fin lit chapters 3+4

cash inflow

money received from various sources

cash outflow

money paid out/spent

financial goals

can be categorized in terms of when you hope to accomplish them. They are tied to your income, level of education, and choice of career

short-term goals

those you plan to accomplish within the next year 

intermediate-term goals

those that you aim to meet within the next 1-5 years

long-term goals

will take more than 5 years to accomplish

forecast

a finance that usually involves making projections about cash flows (money you have coming in-inflow and going out-outflow)

income

cash flow that you can get from an external source (ex. job), allowance from parents, a scholarship, investments (ex. a savings account)

expense

anything on which we spend money (ex. phone bill, car payments)

fixed expense

those expenses that remain the same from period to period (ex. $600 rent a month)

variable expense

those expenses that may change from one period to the next (ex. phone bill)

risk

likelihood of loss’ there is an element of risk in all financial decisions but knowing your tolerance for risk can help make the right choices

budget

a forecast of future cash inflows and outflows; compared to a personal balance sheet, this is overtime; the foundation of personal finance + has 2 steps

personal cash flow statement

records cash inflows and outflows which allows you to easily track where your money comes from and where it goes; document that identifies generally expected cash inflows + outflows

cash inflow

primary cash inflow for most people is their salary, hourly wages, or any money they earn. However, some people may have income from savings accounts or other similar sources. Some receive an allowance and if you receive money from a scholarship, that is income aka cash flow too; income, money from other sources

cash outflow

money that you have going out ex. expenses such as car payments or insurance premiums. Eventually, this can include paying rent, utilities, and cell phone bills. Cash outflows are typically impacted by family size, age, and personal spending habits; expenses, bills, rent, groceries, cell phone bills, car payments, etc

salary

most peoples’ primary cash inflow; the money people earn

forecast

projection about what will happen in the future; must forecast net cash flows for a period of time to turn a personal cash flow into a budget

net cashflow

money left over in a monthly budget; cash inflows- cash outflows= net cashflow

forecast error

the difference between what you forecast to happen and what actually happens; when budget estimates were incorrect + make adjustments where/when they are necessary

personal balance sheet

a financial statement that tells your financial position at a specific point in time; a summary of your assets, liabilities, and net worth + keeps track of your overall wealth; document that indicates net worth (wealth) at a specific point in time

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* Importance of personal balance sheets:
* Net worth will constantly change
* Lenders will review personal balance sheets
* Helps to identify opportunities to increase net worth with net cashflow (*another name for that discretionary income*)

assets

items of value that a person owns and can be classified in several ways

liabilities

the money we owe such as a personal loan we need to pay back or a car loan

net worth

overall wealth; assets-liabilities= net worth; net worth wll constantly change

liquid asset

financial assets that are either cash or can be quickly and easily converted to cash without significant loss of value ex. money in checking/savings accounts. They are usually kept in an interest-bearing checking/savings account; asset that can quickly be converted into cash w/o risk of loss ex. cash, bank account, cash for gold + is important for the unexpected

household asset

include assets typically owned by a household ex. cars, houses, furniture. In general, they make up a larger proportion of a person’s balance sheet than liquid assets; assets typically owned by ‘households’

• Most commonly held type of assets

• Ex. → car, electronics, appliances, etc.

• Important to consider market value: what something is worth today

  • Not the price you paid for it

market value

what something would be worth if you sold it today ex. paid 12k for a car 2 years ago + it’s worth 6K today and in that case, you should list the car value at 6K; in household assets, it’s important to consider this + is defined as what something is worth today (not the price you paid)

investment asset

third major category of assets; something you acquire with the ultimate goal of making money. It is something you buy that you believe will actually increase in value over time. Common investment assets are stocks, bonds, and real estate; asset purchased with goal of making a profit

• Ex. → stock, bond, real estate, etc.

• All have some risk

bond

certificates that function like IOUS- promises to repay a certain amount of money at some future time; People buy bonds with the expectation of receiving interest income while they hold the bond and getting their money back when the bond matures. However, bond issuers are not always able to pay interest or even return the original investment. For this reason, investing in bonds involves some risk; investment where money is ‘loaned’ to a company or government, w/promise to repay a sum of money at later date

• Ex. → $5,000 bond, city of New York

  • You provide $5,000

  • They provide certificate, includes →

    • Interest rate, when redeemed

    • Date when your $5,000                        would be returned to you

• Bonds are not risk free

  • Company/government                               must show courts why they                          aren’t able to meet obligations

  • Bonds are rated to indicate risk level

stocks

certificates that represent fractional ownership of a firm; investment where one becomes a fractional owner of a business

* Shares → units that stocks are bought/sold in
* Many companies offer millions of shares

mutual fund

professionally managed investments that allow investors to pool their money in order to invest in a larger variety of financial assets such as stocks and bonds from many different companies;  investment where investors pool their money together, & pool is used to buy a wide variety  of stocks & bonds, all together

• Portfolio manager handles transactions

• Low risk, low reward

  • Profits/losses shared

  • ‘Eggs are not in one basket’

real estate

includes homes, rental property farms, and other lands; property investments

• One’s own home, rental property, land

• Generally increase in value

current liabilities

debts that must be paid off within one year ex. credit card balances; debts that will be paid off within one year

* Ex. → credit card bill, short-term loan, etc.

long-term liabilities

debts that will take longer than one year to pay off ex. student loans, car loans, and home mortgages are common examples of long-term liabilities; debts that will take more     than one year to pay off

• Ex. → home, car, student loans, etc.

• As payments are made, some of payment goes towards:

  • Principal → amount of initial loan

  • Interest → fees for borrowing

    • Credit cards have high interest charges, so should be current liability

debt-to-asset ratio

used by loan officers to determine whether you have borrowed too much money