Personal Finance Week 1-4 PDF

WEEK 1 | PERSONAL FINANCE Personal finance refers to the management of one’s finances through planning, spending, saving, and investing. It encompasses all areas of both short-term and long-term financial management for you and your family. Personal finance may also relate to a business committe...

WEEK 1 | PERSONAL FINANCE Personal finance refers to the management of one’s finances through planning, spending, saving, and investing. It encompasses all areas of both short-term and long-term financial management for you and your family. Personal finance may also relate to a business committed to offering services and products aimed at helping individuals manage their finances and take advantage of investment opportunities. There are five key areas of personal finance: Income, which refers to a source of cash inflow that individuals use to support themselves and their families Spending, which includes all expenses incurred in purchasing goods and services or anything consumable that is not an investment Saving, which is the retention of excess cash for future investing or spending Investing, which involves the purchase of assets expected to generate returns over time, allowing individuals to receive more than their original investment Personal Protection, which includes a wide range of products to safeguard against unforeseen adverse events. Top personal financial habits setting specific financial goals beginning a budget establishing an emergency fund reducing debt investing wisely It is important to use credit cards with caution think about your family’s needs take time off when necessary. Common money mistakes to avoid failing to plan overspending relying too much on credit delaying retirement savings falling for financial sales pitches making decisions based on emotion Focusing too much on money rather than overall financial health is another pitfall. A solid budget can enhance financial independence by encouraging more responsible spending, improving debt repayment strategies, and increasing savings for future goals. A budget can also help determine how much to set aside for retirement, building an emergency fund, or even planning vacations. There are five budgeting methods to consider The zero-based budget involves ensuring that income minus expenses equals zero, a method ideal for individuals with a set or reasonably predictable income. The pay-yourself-first budget focuses on prioritizing savings and debt repayment before other expenses. The envelope system budget involves planning how to spend your money using cash and allocating it into different envelopes for specific categories.  The 50/30/20 budget breaks expenses into three categories: 50% for necessary expenses, 30% for discretionary spending, and 20% for savings and debt payments. The no-budget budget allows for flexible spending within your means, keeping a close eye on your checking account balance and setting aside cash for savings and debt payments. The financial planning process is a systematic approach to managing finances. It involves evaluating your current financial situation, identifying goals, creating a plan to achieve those goals, and regularly monitoring and adjusting the plan. When setting goals, it’s helpful to categorize them into short-term goals (three months to three years), such as building an emergency fund; medium-term goals (three to ten years), like saving for a house down payment or starting a business; and long-term goals (more than ten years), such as saving for retirement or paying off a mortgage. Gathering financial data includes collecting personal information, compiling a list of assets and liabilities, and recording income and expenses to understand your cash flow. Developing a financial plan involves managing your budget, aligning investment strategies with your financial goals, and planning for taxes. It also involves managing risks through insurance, planning for retirement, and creating an estate plan to ensure an efficient transfer of assets to beneficiaries while minimizing tax liabilities. Analyzing financial data is crucial for determining net worth (assets minus liabilities), performing cash flow analysis to identify spending patterns and savings opportunities, and calculating the debt-to-income ratio to assess financial health. Understanding your risk tolerance based on factors such as age and financial goals is essential when making investment decisions. Implementing a financial plan involves prioritizing actions, allocating resources, and consulting professionals like financial planners when necessary. Monitoring and adjusting your financial plan is important to ensure it stays aligned with changing personal circumstances and external factors such as economic conditions. Periodic reviews help ensure that financial goals and strategies are updated as needed. WEEK 2 | PERSONAL FINANCE Establishing Your Financial Foundation The financial statements of a company provide a snapshot of its financial position at a specific time and date.  