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Personal Finance, Screenshot 2023-10-05 223408 - Coggle Diagram

- - - - desires for a period covering about 6 years to the next 30/40 years
      - change over time -> revise accordingly
      - goals too ambitious -> more realistic
        goals too conservative -> adjust to make financially responsible decisions
    - - set each year and cover a 12-month period
      - become the key input for cash budget, a tool used to plan for short-term income and expenses
      - unless you attain short-term goals, you won't achieve immediate or long-term goals
  - - - liquid assets (cash, savings accounts, money market funds) to pay daily expenses
      - investments (stocks, bonds, mutual funds) to earn a return
      - personal property (movable property such as automobiles, appliances,...)
      - real property (immovable property such as land, house,..)
    - - create liabilities by borrowing money
        the debts must be paid at some future time
      - insurance reduces financial risk and protects both income and assets
    - - People invest excess income to accumulate wealth (for major expenditures or for retirement)
      - the higher the returns on the investment of excess funds, the greater wealth they accumulate
    - - Retirement planning: the sooner you start an IRA (individual retirement account), the better off you'll be
      - Estate planning: as people grow older, they consider how they can pass wealth on to their heirs
- - - - Two incomes buy more, but they also require greater responsibility to manage money wisely
      - One trend with a profound effect on standard of living is the two-income family
      - Use financial resources effectively
    - - Your current spending level is based on the necessities of life and your average propensity to consume, which is the percentage of each dollar of income, on average, that is spent for current needs rather than savings
      - A carefully developed financial plan should set aside a portion of current income for deferred, future spending
    - - Wealth is the net total value of all the items the individual owns
      - Financial assets are intangible, paper assets such as savings accounts and securities
      - Tangible assets are physical assets such as real estate and automobiles, can be held for either consumption or investment purposes
- - - - Definition
        
        describes your financial position - the assets you hold, less the debts you owe, equal your net worth - at a given point of time
      - Main assets
        
        Liquid assets
        
        Low-risk financial assets in the form of cash or instruments that can be converted to cash quickly
        
        Ex: cash on hand/in a checking/savings account, money market deposit accounts, money market funds,...
        
        Financial assets
        
        Assets acquired to earn a return rather than provide a service (stocks, bonds, mutual funds,...) -> achieve long-term personal financial goals
        
        Real and personal property
        
        Real property (land, house) may appreciate, increase in value
        
        Personal property (appliances, clothing,..) depreciate, decline in value shortly after being put into use
      - Asset value
        
        Use market value in the balance sheet
      - Debt
        
        Current or short-term debt
        
        Any debt currently owed and due within 1 year
        
        Ex: charges for consumable goods, utility bills,.. and total open account credit obligations - the outstanding balances against established credit lines
        
        Long-term debt
        
        Debt due >1 year
        
        Ex: real estate mortgages, education loans, margin loans used to purchase securities
    - - tracks income earned, expenses made during a given period
        -> compare actual expenses and purchases with the amounts budgeted and then make the necessary changes
      - the statement is prepared on a cash basic - record only cash transactions
      - 3 parts
        
        Income: Cash in
        
        wages, salaries, self-employment income, bonuses, commissions, asset sales,...
        
        Expenses: Cash out
        
        fixed expenditure
        
        contractual, predetermined, involving equal payments each period. Ex: mortgage and installment loan payments, monthly savings, insurance premiums,...
        
        variable expenditure
        
        Ex: food, clothing, utilities, entertainment, medical expenses
        
        Cash surplus or deficit
        
        Cash surplus = Income - Expense
        
        Surplus
        
        Save and invest
        
        Repay debts
        
        Acquire assets
        
        Deficit
        
        Sell assets
        
        Borrow