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Financial Statements
let you know where you stand financially detailed short term financial forecast
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* Evaluate and plan major outlays feedback * Reduce taxes * Establish savings and investment programs feedback * Manage credit * Risk management and insurance * Implement retirement program * Facilitate estate distribution
FINANCIAL PLANS
* Monitor and control income, living expenses, purchases, and savings on a monthly basis
BUDGETS
FINANCIAL STATEMENTS
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A dollar today is worth more than a dollar received in the future because it can be invested and earn interest.
Single sum
one lump sum investment with no more additions or subtractions.
Annuity
a series of payments made at fixed time intervals for a specified number of periods.
Future Value
The value your invested money will
grow to become earning a specific rate of interest over a given time period. value to a larger future value by applying compound interest is known as compounding.
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Examples: What will $10,000 grow to if it is invested at 5% for 10 years? What will you have if you invest $10,000 every year for the next 10 years at 5%?
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Present Value
The amount needed today to invest at
a specific rate of interest over a given time period to accumulate the desired future amount. compounding and is the process of working from the future value back to the present value.
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Examples:
You wish to accumulate a retirement fund of $1,000,000 at age 62. At 5% p.a. of investment yield, (a) What single lump-sum deposit must you make today? (b) What annual deposits must you make (i) at the beginning of each year; (ii) at the end of each year
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Balance Sheet
A statement of your financial position at one point in time. A snapshot of your financial position on a particular day
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Liabilities Assets
(what you own)
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Balance Sheet
ASSETS (Fair Market Value of Assets)
Liquid assets
are INSOLVENT and do not have enough assets to cover your financial obligations technically bankrupt
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Income: Cash IN
Wages and salaries Bonuses and Commissions Interest and dividends Annuity income Rental income Proceeds from sales of assets
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VARIABLE
Credit cards payments Recreation Entertainment
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How does a Deficit on your Income Statement affect your Net Worth on your Balance Sheet?
Example Assume that all your income for the month has been spent. But you decide you just want to take a holiday trip to Jamaica. The trip costs $3,500.
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Scenario 1: Deplete an Asset Take money from your savings account to pay for the trip.
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Deficit spending
DECREASES
your Net Worth!
Solvency Ratio =
Liquidity Ratio =
Liquid Assets
Total Current Liabilities
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Saving Ratio =
Debt Service Ratio = Total monthly loan payments Monthly gross (before tax) income
A measure of your ability to meet your debt obligations
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Cash Budget
A detailed short-term financial forecast
of income and expenditures
Actual cash inflow and cash outflow To ensure no cash flow problem Help to manage income and
expenditures in the future
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Liquidate savings/investments. Borrow to cover the deficit. Cut low priority expenses; alter
spending habits.
Increase income.
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