The Statement of Financial Position or balance sheet includes key components such as assets, liabilities, and shareholders’ equity. Assets Cash and Cash Equivalents: Liquid assets, including Treasury bills and certificates of deposit. Accounts Receivable: Money owed to the company by customers for products and services. Inventory: Goods on hand intended for sale, including finished goods, work in progress, and raw materials. Prepaid Expenses: Costs paid in advance, recorded as assets because their value is not yet recognized. If the benefit is not recognized, the company may be entitled to a refund. Statement of Financial Position - Assets Property, Plant, and Equipment (PPE): Capital assets owned by the company for long-term benefits, such as buildings and machinery. Investments: Assets held for future growth, not used in operations but held for capital appreciation. Intangible Assets: Includes trademarks, patents, goodwill, and other assets that have long-term economic benefits but cannot be physically touched. Statement of Financial Position - Liabilities Accounts Payable: Bills due for business operations, including utilities, rent, and raw materials. Wages Payable: Payments owed to employees for time worked. Notes Payable: Recorded debt agreements that include the payment schedule and amount. Dividends Payable: Dividends declared to shareholders but not yet paid. Long-term Debt: Obligations such as sinking bond funds, mortgages, or other loans due in more than one year. Statement of Financial Position - Shareholders’ Equity Shareholders’ Equity: The company’s total assets minus its total liabilities. This represents the amount that would be returned to shareholders if all assets were liquidated and debts paid. Retained Earnings: Part of shareholders’ equity, representing net earnings not paid out as dividends. Statement of Comprehensive Income Unlike the balance sheet, the income statement covers a range of time, typically a year or a quarter. It provides an overview of revenues, expenses, net income, and earnings per share, focusing on profitability. Revenue Operating Revenue: Generated from core business activities. Non-operating Revenue: Income earned from non-core activities. Other Income: Revenue from activities outside the primary function, such as gains from the sale of long-term assets. Expenses  Primary Expenses: Costs incurred in generating revenue, including the cost of goods sold (COGS), selling, general and administrative expenses (SG&A), depreciation, amortization, and research and development (R&D). Secondary Expenses: Costs related to non-core activities, including interest paid on loans or debts and losses from the sale of assets. Other Comprehensive Income Includes unrealized gains and losses not reported on the income statement, such as those from debt securities, derivative instruments, foreign currency adjustments, and retirement programs. Statement of Changes in Equity Tracks total equity over time, tying back to the balance sheet. The ending balance equals the total equity reported. The components include: Beginning Equity: The equity at the end of the previous period, carried forward. Net Income: The income earned during the period, rolled into retained earnings. Dividends: Profits distributed to shareholders. Other Comprehensive Income: Period-over-period changes in comprehensive income. Statement of Cash Flows Operating Activities: Cash inflows and outflows from core business operations, including changes in cash, accounts receivable, depreciation, inventory, and accounts payable. Investing Activities: Cash flows from long-term investments, including equipment purchases, asset sales, loans made or received, and payments related to mergers or acquisitions. Financing Activities: Cash from investors or banks, including debt issuance, equity issuance, stock repurchases, loan repayments, and dividend payments. Notes to Financial Statements Financial Statement Footnotes: Provide additional explanatory information to help clarify the main financial statements without overloading them with excessive details. Financial Statement Analysis Overview: Involves evaluating an entity’s past performance, present condition, and future potential by analyzing its financial statements. Intracompany Basis: Compares a company’s current financial data with its past performance. Industry Averages: Compares a company’s data with industry averages. Intercompany Basis: Compares a company’s financials with those of its competitors. Analysis Tools 1.Horizontal (Trend) Analysis: Evaluates financial statement items over time, showing changes as percentages. 2.Vertical (Common Size) Analysis: Evaluates items within the financial statements as a percentage of a base amount (e.g., total assets for the balance sheet or sales for the income statement). Ratio Analysis Liquidity: The ability to meet short-term obligations. Solvency: The ability to meet long-term obligations. Profitability: Analyzes a company’s performance through patterns in returns and margins. Common patterns include: 1.Return: Focus on net income (numerator). 2.Margin: Focus on sales (denominator). 