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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
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
Note 
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