2.Explain how to draw up a personal net-worth statement, a personal cash-flow statement, and a personal budget.
1. Evaluate your current financial status by creating a net worth statement and a cash flow analysis. 2. Set short-term, intermediate-term, and long-term financial goals. 3. Use a budget to plan your future cash inflows and outflows and to assess your financial performance by comparing budgeted figures with actual amounts. • In step 1 of the financial planning process, you determine what you own and what you owe : 1. Your personal assets consist of what you own. 2. Your personal liabilities are what you owe—your obligations to various creditors. • Most people have two types of assets: 1. Monetary or liquid assets include cash, money in checking accounts, and the value of any savings, CDs, and money market accounts. They’re called liquid because either they’re cash or they can readily be turned into cash. 2. Everything else is a tangible asset —something that can be used, as opposed to an investment. • Likewise, most people have two types of liabilities: 1. Any debts that should be paid within one year are current liabilities . 2. Noncurrent liabilities consist of debt payments that extend for a period of more than one year.
• Your net worth is the difference between your assets and your liabilities. Your net worth statement will show whether your net worth is on the plus or minus side on a given date. • In step 2 of the financial planning process, you create a cash-flow or income statement, which shows where your money has come from and where it’s slated to go. It reflects your financial status over a period of time. Your cash inflows —the money you have coming in—are recorded as income . Your cash outflows —money going out—are itemized as expenditures in such categories as housing, food, transportation, education, and savings. • A good way to approach your financial goals is by dividing them into three time frames: short-term (less than two years), intermediate-term (two to five years), and long-term (more than five years). Goals should be realistic and measurable, and you should designate definite time frames and specific courses of action.