HACE 3200 1st Edition Lecture 4Outline of Last Lecture I. Evaluate your Financial HealthII. AssetsIII. LiabilitiesIV. ExpendituresV. Developing a BudgetOutline of Current Lecture I. Using Ratios: A Financial ThermometerII. Current RatioIII. Month’s Living Expenses Covered RatioIV. Debt RatioV. Long-term Debt Coverage RatioVI. Savings RatioVII. Financial PlannersCurrent Lecture- Chapter Two: Part 2- Using Ratios: A Financial Thermometer o Analyzes the raw data from your balance sheet and income statement to identify your financial strengths and weaknesses.o Allows you to answer the following questions..- Question 1: Do you have adequate Liquidity?o Liquidity: the relative ease and speed with which you can convert noncash assets into assets.- Ratioso Ratios to determine whether or not you have enough Monetary Assets  1) to pay for an unexpected large expense or 2) to tide you over during periods of reduced or eliminated earnings.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Liquidity Ratioso 1. Current ratioo 2. Month’s living expenses covered ratio- Current Ratioo Monetary assets/ current liabilitieso Shows whether you have enough liquid assets to cover expenses currently due.o Ratio greater than 2 recommended- Monetary Assets:o Cash or other assets that can be easily liquidatedo Examples- cash, checking accounts, savings accounts- Your Liabilities: What you Oweo Current Liabilities: are liabilities that must be paid off within the next year. Examples- credit cards and utility bills- Calculate Current Ratioo Frank has: $4,000 in checking $8,000 loan due 12/14/14 $15,000 in Money Market Acct $2,000 cash $15,000 attorney payment due 9/07/14 $3,000 therapy installment payment due 10/18/13Monetary Assets: Current Liabilities o 4000 checking 8000 loano 15000 Money Market 15000 attorneyo 2000 cash 3000 therapy- Answer- 21,000/26,000- ratio= .0877 *multiply by 100- Is this a good ratio? NO. Can only pay off 80% of current debt Month’s Living Expenses Covered Ratio o Monetary assets/ annual living expenses Divide annual living expenses by 12o The rule of thumb: 3 to 6 months of expenses Calculate Month’s Living Expenses Ratioo Monetary Assets $3,000 savings $1,000 Money Market $600 Checkingo Expenses $6,000 annual rent $5,000 yrly medical ins $4,000 yrly liability ins $3,000 annual food $9,600 annual debt Answero $4,600 in monetary assets divided by $2,300 or (27,600/12) in living expenseso Results in enough liquid monetary assets to cover only 2 months of living expenseso Book says this IS NOT adequate! Calculate Month’s Living Expenses Ratio (example 2)o Monetary assets $13,000 savings $10,000 Money Market $600 checkingo Expenses $6,000 annual rent $3,000 yrly medical ins $4,000 yrly liability ins $5,000 annual food $9,600 annual debt Answero $23,600 in monetary assets divided by $2,300 or (27,600/12) in living expenseso Results in enough liquid monetary assets to cover 10.26 months of living expenseso Book says this is adequate! Question 2: Can you meet your debt obligations?o Ratios to determine whether or not you can meet current or long-term debt obligations Debt ratioso 1) debt ratioo 2) long-term debt coverage ratio 1) Debt Ratioo total (debt) liabilities/ total assetso this ratio tells you whether you could payoff all your liabilities if you liquidated allyour assets Liabilitieso 4500 car loano 26000 student loano 112000 house loan Assetso 277000 houseo 15000 caro 54000 jewelry $142,500/$346,000o =.4118 or 41.18% of their assets are financed through their debt, and yes they could pay the debt off if they needed. 2) Long-Term Debt Coverage Ratioo total income available for living expenses/total long-term debt payment this ratio tells you how many times you could make your debt payments with your current annual income. Ratio of 2.5 or greater recommendedo Income available for living: $56,510 o Debts: Mortgage: $19,656 Auto loan: $2,588 College loan: $1,600 Tv loan: $230- 56,510/24,074= 2.35 times. Anything less than 2.5=Red Flag Question 3: Are You Saving As Much As You Think?o Ratio to determine if you are saving as much as you think Savings Ratioo Income available for savings/ income available for living expense This ratio tells you what proportion of your after-tax income is being savedo Income available for saving:$4,276o Income available for living: $56,510o Ratio= .076 or 7.6% Interpretation- U.S. rate typically: 3%-8%- Varies with stage of the financial life and goals Managing Your Own Affairs Versus Hiring A Professionalo The 3 options Go it alone, make a plan and have it checked by a professional Work with a professional and develop a plan Let the professional do it all. (WORST OPTION) Paying Your Financial Planner:o Fee-only planners develop income from charging the client for the service provided or for a financial plano Commission-based planners derive income from the sale of financial productso Some planners charge a combination of fees and