HACE 2100 1st Edition Exam 2 Study Guide Dollars and Sense Financial Illiteracy more than US teens are unable to make simple everyday choices about spending and only 1 10 can solve complex financial tasks 17 8 of students don t even reach baseline level of financial proficiency the financial literacy and education commission was established under the fair and accurate credit transactions act of 2003 the commission was tasked with developing a national financial education website mymoney gov and a national strategy on financial education chaired by the secretary of the treasury and the vice chair is the director of the consumer financial protection bureau So what do you need Sound financial plans what will plans do they will help you achieve your financial goals achieve financial independence invest intelligently minimize payments to the government cover your assets insurance The Life Cycle of Financial Planning Stage 1 The Early Years a time of wealth accumulation develop savings plans and set your initial goals of all lengths establish long range investment strategy invest in stocks and mutual funds during this time through age 54 Stage 2 Approaching Retirement the golden years realize intermediate term goals and re evaluate your plan to match current goals plan for retirement ages 55 64 Stage 3 The Retirement Years reduce investment risk and concentrate on preservation of assets rather than growth invest in bonds plan for the transfer of your estate age 65 The Person Financial Planning Process Step 1 evaluate your financial health evaluate current income spending and wealth situation assess whole financial picture you can t get to where you want until you know where you are Step 2 define your financial goals specifically define and write down your goals to reflect your situation attach a cost to each goal and set a date for when the money is needed to accomplish the goal goals the cornerstone of a financial plan goals keep future in mind by reminding you of rewards goals entice you to keep plan in effect goals provide tangibility for the question why time horizons for goals short term within 1 year intermediate term 1 10 years long term more than 10 years Step 3 develop plan of action what must i do to achieve goals flexibility ability for your plan to change as situations goals change liquidity your ability to convert non cash assets into cash with relative ease protection your ability to meet unexpected large expenses without destroying your plan minimization of taxes your ability to pay as little as possible to uncle sam Step 4 implement your plan your plan road map use common sense moderation don t track every single penny remain positive stay on track Step 5 revise your plan review progress match plan to goals be prepared to start over if your plan no longer meets your needs Using a Balance Sheet to Measure Your Wealth personal balance sheet a statement of your financial position on a given date it is a snapshot of the present it lists your assets and your liabilities assets what you own monetary assets those that can be easily liquidated e g cash checking account savings account short term goals investment assets assets that are invested for the future e g stocks bonds cash value life insurance intermediate long term goals retirement plans investments by you your employer to save for retirement e g IRAs 401 k plans 403 b plan education retirement plan Keogh self employed people SEP IRA self employed people real estate tangible asset such as land or a dwelling represents most of your savings and hopefully appreciates in value tangible assets physical asset that you can use feel and touch usually the biggest financial asset you will ever have automobiles other vehicles tangible assets that must be inspected licensed reported as fair market value but usually depreciates personal property tangible assets that represent your lifestyle usually emotional in value but economically speaking depreciates liabilities what you owe long term those that extend beyond a year e g home mortgage auto loans your net worth a measure of your wealth assets liabilities net worth insolvent condition in which you owe more money that your assets are worth Using a Personal Income Statement to Trace Your Money personal income statement tells you where your money comes from and where it has gone it is a motion picture of the past vs snapshot of the present for balance sheet income statement is based entirely on actual cash flows expenditures where your money goes the two major expenditures categories taxes and living expenses fixed expenses those that you don t directly control e g mortgage cable payments variable expenses those that you can control e g food entertainment Using Ratios A Financial Thermometer analyzes the raw data from your balance sheet and income statement to identify your financial strengths and weaknesses and allows you answer the following questions do you have adequate liquidity ratios to determine whether or not you have enough monetary assets enough to pay for unexpected large expenses enough to get you through periods of reduced or eliminated earnings current ratio monetary assets current liabilities shows whether you have enough liquid assets to cover expenses currently due ratio should be greater than 2 month s living expenses covered ratio monetary assets annual living expenses 12 rule of thumb 3 6 months of expenses covered can you meet your debt obligations ratios to determine whether or not you can meet current long term debt obligations debt ratio total liabilities total assets tells whether or not you could pay off all of your liabilities if you liquidated all of your assets if ratio is for example 4118 that means one s assets are 41 18 financed through debt but yes one could pay off all debt if needed long term debt coverage ratio total income available for living expenses total long term debt payment ratio tells you how many times you could make your debt payments with your current annual income should be 2 5 or greater are you saving as much as you think savings ratio one that determines if you are saving as much as you think income available for savings income available for living expenses savings ratio tells you what proportion of your after tax income is being saved the US rate 3 8 US personal savings rate is at 5 40 compared to 5 60 last month this is lower than long term average of 8 42 Family Financial Management A Simple Balance Sheet snapshot of one point