Finance Terms and Its Explanation

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 individual's financial affairs in order to fulfill financial goals.

SIX STEP FINANCIAL PLANNING PROCESS:
1. DEFINE financial goals
2. DEVELOP financial plans and strategies to achieve goals
3. IMPLEMENT financial plans and strategies
4. PERIODICALLY DEVELOP and IMPLEMENT budgets to monitor and control progress toward goals
5. USE financial statements to EVALUATE results, TAKE CORRECTIVE ACTION
6. REDEFINE goals and REVISE

Financial Goals - results that an individual wants to attain

Money - medium of exchange used as a measure of value in financial transactions

Utility - amount of satisfaction received from purchasing certain types or quantities of goods and services

Long-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 years

Short-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, house

Liability - something we owe measured by the amount of debt we incur

Insurance - way to reduce financial risk and protect both income and assets

Estate Planning - to effectively pass wealth on to their heirs

TWO 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 
Business
Consumer - central player in the financial planning environment
2. Economy

Monetary Policy
- programs for controlling the amount of money in circulation.
- used to stimulate or moderate economic growth

Fiscal Policy - its programs of spending and taxation
- government adjusts its spending levels and tax rates to monitor and influence a nation's economy

Economic 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 peak
Peak - expansion ends and a contraction begins
Contraction - real GDP falls
Trough - contraction ends and expansion begins

Prices - amount of money the seller is willing to accept in exchange for a given quantity of some good or service

Inflation - state of the economy in which the general price level is increasing

Consumer Price Index (CPI) - measure of inflation based on changes in the cost of consumer goods and services

Purchasing 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 sell

Fee-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 

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Financial Plans - roadmaps that show you the way

Personal Financial Statements
- let you know where you stand financially

Budgets 
- 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 expenses

Personal Financial Statements
- planning tools that are essential to developing and monitoring personal financial plans

Balance Sheets 
- financial statement describes a person's 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 market

2. 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 sheet

3. Net Worth - difference between your assets and liabilities
                        - Amount of actual wealth
- Equity - an individual or family has in its owned assets

Income and Expense Statement 
- measures financial performance over time
- has 3 parts:
1. Income 
2. Expenses
3. Cash Surplus/Deficit - difference between income & expenses

Fixed Expenses
- usually contractual, predetermined, and involving equal payments each period
Variable Expenses
- amounts exchange from one time period to the next

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