Professional Documents
Culture Documents
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Learning Objectives
1. Calculate your level of net worth or wealth using a balance sheet. 2. Analyze where your money comes from and where it goes using an income statement. 3. Use ratios to identify your financial strengths and weaknesses.
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Learning Objectives
4. Set up a record-keeping system to track your income and expenditures. 5. Implement a financial plan or budget that will provide for a level of savings needed to achieve your goals. 6. Decide if a professional financial planner will play a role in your financial affairs.
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Introduction
Where does all your money go?
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Figure 2.1 The Budgeting and Planning Process: Evaluating Your Financial Health and Developing a Plan of Action
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Investments
Retirement plans
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Figure 2.3 A Balance Sheet for Louise and Larry Tate, December 31, 2011
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Figure 2.3 A Balance Sheet for Louise and Larry Tate, December 31, 2011 (cont.)
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Subtract federal, state, social security taxes from earnings to calculate your take-home pay
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Figure 2.6 Louise and Larry Tates Personal Income Statement (cont.)
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Months Living Expenses Covered Ratio: monetary assets divided by annual living expenditures divided by 12
Should aim for 3 to 6 months of liquid assets Less if enough credit and insurance
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Long-term Debt Coverage Ratio: total income available for living expenses divided by total long-term debt payments
Less than 2.5 is a red flag
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Record Keeping
Without records difficult to prepare taxes.
You track expenses and know how much and where you are spending.
Easier for someone to step in during an emergency and understand your financial situation.
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2. File and store your financial records so they are readily accessible.
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Develop a plan of action and cash budget using the income statement Monitor your progress using the balance sheet and income statement.
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Compare actual expenditures in each category with budget amounts at the end of the month.
Evaluate whether you change budget estimates or exert self-control?
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Hiring a Professional
Three options for working with professionals
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What Planners Do
More unique financial situations need professional help. They give advice. You still need to know the basics and still bear ultimate responsibility.
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Check experience
Referrals
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Fee-and-commission planners
Fee offset planners
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Summary
Use a balance sheet to determine the level of wealth that you or your family has accumulated on a given date. Use an income statement to understand where your money comes from and goes to be able to save enough to meet goals. Use financial ratios as targets or standards in managing financial resources.
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Summary
A sound record-keeping systems makes tax preparation and tracking of spending easier. Use a budget to plan and evaluate spending and saving.
Professional financial planners can help by validating your plan or developing a plan.
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