio alerts you to whether you have adequate cash reserves to cover your monthly expenses in the event of an emergency. It is recommended to set aside at least 3 to 6 months’ worth of expenses. 2. Liquid Assets to Net worth ratio - This ratio measures the percentage of your total assets that are cash (or cash equivalents). The higher the liquidity ratio, the bigger the buffer you have against any unexpected income loss. 3. Savings Ratio - How much of your monthly income that you channel towards savings is determined by this ratio. The higher the ratio, the better, as this reflects your ability to save more than you spend. 4. Debt to Asset Ratio - This ratio indicates how much of your assets are funded by debt and helps you understand if you have borrowed more than you should. The higher your debt ratio, the higher your liabilities and this could potentially lead to solvency issues. 7 Personal Financial Ratios: 5. Total Debt Serving Ratio - This ratio calculates the amount of your salary that is used for your regular debt settlements. A ratio of 35% or below means you have ample income to fulfil your monthly debt repayments. 6. Net Invested Assets to Net worth Ratio - This ratio lets you know how much of your assets are effectively used to accumulate wealth for you for the long-term. To position yourself well for your retirement years, strive to have at least 50% of your assets invested. 7. The solvency ratio is calculated to gauge your risk of getting bankrupt due to the inability to settle the debts taken. The higher the solvency ratio, the stronger your financial position. Good Luck!