3.Two-Year Analysis: Involves comparing two years of balance sheet (BS) data. WEEK 3 | Personal Finance Opportunity Cost Definition: A concept from microeconomic theory referring to the cost of potential gain you give up to pursue a different option. It is the cost of not taking the next best alternative—what you sacrifice to get something else. Examples: Option 1: Invest in Stocks Option 2: Invest in Real Estate Option 1: Save Money Option 2: Lend to a Friend Option 1: Take on a Second Job Option 2: Pursue a Hobby How to Calculate Opportunity Cost There’s no formal formula for calculating opportunity cost, but the simplest relevant equation is: C = FO- CO Where: FO = Return on the best forgone option  CO = Return on the chosen option Types of Opportunity Costs 1.Implicit Opportunity Cost: Intangible costs that cannot easily be accounted for, such as time or effort. For example, if a company invests time in nonprofit efforts, the implicit cost is the money it could have earned had it used that time for profit-driven work. 2.Explicit Opportunity Cost: Tangible and quantifiable costs. For example, if a company spends ₱2,000 on new printers, the explicit cost is what else it could have done with that ₱2,000. Why Opportunity Cost Matters in Personal Finance Helps better evaluate the pros and cons of each option, leading to stronger decision-making. Encourages informed and strategic decisions that align with long-term goals and values. Promotes awareness of long-term benefits and drawbacks of every financial decision. Marginal Benefit and Cost in Decision Making Marginal Benefit: The extra benefit derived from consuming or producing one more unit of a good or service. Law of Diminishing Marginal Utility: The more of something you have, the less satisfaction you get from an additional unit. Marginal Cost: The additional cost of producing one more unit of a good or service. Law of Increasing Marginal Cost: As production increases, lower-quality or more expensive resources are used, increasing the cost of additional units. Time Value of Money (TVM) Key Concepts: 1.Opportunity Cost: Current capital can be invested to achieve a higher return, which is the opportunity cost of money. 2.Inflation: Inflation and future uncertainty reduce the value of money over time, making the present value of money greater than its future value. Key Terms in TVM: 1.Interest/Discount Rate (i): The rate applied to discount or compound money to calculate its present or future value. 2.Time Periods (n): The number of time periods for which the present or future value is calculated (e.g., annually, semi-annually). 3.Present Value (PV): The current value of a sum of money that will be received in the future, using discounting. 4.Future Value (FV): The value of a sum of money at a future date. Important for investment decisions. 5.Installments (PMT): Periodic payments. Positive when received, negative when made. Taxation  Definition: The process through which the government imposes financial burdens on individuals and businesses within its jurisdiction to generate revenue for public use. Theories of Taxation: 1.Necessity Theory: The existence of the government justifies taxation. 2.Lifeblood Theory: Taxes are essential for government functions; without taxes, the government is paralyzed. 3.Benefit-Protection Theory: Citizens and the government have reciprocal duties; taxes ensure citizens receive services and protection. Purposes of Taxation: 1.Primary Purpose: To raise revenue for government expenditures (Revenue/Fiscal Purpose). 2.Secondary Purpose: Promotes social and economic welfare (Regulatory/Sumptuary Purpose). Classification of Taxes 1.As to Subject Matter: Personal: A fixed amount imposed on individuals. Property: Tax based on property value. Excise: Tax on specific goods, rights, or privileges (e.g., sin products). 2.As to Who Bears the Burden: Direct: The taxpayer cannot shift the tax burden. Indirect: The taxpayer can shift the burden to someone else (e.g., VAT). 3.As to Scope: National: Imposed by the national government. Local: Imposed by local government units. 4.As to Amount: Specific: Fixed amount based on measurement. Ad Valorem: Based on the value of the property. 5.As to Rate: Proportional: Fixed percentage rate. Progressive: Tax rate increases as the tax base increases. Regressive: Tax rate decreases as the tax base increases. Means of Avoiding the Burden of Taxation 1.Shifting: Transferring the tax burden to another party (e.g., VAT). 2.Exemption: Granting immunity to certain individuals (e.g., seniors, PWDs). 3.Tax Evasion: Using illegal methods to reduce taxes. 4.Tax Avoidance: Legally exploiting alternative tax assessments to reduce liability. 5.Capitalization: Reducing the selling price of a property to offset the tax burden. 6.Transformation: Absorbing the tax and compensating by improving production. Individual Taxpayers 1.Resident Citizens (RC): Filipino citizens residing in the Philippines. 2.Non-resident Citizens (NRC): Reside abroad with the intention to stay.  Work abroad permanently or for extended periods (183+ days in a year). 3.Resident Aliens (RA): Foreigners residing in the Philippines without definite plans to leave. 4.Non-resident Aliens (NRA): NRA-ETB: Engaged in business in the Philippines. NRA-NETB: Not engaged in business in the Philippines. Types of Income 1.Ordinary Income: Income from compensation, business, or professional practice. 2.Passive Income: Income subject to final withholding tax, including: Interest, dividends, royalties, prizes, and winnings. 