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Measuring Your Financial Health (8/31 - 9/9/09)
I. Part 1: Financial Planning
A. Ch. 2 - Measuring Your Financial Health and Making a Plan
1. Using a Balance Sheet to Measure Your Wealth
a. Assets: What You Own
(1) Fair Market Value: What an asset can be sold for rather than what it cost or what it will be worth in the future.
(2) Tangible asset: A physical asset, such as a house or car, as opposed to an investment.
b. Liabilities: What You Owe
c. Net Worth: A Measure of Your Wealth
(1) Insolvent: Owing more than you own.
d. Daily_Spending_Journal.pdf
e. Personal_Balance_Sheet.pdf
2. Using an Income Statement to Trace Your Money
a. Income: Where Your Money Comes From
b. Expenditures: Where Your Money Goes (expenses)
(1) Variable Expenditure: An expenditure over which you have control. You are not obligated to make that expenditure (like going to the movies), and it may vary from month to month.
(2) Fixed Expenditure: An expense over which you have no control. You are obligated to make this expenditure and it is usually the same every month like rent (fixed amount) or utilities (could vary due to use).
c. Simplified_Income_Statement.pdf
3. Using Ratios: Financial Thermometers
a. Question 1: Do I Have Enough Liquidity to Meet Emergencies?
(1) current ratio = monetary assets / current liabilities
(a) Should be above 1.0, Most financial advisors look for a current ratio above 2.0.
(2) month's living expenses covered ratio = monetary assets / (annual living expenses / 12)
(a) How many months of living expenses you can cover with your assets.
(3) Principle 1: The Risk-Return Trade-Off
b. Question 2: Can I meet My Debt Obligations?
(1) debt ratio = total debt or liabilities / total assets
(a) How much or your assets have been financed by borrowing.
(2) long-term debt coverage ratio = total income available for living expenses / total long-term debt payments
(a) How many times you can make your debt payments with your current income.
c. Question 3: Am I Saving as Much as I Think I Am
(1) savings ratio = income available for savings and investment / income available for living expenses
(a) Tells you the portion of your after-tax income that you are saving.
(2) Principle 13: Pay Yourself First
d. ratios_exercise.pdf
4. Putting It All Together: Budgeting
a. Developing a Cash Budget
(1) Principle 7: Stuff Happens
(2) Put away 10% of your income the moment you get paid
b. Implementing a Cash Budget
5. Hiring a Professional
a. What Planners Do
(1) Principle 9: Knowledge is the Best Protection
b. Choosing a Professional Planner
(1) Principle 12: The Agency Problem - Beware of the Sales Pitch