Essay About Financial Assets And Personal Financial Planning

Finance Terms and Its Explanation
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Average Propensity to Consume- percentage of each dollar of income on average that a person spends for current needs rather than savings.Wealth – total value if all items owned by an individual (savings account, stocks, bonds, home, cars)Financial Assets – intangible assets (savings account and securities acquired for promised future return)Tangible Assets – physical assets (real estate or cars for consumption or investment)Personal Financial Planning – systematic process that considers important elements of an individuals financial affairs in order to fulfill financial goals.SIX STEP FINANCIAL PLANNING PROCESS:1. DEFINE financial goals2. DEVELOP financial plans and strategies to achieve goals3. IMPLEMENT financial plans and strategies4. PERIODICALLY DEVELOP and IMPLEMENT budgets to monitor and control progress toward goals5. USE financial statements to EVALUATE results, TAKE CORRECTIVE ACTION6. REDEFINE goals and REVISEFinancial Goals – results that an individual wants to attainMoney – medium of exchange used as a measure of value in financial transactionsUtility – amount of satisfaction received from purchasing certain types or quantities of goods and servicesLong-Term Financial Goals – wants and desires for a period covering 6 years out to the next 30 or 40 years (6+ years)Intermediate Goals – 2 to 5 yearsShort-Term Financial Goals – set each year and cover a year period (1 year or less)Liquid Assets – used to pay everyday expenses (cash, savings accounts, money market funds)Investments – acquired to earn a return on our money (stocks, bonds, mutual funds)Personal Property – movable property (cars, furniture, appliances, electronics, clothing, jewelry)Real Property – immovable property, land, houseLiability – something we owe measured by the amount of debt we incurInsurance – way to reduce financial risk and protect both income and assetsEstate Planning – to effectively pass wealth on to their heirsTWO IMPORTANT ASPECTS OF PLANNING ENVIRONMENT:1. Players – Three Vital Groups:Government – Taxation and Regulation, the two major constraints from the perspective of personal financial planning BusinessConsumer – central player in the financial planning environment2. EconomyMonetary Policy – programs for controlling the amount of money in circulation.- used to stimulate or moderate economic growthFiscal Policy – its programs of spending and taxation- government adjusts its spending levels and tax rates to monitor and influence a nations economyEconomic Cycles – upward and downward moment, vary in length and how high or low the economy moves- 4 Stages:Expansion – real GDP increases until it hits a peakPeak – expansion ends and a contraction beginsContraction – real GDP fallsTrough – contraction ends and expansion beginsPrices – amount of money the seller is willing to accept in exchange for a given quantity of some good or serviceInflation – state of the economy in which the general price level is increasingConsumer Price Index (CPI) – measure of inflation based on changes in the cost of consumer goods and servicesPurchasing Power – amount of goods and services that each dollar buys at a given time? FINANCIAL PLANNERS:Commission-based Planners – earn commissions on the financial products they sellFee-only Planner – charge fees based on the complexity of the plan prepared? Flexible-Benefit (cafeteria) Plans – employer allocates a certain amount of money to each employee!!! Income can be taxed as active (ordinary), portfolio (investment), passive, tax-free, tax deferred!!! Inflation directly affects interest rates — CHAPTER 2 —Financial Plans – roadmaps that show you the wayPersonal Financial Statements – let you know where you stand financiallyBudgets – detailed short-term financial forecasts that compare estimated income with estimated expenses- allow you to monitor and control expenses and purchases consistent with financial plans- short-term financial planning report that helps you achieve your short-term financial goals- detailed financial report that looks forward based on expected income and expensesPersonal Financial Statements – planning tools that are essential to developing and monitoring personal financial plansBalance Sheets – financial statement describes a persons financial position at a given point of time- has 3 parts: 1. Assets – what you own.- Liquid Assets – low risk financial assets held in form of cash or instruments that can be easily be converted in cash- Investments – assets acquired to earn a return rather than provide a service – Real Property – immovable property- Personal Property – movable property^ should all be recorded in Fair Market Value – actual value of the asset, reasonable expected price to sell in open market2. Liabilities/Debts – what you owe- Current/Short Term Liability – any debt currently owed and due within 1 year of the date on the balance sheet- Long Term Liability – debt due 1 year or more from the date of the balance sheet3. Net Worth – difference between your assets and liabilities                         – Amount of actual wealth- Equity – an individual or family has in its owned assetsIncome and Expense Statement – measures financial performance over time- has 3 parts:1. Income 2. Expenses3. Cash Surplus/Deficit – difference between income & expensesFixed Expenses – usually contractual, predetermined, and involving equal payments each periodVariable Expenses – amounts exchange from one time period to the