Samantha Parkin

Name: __________________________________

Chapter 2 Measuring Your Financial Health and Making a

Plan
Directions: As you read through Chapter 2 in your textbook, answer the following questions:
1. Read over the introduction to this chapter on pages 32-34, then look at Figure 2.1. What are
the steps in the budgeting and planning process?
Evaluate Your Financial Health
a. ______________________________________________________________________
Define Your Financial Goals
b. ______________________________________________________________________
Develop a Plan of Action
c. ______________________________________________________________________
Implement Your Plan
d. ______________________________________________________________________
Review Your Progress, Reevaluate, Revise Your Plan
e. ______________________________________________________________________
2. What is a personal balance sheet?
A statement of your financial position on a given date. It includes the assets you own, the debt or liabilities you have incurred, and your net worth.
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3. A balance sheet is made up of three parts: assets, liabilities, and net worth. See a sample
balance sheet in Figure 2.3. Explain each of these components:
what you own
a. Assets: _________________________________________________________________
Something that is owed of the borrowing of money
b. Liabilities: ______________________________________________________________
A measure of the level of your wealth. ( Assets-Liabilities= Net Worth)
c. Net Worth: _____________________________________________________________

Assets What You Own:

4. What is fair market value?
What an asset could be sold for rather than what it cost or what it will be worth sometime in the future.
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5. What is a monetary asset?
Is basically a liquid asset like your money on hand or your checking and savings account.
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6. Explain what investments are:
They are assets that accumulate wealth to satisfy a future goal. (stocks, mutual funds, or bonds)
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7. Explain what a retirement plan is:
It is an investment made by you or your employer aimed directly at achieving your goal of saving for retirement.
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8. What is a tangible asset?
a physical asset, such as a house or a car, as opposed to an investment.
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9. What asset holds the majority of your savings?

A house
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10. Explain what the blue book value of a car is:

A list of used-car prices, giving the average price a particular year and model sells for and what you might expect to
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11. What are some types of personal property you might own?
Furniture, appliances, jewelry, and TVs.
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12. What are some other types of assets?
A part of a business you might own.
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Liabilities What You Owe

13. Explain what current debt is:

The total of your unpaid bills including utility bills, past-due rent, cable TV bills, credit card bills, and insurance prem
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14. Explain what long-term debt is:
It is larger assets, such as a house or a car or student loans that you have to pay the debt.
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15. What is the largest and longest-term debt that most people will take on?
The mortgage on a house
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Net Worth A Measure of Your Wealth
16. What is the formula for calculating your net worth?
Assets- Liabilities= Net Worth
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17. What does it mean if you are insolvent?
the condition in which you owe more money than your assets are worth.
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18. Summarize what it means to have a good level of net worth:
who has done a better job of achieving financial goals.
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19. Look at Table 2.1. What is the average net worth for a person less than 35 years old with no
106,000
high school diploma? $__________
19,388
20. What is the average cost of one year in college? $_________

Using an Income Statement to Trace Your Money

21. Explain what an income statement is:
a statement that tells you where your money has come from and where it has gone over some period of time.
_______________________________________________________________________

has come from

22. An income statement will tell you where your money ________________________
and where
gone
it has ______________
over some period of time.

23. To construct an income statement, you need to record your income only for the
given time period
expanses
_____________________________
and subtract from it the __________________
you
incurred during that period. Look at Figure 2.4 for a general outline of an income statement.
Income: Where Your Money Comes From
24. Your income can come from many sources. What are some of them?
Wages, salary, bonuses, tips, royalties, and commissions
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25. Some of your income might not ever reach your paycheck. What are two examples of money
that can be diverted from your income before you get paid?
Voluntary retirement plans, used to pay for insurance you buy through work, or be sent to the government to cover taxes.
_______________________________________________________________________
Expenditures: Where Your Money Goes
26. Why is it harder to track expenses than it is to track income?
Most expenditure are cash transactions and od not leave a paper trail and its hard to keep track of all the things you buy.
_______________________________________________________________________
27. What are variable expenditures?
an expenditure over which you have control. That is, you are not obligated to make that expenditure,
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28. What are fixed expenditures?
An expenditure over which you have no control. You are obligated to make that expenditure, and it may vary from month to month.
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29. Look at Figure 2.5. What are the top four categories of expenditures for the average family,
and what is the percent of income each takes?
a.
b.
c.
d.