3.Capital Gains: Gains from the sale of stocks or real estate, subject to capital gains tax. WEEK 4 | Personal Finance Monetary Assets Monetary assets are short-term assets that can be easily liquidated, such as cash, cash equivalents, short-term investments, and receivables. Their value is fixed in terms of money, meaning they do not depreciate or appreciate, although their purchasing power may change with inflation or deflation. Characteristics of Monetary Assets 1.Change in Real Terms: Monetary assets are fixed in dollar value but subject to changes in purchasing power. For example, $100 today may buy less in the future due to inflation. In this sense, the real value of monetary assets can decrease, even if the nominal value remains the same. 2. Restatements in Financial Statements: Unlike non-monetary assets (e.g., land), monetary assets are not subject to revaluation in financial statements. If recorded in a foreign currency, their value must be restated using the exchange rate at the closing date. IAS 21 Guidelines: Monetary assets are translated using the closing exchange rate. Non-monetary assets remain at the historical exchange rate. 3.Other Features: Easily liquidated. Can be converted into cash when needed. A ready market for sale is available. Not subject to depreciation. Used for working capital. Examples of Monetary Assets Cash Bank deposits Trade receivables Other receivables settled through cash Investments in debt instruments Lease investments Savings and Checking Accounts As to Purpose Checking Account: Primarily used for day-to-day transactions like deposits, withdrawals, payments, and bill payments. It is ideal when the goal is to spend money. Savings Account: Meant for saving money, not for daily transactions. It is used to accumulate interest on the deposits. As to Number of Permissible Transactions Checking Account: Allows unlimited deposits and withdrawals. Savings Account: Usually has restrictions on the number of withdrawals within a specific period. As to Interest Payments Checking Account: Typically does not offer interest. Some new accounts may offer minimal interest. Savings Account: Offers interest on deposits, with rates generally higher than those offered by checking accounts, encouraging account holders to maintain funds. As to Minimum Balance Requirement Checking Account: Requires a higher minimum balance than savings accounts. Penalties for failing to maintain the balance are usually higher. Savings Account: Requires a lower minimum balance. As to Transaction Frequency Checking Account: Requires a minimum of one transaction per month to remain active. Savings Account: Requires at least one transaction every six months; otherwise, it may be classified as dormant. Time Deposit A time deposit is an investment vehicle where money is locked in for a set period, earning interest at a fixed rate. The term can range from one month to several years, and rates vary by financial institution. Key Terms in Time Deposit 1.Minimum Placement: The lowest amount of money required to open a time deposit account. 2.Term: The period during which the money remains locked in, ranging from 30 days to five years. 3.Interest Rate: The percentage at which the money earns during the term, with longer terms typically offering higher rates. 4.Fund Access: Funds can only be withdrawn after the maturity period, with some banks allowing online or over-the-counter withdrawals. 5.Transaction Record: A confirmation of the deposited funds, including the interest rate and terms of the deposit. 6.Documentary Stamp: A fee charged at the end of the term, amounting to ₱1.50 for every ₱200 deposited. Advantages of Time Deposits Fixed interest rate Insured by the PDIC Encourages disciplined saving Disadvantages of Time Deposits Penalty on early withdrawals Locked-in period with no option to increase deposits during the term Understanding Consumer Credit Credit is an arrangement to receive goods, services, or cash now and pay for them later. Consumer credit is specifically for personal needs. It is based on trust in the consumer’s ability and willingness to repay the debt. Types of Consumer Credit 1.Closed-end (Installment): Used for a specific purpose, amount, and period (e.g., car loans). Payments are usually in equal installments. 2.Open-end (Revolving): Loans are made on a continuous basis (e.g., credit cards). The consumer is billed periodically and makes at least a partial payment. Sources of Consumer Credit 1.Commercial Banks: Offer various loans such as consumer loans, housing loans, and credit card loans. Consumer loans are for installment purchases of durable goods. Credit card loans offer cash advances within credit limits. 2.Savings and Loan Associations (S&Ls): Traditionally specialized in long-term mortgage loans. Now offer personal installment loans, home improvement loans, second mortgages, and education loans. Loans usually require collateral and have lower interest rates. 3.Consumer Finance Companies (CFCs): Provide personal installment loans and second mortgages, often to consumers with poor credit. Interest rates are higher due to the higher risk of default. 4.Sales Finance Companies (SFCs): Offer financing for big-ticket items like cars, appliances, and furniture. Payments are made to the finance company, not the dealer. 5.Life Insurance Companies: Allow loans against the cash value of life insurance policies. The loan balance is subtracted from the policy’s payout if not repaid. 6.Pawnbrokers: Offer secured loans using personal property as collateral. Higher interest rates, but no approval process is required. 