Personal Finance Chapter 2

Money Management

The day-to-day process of managing finances while working toward long-term financial goals.

Financial Records

Documents used to organize and track financial information.

Balance Sheet

A statement showing assets, liabilities, and net worth at a specific point in time.

Cash Flow Statement

A summary of cash inflows and outflows over a period of time.

Budget

A plan for future spending and saving.

Assets

Items of value that you own.

Liabilities

Amounts you owe to others.

Net Worth

Assets minus liabilities.

Liquid Assets

Assets that can easily be converted to cash.

Real Estate Assets

Land and buildings that you own.

Personal Possessions

Personal property with monetary value, such as a car or furniture.

Investment Assets

Assets held for long-term financial growth, such as stocks or retirement accounts.

Current Liabilities

Debts due within one year.

Long-Term Liabilities

Debts due after more than one year.

Insolvency

The inability to pay debts when they are due.

Debt Ratio

Liabilities divided by net worth.

Current Ratio

Liquid assets divided by current liabilities.

Liquidity Ratio

Liquid assets divided by monthly expenses.

Debt-Payments Ratio

Monthly credit payments divided by take-home pay.

Savings Ratio

Monthly savings divided by gross income.

Take-Home Pay

Income remaining after taxes and deductions; also called disposable income.

Disposable Income

Income remaining after taxes and deductions.

Discretionary Income

Income remaining after paying essential living expenses.

Cash Inflow

Money received.

Cash Outflow

Money spent.

Net Cash Flow

Cash inflows minus cash outflows.

Surplus

Positive net cash flow.

Deficit

Negative net cash flow.

Fixed Expenses

Expenses that remain relatively constant each month.

Variable Expenses

Expenses that change from month to month.

Emergency Fund

Savings reserved for unexpected expenses or emergencies.

Budget Variance

The difference between the budgeted and actual amount.

Budgeting

The process of planning future income and expenses.

Balance Sheet Formula

Assets − Liabilities = Net Worth.

Net Cash Flow Formula

Cash Inflows − Cash Outflows = Net Cash Flow.

Balance Sheet vs. Cash Flow Statement

Balance Sheet shows financial position at one point in time; Cash Flow Statement tracks income and expenses over time.

Cash Flow Statement vs. Budget

Cash Flow Statement reports actual financial activity; Budget plans future financial activity.

Assets vs. Liabilities

Assets are what you own; liabilities are what you owe.

Current vs. Long-Term Liabilities

Current liabilities are due within one year; long-term liabilities are due after one year.

Fixed Expenses vs. Variable Expenses

Fixed expenses stay relatively constant; variable expenses change from month to month.

Disposable Income vs. Discretionary Income

Disposable income is after taxes; discretionary income is after essential expenses.

Surplus vs. Deficit

Surplus means income exceeds expenses; deficit means expenses exceed income.

Net Worth vs. Net Cash Flow

Net worth measures overall financial position; net cash flow measures money gained or lost over a period.

Debt-Payments Ratio Recommendation

Less than 20% of take-home pay.

Savings Ratio Recommendation

Save 5–10% of gross income each month.

Emergency Fund Recommendation

Save enough to cover 3–6 months of living expenses.