Personal Finance: Planning, Investing, and Financial Health
Chapter 1
Personal Finance: the process of planning your spending, financing, and investing activities, while taking into account uncontrollable events such as death or disability, in order to optimize your financial situation over time.
Opportunity cost: what you give up as a result of a decision.
Steps to develop a financial plan:
- Establish your financial goals
- Consider your financial position
- Identify and evaluate alternative plans
- Select and implement the best plan
- Evaluate the financial plan
- Review
Pearson answers Chapter 1:
1. Personal financial planning is the process of planning your spending, financing, and investing in order to optimize your financial situation.
2. A personal financial plan involves decisions about financial goals and describes the spending, financing, and investing plans necessary to achieve those goals.
3. The five key components of a financial plan include protecting assets and income and tax planning.
4. Budget Planning. Budget planning represents the process of forecasting future expenses and savings. It involves evaluating your current financial position by assessing your income, expenses, assets, and liabilities.
Chapter 3
Disposable (after-tax) income: your income minus applicable income taxes and other payroll deductions, such as CPP and EI.
1. Define a personal cash flow statement. = A personal cash flow statement is a financial statement showing a person’s income, fixed expenses, and savings.
2. What are stocks? What are some features of a stock? Stocks are certificates that represent partial ownership of a firm. Firms issue stocks to obtain funding for various purposes. The market value of a stock changes daily, and stocks can earn a return if the firm pays dividends to its shareholders.
3. What are bonds? What are some features of bonds? Bonds are certificates issued by borrowers to raise funds. You earn interest while you hold the bond for a specified period.
Current Ratio = Liquid Assets / Current Liabilities
4. Is it better to have a high or low current ratio? It is better to have a high current ratio because that implies that you can cover any short-term expenses. A current ratio less than 1.0 means that you do not have sufficient funds to cover your upcoming payments.
Liquidity Ratio = Liquid Assets / Monthly Living Expenses. It is better to have a high liquidity ratio because the ratio tells you how many months of living expenses you can cover with your present level of liquid assets. A liquidity ratio less than 1.0 means that you do not have sufficient funds to cover the expenses of a single month. Saving Ratio = Savings / Disposable income, Debt to Asset = Liabilities/assets
Chapter 5
Depository Institutions = Domestic banks, Foreign Banks, Subsidiaries.
Financial conglomerates: financial institutions that offer a diverse set of financial services to individuals or firms.
Money Management: Is a series of decisions you make over a short-term period regarding cash inflows and outflows.
Interest earned = Principal x Interest Rate x Time, I = P x R x T