FINA1109 Lecture Notes - Lecture 3: Net Income, Blackboard, Debt Ratio
Monday, 14 August 2017
LECTURE 3
SAVING MONEY FOREVER
-Time value of money
•When looking at the time value of money, remember three key inputs:
-How much you save/pay
-How many times and when you save/pay
•Earlier or more often means greater compounding effect
-The interest rate you receive/pay
-Analysing your current finances
•Objective:
-Organise our financial information to enable assessment of our financial position
-Summarise financial position
-Interpret a set of financial ratios
•Fixed expenses
•Variable expenses: can perhaps change level of expense
•Compare expenses to income
•Example:
-Using financial ratios as planning tools
•Useful financial ratios:
-Equity or net worth ratio (How much do we own vs how much do we owe)
•= (Net worth) / (Total assets) x 100
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Monday, 14 August 2017
•Example: ($605 000) / ($875 000) x 100 = 69.14%
-This means that the Day family own approx 70% of the assets that they have acquired,
lenders own 30%
-Remember this changes over the life cycles
-Liquidity ratio (What proportion of assets can be accessed quickly)
•(1) Compare “liquid”/short term assets to short-term liabilities
-= (Liquid assets) / (Current debt) x 100
-“liquid” = an asset which if you sell today could be sold for what it’s worth
-Example: ($2000) / ($10 000) x 100 = 20%
-Interpretation: shows proportion of liquid assets available to cover current debt
•(2) Basic liquidity ratio: Compare “liquid”/short term assets to monthly expenses
-Example: Monthly expenses = ($97 000) / 12 = 8083
•BLR = ($2000) / ($8083) = 0.25 months
-Interpretation: Number of months you can pay expenses with no income
•Days can meet < 1 month expenses with liquid assets
-Savings ratio (proportion being saved)
•Bureau of statistics define as “anything you don’t spend”
•= (Savings) / (Net income) x 100
•Home repayments can be seen as a type of saving (compared to renting)
•Example: ($1000 + $4000) / ($102 000) x 100 = 4.9%
•Savings ratio dictated by life-cycle stage:
-May be low or negative for young couple with small children and also for an elderly couple
•Two different questions
-How much could you save?
-Why do you want to save?
-Debt service ratio (what proportion of income needs to be spent to service debt)
•Debt ratio = (Total debt) / (Disposable income) x 100
•Disposable income = after tax
-Example: ($270,000) / ($102,000) x 100 = 265%
•Note: Debt is not paid back at once, so can you service the debt?
•“Good” debt and “bad” debt
!2
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Time value of money: when looking at the time value of money, remember three key inputs: How many times and when you save/pay: earlier or more often means greater compounding effect. Organise our nancial information to enable assessment of our nancial position. Interpret a set of nancial ratios: fixed expenses, variable expenses: can perhaps change level of expense, compare expenses to income, example: Using nancial ratios as planning tools: useful nancial ratios: Equity or net worth ratio (how much do we own vs how much do we owe: = (net worth) / (total assets) x 100. This means that the day family own approx 70% of the assets that they have acquired, Remember this changes over the life cycles. Liquidity ratio (what proportion of assets can be accessed quickly: (1) compare liquid /short term assets to short-term liabilities. = (liquid assets) / (current debt) x 100.
