2295 Midterm Notes
DepartmentManagement and Organizational Studies
Course CodeMOS 2320A/B
CHAPTER 1 – INTRODUCTION
Personal financial planning: The process of managing your money to achieve personal
Financial planning process:
1. Determining your current financial situation
2. Developing financial goals
3. Identifying alternative courses of action
4. Evaluating alternatives
5. Creating and implementing a financial action plan
6. Re-evaluation and revising the plan
Values: Ideas and principles that a person considers correct, desirable, and important.
Opportunity cost: What a person gives up by making a choice.
Time value of money: Increases in an amount of money as a result of interest earned.
Adult life cycle: The stages in the family situation and financial needs of an adult.
Life cycle approach: The idea that the average person goes through four basic stages in
personal financial management (<30s, 30s-50s, 50+, retirement years).
Financial goals should…
Be stated in specific, measurable terms
Have a time frame
Indicate the type of action to be taken
SMART = Specific, Measurable, Action-oriented, Realistic, Timely
Economics: The study of how wealth is created and distributed.
Inflation: A rise in the general level of prices.
Compounding: A process that calculates interest based on previously earned interest.
Future value: The amount to which current savings will increase based on a certain interest rate
and a certain time period; typically involves compounding.
Annuity: A series of equal amounts (deposits or withdrawals) made at regular time intervals.
Present value: The current value for a future amount based on a certain time period; also
referred to as discounting.
Components of personal financial planning:
Retirement and estate planning
Liquidity: The ability to readily convert financial resources into cash without a loss in value.
Bankruptcy: A set of federal laws that allow you to either restructure your debts or remove
Financial plan: A formalized report that summarizes your current financial situation, analyzes
your financial needs, and recommends future financial activities.
CHAPTER 2 – MONEY MANAGEMENT STRATEGY: FINANCIAL STATEMENTS AND
Money management: Day-to-day financial activities necessary to manage current personal
economic resources while working toward long-term financial security.
Safety deposit box: A private storage area at a financial institution with maximum security for
Types of financial records:
Personal and employment records
Money management records
Financial services records
Consumer purchase and automobile records
Estate planning and retirement records
Personal balance sheet: A financial statement that reports what an individual or a family owns
and owes; also called a net worth statement.
Step 1: Listing items of value
o Assets: Cash and other property with monetary value.
o Liquid assets: Cash and items of value that can be easily converted to cash.
o Real estate
o Personal possessions
o Investment assets
Step 2: Determining amounts owed
o Liabilities: Amounts owed to others.
o Current liabilities: Debts that must be paid within a year.
o Long-term liabilities: Debts that are not required to be paid in full until more
than a year from now.
Step 3: Computing net worth
o Net worth: The difference between total assets and total liabilities.
Insolvency: The inability to pay debts when they are due because liabilities far exceed the value
Cash flow: The actual inflow and outflow of cash during a given time period.
Cash flow statement: A financial statement that summarizes cash receipts and payments for a
Step 1: Record Income
o Income: Inflow of cash to an individual or a household.
o Take-home pay: Earnings after deductions for taxes and other items; also
called disposable income.
o Discretionary income: Money left over after paying for housing, food, and
Step 2: Record cash outflows
o Fixed expenses: Payments that do not vary from month to month.
o Variable expenses: Flexible payments that change from month to month.
Step 3: Determine net cash flow
A balance sheet will allow you to:
Measure your progress towards financial goals
Identify how your assets are distributed amongst the different categories
Calculate your current asset allocation, defined as a percentage allocation of
financial assets between cash, fixed income and equity investments.
Identify assets that may be lost, stolen, damaged or destroyed
Summarize the type and extent of your indebtedness
Your cash flow statement(s) will:
Highlight your sources of income
Reveal whether you are overspending
Help you assess your spending and saving patterns
Budget: Necessary for successful financial planning, it is a specific plan for spending income.
Steps to creating and implementing a budget:
1. Setting financial goals
2. Estimating income
3. Budgeting emergency fund and savings
4. Budgeting fixed expenses
5. Budgeting variable expenses
6. Recording spending amounts
7. Reviewing spending and savings patterns
Budget variance: The difference between the amount budgeted and the actual amount received
Budget deficit: The amount by which actual spending exceeds planned spending.
Budget surplus: The amount by which actual spending is less than planned spending.