finance ch. 1-3

personal finance the process of planning your spending, financing and investing to optimize your financial situation.
personal financial plan specifies your financial goals and describes the spending financing and investing plans that are intended to achieve those goals.
opportunity cost what you give up as a result of a decision
budget planning (budgeting) the process of forecasting future expenses and savings
components of financial plan 1. budgeting and tax planning 2. managing your liquidity3. financing your large purchases4. protecting your assets and income (insurance) 5. investing your money6. planning on retirement and estate
assets what you own
liabilities what you owe
net worth the value of what you own minus what you owe
liquidity access to funds to cover any short term cash deficiencies
money management decisions regarding how much money to retain in liquid form and how to allocate the funds among short term investment
credit management decisions regarding how much credit to obtain to support your spending and which sources of credit to use
managing loans includes what? determining how much you can afford to borrow, deciding on the maturity(length of time) of the loan and selecting a loan that charges a competitive interest rate
insurance planning determining the types and amount of insurance needed to protect your assets
why should funds that you have beyond what you need to maintain your liquidity be invested? these funds normally are not used to satisfy your liquidity needs, they can be invested with the primary objective of earning high return
risk uncertainty surrounding the potential return of an investment
retirement planning determining how much money you should set aside each year for retirement and how you should invest those funds
estate planning determining how your wealth will be distributed before or upon your death
personal cash flow statement a financial statement that measures a persons cash inflows and cash outflows
cash inflow salary, generating cash
cash outflow represents all your expenses
net cash flows cash inflows minus cash outflows
budget a cash flow statement that is based on a foretasted cash flows for a future time period
factors affecting cash outflows size of family, age, personal consumption behavior
factors affecting cash inflows stage in your career path, type of job, number of income earners in your house
liquid assets financial assets that can easily be sold without a loss in value
household assets items normally owned by a household, such as a home, car, or furniture
bonds certificates issued by borrowers to raise funds
stocks certificates representing partial ownership of a firm
annuity a series of equal cash flow payments that are retrieved or paid at equal intervals in time
compounding the process of earning interest on interest
future value interest factor a factor multiplied by today’s savings to determine the savings will accumulate over time
present value interest factor a factor multiplied by a future value to determine the present value of that amount
annuity due a series of cash flow payments that occur at the beginning of each month
timelines diagrams that show payments received or paid overtime
future value interest factor for an annuity a factor multiplied by the periodic savings level (annuity) to determine how savings will accumulate over time
present value interest factor for an annuity a factor multiplied by a periodic savings level (annuity) to determine the present value of the annuity
The time value of money refers to the fact that a dollar received today is​ worth what? more than a dollar received tomorrow because it can be saved and earn interest.
time value of money the measure of the opportunity cost of a spending dollar
The time value of money concept is most commonly applied​ to what? single dollar amounts, where both present and future values can be determined.
compounding can help you what? forecast the funds that will be available to you at retirement
The two methods that can be used to calculate future values​ are what? future value interest factors or a financial calculator.
determining the present value of an amount is useful when you want​ to what? know how much money to set aside today to have money for a vacation in 2 years.
the present value of an annuity indicates what a series​ of what? individual cash flows is worth to you now if you can invest your funds at an interest rate i

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