Housing (utilities, fule, and public services) with 34.4%

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Transportation with 15.6%
______________________________________________________________________
Food is 13%
______________________________________________________________________
Personal Insurance and Pensions with 11.2%
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30. What is a budget?

A plan for controlling cash inflows and cash outflows. Based on your goals and financial obligations, a budget limits spending in different categories.
_______________________________________________________________________
Before you can create and use a budget, you must first analyze your balance sheet and income
statement.
Using Ratios: Financial Thermometers
Financial ratios allow you to analyze the raw data in your balance sheet and income statement and
compare them to a preset target or your own previous performance.
3

Question 1: Do I Have Enough Liquidity to Meet Emergencies?

31. Explain what a current ratio is:
A ratio aimed at determining if you have adequate liquidity to meet emergencies.
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32. What is the formula for current ratio?
Current Ratio= Monetary assets/ Current liabilities
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2.0
33. Most financial advisors look for a current ratio above ____.

34. Explain what the months living expenses covered ratio is:
A ratio aimed at determining if you have adequate liquidity to meet emergencies.
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35. The traditional rule of thumb in personal finance is that an individual or family should have
3
6
enough in liquid asset to cover ____
to ____
months of living expenditures.
Question 2: Can I Meet My Debt Obligations?
36. Explain what the debt ratio can tell you:
A ratio aimed at determining if you have the ability to meet your debt obligations.
_______________________________________________________________________
37. What is the formula for the debt ratio?
Debt Ratio= Total Debt/ Total assets
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38. Explain what the long-term debt coverage ratio is:
A ratio aimed at determining if you have the ability to meet your debt obligations, defined as total income available for living expenses divided by total-term debt payments.
_______________________________________________________________________
Question 3: Am I Saving as much as I Think I Am?
39. Explain what the savings ratio can tell you:
It tells you how much of your income you are actually saving.
_______________________________________________________________________
40. What is the formula for the savings ratio?
Saving Ratio= income available for savings and investment/income available for living expenditures.
_______________________________________________________________________
Record Keeping
41. What are the three reasons given for why it is important to keep and maintain records?
a.
b.
c.

Without adequate records it's extremely difficult to prepare taxes.

______________________________________________________________________
A strong record-keeping system allows you to track expenses and know exactly how much you're spending
______________________________________________________________________
It makes it easier for someone else to step in during an emergency and understand your financial situation.
______________________________________________________________________

42. In general, credit card and check expenditures are easy to track because they leave a paper
trail. What is the easiest way to keep track of cash expenditures?
To record them in a notebook or your checkbook register as they are made.
_______________________________________________________________________
43. What is a ledger?
a book or notebook set aside to record expenditures.
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Putting It All Together: Budgeting
44. What financial statement is the key to developing a plan of action to achieve your goals
(bottom of page 50)?
income statement
_______________________________________________________________________
45. A budget is really nothing more than a plan for:
controlling cash inflows and out-flows
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46. To develop a budget, what do you begin with?
Your most recent annual personal income statement and examine it.
_______________________________________________________________________
47. In which category of expenses can you look for ways to reduce your spending and increase
your saving?
Variable Expenses
_______________________________________________________________________
48. A key point to remember when budgeting is that no budget is set in stone (page 52). What are
two examples of stuff that might happen?
A car or a washer
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49. Look at Stop & Think on page 52. To save, you wont be able to buy everything you want. Give
two examples of small things YOU would be willing to give up to start to save money:
Getting a snack from the vending machine each day and not spending so much money on clothes.
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50. Briefly explain how the envelope system of budgeting works:
Put money in an envelope for a major expenditure category and take out money when you need it, but once its gone no more spending in that area.
_______________________________________________________________________
Hiring a Professional
51. What are the three options available regarding working with professionals?
a.
b.
c.

Go at it alone, make your own plan, and have it checked by a professional.

______________________________________________________________________
Work with a professional to come up with a plan.
______________________________________________________________________
Leave it all in the hands or a professional.
______________________________________________________________________

52. What is a personal financial specialist (PFS)?

Is a certified public accountant who has passes certification tests in personal financial planning, 3 years of personal financial planning experience.
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53. What is a certified financial planner (CFP)?

Has Satisfactory completed a 10- hours, 2 day exam and a minimum of 3 years of experience in the field.
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54. What is a chartered financial consultant (ChFC)?
Has completed coursework and ten exams administered by the American College.
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