unit 2: measuring financial health. learning objectives o define asset, liability, and net worth. o...
TRANSCRIPT
Unit 2: Measuring
Financial Health
Learning ObjectivesO Define asset, liability, and net worth.O Calculate the level of net worth using a
balance sheet.O Analyze where money comes from and
where it goes using an income statement.O Use ratios to identify financial strengths and
weaknessesO Set up a record keeping system to track
income and expendituresO Implement a financial plan to help meet my
financial goals.
Using a Balance Sheet to Measure Wealth
O Before you can decide how much you need to save to reach your goals, you have to measure your financial condition.
O A personal balance sheet is a statement of your financial position on a given date. O Lists assets, liabilities, and net worth
(equity)
Assets: What You OwnO First section of balance sheet
represents assetsO All your possessions are considered
assets, whether or not you still owe money on them
O Fair market value is what an asset could be sold for rather than what it cost or what it will be worth sometime in the future.
Assets: What You OwnO Types of Assets
O Monetary assets are liquid asset, including cash you hold, your checking and savings account balances, and your money market fundsO A liquid asset is either cash or can easily
be turned into cash O Financial assets are investments,
including common stocks, mutual funds, or bonds, used to accumulate wealth.
Assets: What You OwnO Types of Assets (cont.)
O Tangible Assets are physical assets, such as a house or a car, as opposed to an investment
O Personal Property consists of tangible assets. Personal property is all your possessions—furniture, appliances, jewelry, TV’s, etc. O Fair market value will be only a fraction of
the purchase amount O Value decreases over time
Liabilities: What You Owe
O A liability is debt that you have taken on and that you must repay in the future.
O A current liability must be paid off within the next yearO Utility bills, past-due rent, cable bills,
credit card billsO A long-term liability consists of a
debt on a larger assetO Home, car, or student loan
Net Worth: A Measure of Your Wealth
O To calculate your net worth or equity, subtract total debt (liabilities) from total assets.
O Represents the level of wealth you have accumulated
O If you owe more money than you are worth you are considered insolvent.
Using an Income Statement to Trace Your Money
O Step 2: Trace your moneyO An income statement tells you
where your money has come from and where it has gone over some period of time.
O Helps you stay solvent
Using an Income Statement to Trace Your Money
O Prepared on a cash basisO Record income when you actually
receive moneyO Record expenditures only when you
actually pay money out
Income: Where Your Money Comes From
O Income includes wages, salary, bonuses, tips, royalties, and commissions
O Take home pay= earnings- taxes
Expenditures: Where Your Money Goes
O Expenditures are difficult to calculate because many expenditures are cash transactions and do not leave a paper trail.
O A variable expenditure is one over which you have control.
O A fixed expenditure is one over which you have no control.
Clothing and Ac-cessories; 13
Transporta-tion; 31
Recreation ;
22
Food; 31
Med-ical
Care; 52All Other; 42
House and
Household
Oper-ation;
65
State/Local
Taxes; 37
Fed-eral
Taxes; 70
How Americans Spent Their Money in 2005
O A budget is the process of setting spending goals.
O A plan for controlling cash inflows and outflows.
O Limits spending in different categories.
Using Ratios: Financial Thermometers
Question 1: Do I have enough liquidity to meet emergencies?
O Current ratio is aimed at determining if you have adequate liquidity to meet emergencies.
O = Monetary assets Current liabilitiesO Month’s living expenses covered
ratio= monetary assets Annual living expenditures/12
Question 1: Do I have enough liquidity to meet emergencies?
O Current Ratio= 3950/1500O 2.39
O Month’s Living Expenses Covered ratio= 3590/(52,234/12)= 3590/4353= .825 monthsO Tells how many months of living
expenditures you can cover with your present level of monetary assets
Question 2: Can I meet my debt obligations?
O Debt ratio= total debts or liabilties total assetsO Long term debt coverage ratio= total income available for living expenses total long term debt payments
Question 3: Am I saving as much as I think I am?
O Savings ratio= income available for savings and investment income available for living expensesO Tells what after tax portion of your
income you are saving
Record KeepingO Fourth step: maintain records
O Without adequate records it is difficult to prepare taxes
O Allows you to track expenses and know how much you spend and where
O Makes it easier for someone else to step in during an emergency
Record KeepingO Involves two steps
O Tracking your personal financial dealings
O Filing and storing your financial records
O The best record keeping system is one that you will use!
O A ledger is a book or a notebook set aside to record expenditures