7.Loan Sharks:  Illegal lenders who charge excessive interest rates and use illegal collection methods. Avoid them at all costs. 8.Family and Friends: Personal loans from family members, which should be handled professionally to avoid misunderstandings. Obtaining Credit and Building a Good Credit Reputation When applying for a loan, mortgage, or credit card, lenders evaluate your creditworthiness—how you’ve managed debt and whether you can handle more. Understanding the 5 C’s of Credit can help boost your creditworthiness: 1.Character: Trustworthiness in repaying debts. 2.Capacity: Ability to repay the debt based on income and expenses. 3.Capital: Savings and assets to support the loan. 4.Collateral: Assets pledged as security for the loan. 5.Conditions: Economic conditions that may affect the ability to repay. Building a Good Credit Reputation Establishing good credit habits is essential for long-term financial health. Good credit is vital not only for borrowing but also for securing better terms on rent, cell phones, and utilities. Tips for Building Good Credit: 1.Pay Bills on Time: Ensure timely payments, even if it’s just the minimum amount. 2.Avoid Maxing Out Credit: Keep credit card balances low. 3.Manage Debt-to-Income Ratio: Keep obligations low relative to income. 4.Contribute to an Emergency Fund: Save regularly to cover unexpected expenses. 5.Practice Before Taking on New Debt: Simulate loan payments by saving the amount for several months. 6.Apply for New Credit Only When Needed: Avoid multiple credit applications in a short period. 7.Think Before Closing Accounts: Closing accounts can hurt your credit score by reducing your available credit. 8.Protect Against Fraud: Use established banks and check for errors on credit reports. Dealing with Indebtedness Over-indebtedness occurs when debt exceeds current income, and it can either be passive (due to sudden unemployment) or active (taking on too much debt). To avoid this: Don’t Take on More Debt: Limit the use of credit cards and loans. Cut Unnecessary Expenses: Reduce spending on non-essential items. Make a Payment Plan: Organize a repayment schedule to regain control over finances. Preventing Over-indebtedness: Keep credit card and loan use in check. Create a budget to track income and expenses. Spend wisely and avoid unnecessary borrowing. 1.What does personal finance refer to? Management of one’s finances through planning, spending, saving, and investing. 2.Key components of financial planning include all except: Allow your financial planner to make all of your major money decisions. 3.If a transaction causes total liabilities to decrease but does not affect owner’s equity, what change, if any, will occur in total assets? Assets will be decreased. 4.Which of the following is not associated with the statement of income? Unearned revenue. 5.What do you mean by interest? Both statements are true. 6.What does investing involve in personal finance? Putting money into financial instruments to grow wealth. 7.What is a key component of debt management in personal finance? Paying off debts on time and minimizing interest charges. 8.Refers to a wide range of products that can be used to guard against an unforeseen and adverse event. Protection. 9.Knowing and avoiding common money mistakes can help us to achieve financial freedom. Some of the following are examples except: Not separating the wheat from the chaff. 10.Provides tax planning and preparation services, as well as financial advice on various aspects of personal finance. Certified Public Accountant. 11.Assist clients in creating estate plans, including wills and trusts, to ensure the efficient transfer of assets and minimize potential tax liabilities. Estate Planning Attorneys. 12.This budgeting method is best for people who have a set income each month or can reasonably estimate their monthly income. After calculating your monthly income, subtract all your monthly expenses and savings, making sure the final result is zero. The zero-based budget. 13.Is another simple budgeting method focusing primarily on savings and debt repayment. With this method, you set aside a specific amount from each paycheck for savings and debt payments, spending the rest as you see fit. The pay-yourself-first budget. 14.Statement A: A budget can help you determine how much to set aside to reach your financial goals, whether saving more for retirement, building your emergency fund, or planning your next vacation. Statement B: By creating and following a budget, you can decide how to spend your money each month based on what’s most important. Both statements are correct. 15.Statement A: Major factors that affect our investment behavior and decision-making might involve age, risk tolerance, and financial freedom. Statement B: Investing relates to the purchase of assets that are expected to generate a rate of return, with the hope that over time the individual will receive back less money than they originally invested Both statements are correct. Financial Planning Process Classification: 16.Conducting Periodic Reviews F. Monitoring and Adjusting the Financial Plan 17.Collecting Financial Information B. Gathering Financial Data 18.Setting Short-term, Medium-term, and Long-term financial goals A. Establishing Goals 19.Prioritizing Actions E. Implementing the Financial Plan 20.Calculating Net-worth C. Analyzing Financial Data