Focus on Personal Finance 5th Edition

Kapoor Solutions Manual

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Focus on Personal Finance 5th Edition Kapoor Solutions Manual

Chapter 02 - Money Management Skills

CHAPTER 2
MONEY MANAGEMENT SKILLS

CHAPTER OVERVIEW
Successful money management is based on organized financial records, accurate personal financial
statements, and effective budgeting. This chapter offers a discussion of the importance and type of
financial documents. This is followed by an explanation of the components and procedures for preparing
personal financial statements—the balance sheet and the cash flow statement. Next, the chapter covers
the basics of developing, implementing, and evaluating a budget. Finally, savings techniques for
achieving financial goals are discussed.

LEARNING OBJECTIVES CHAPTER SUMMARY

After studying this chapter, students will be able to:

Obj. 1 Identify the main Successful money management requires a coordination of

components of wise personal financial records, personal financial statements, and
money management. budgeting activities. An organized system of financial records
and documents should provide ease of access as well as security
for financial documents that may be impossible to replace.
Obj. 2 Create a personal balance A personal balance sheet, also known as a net worth statement, is
sheet and cash flow prepared by listing all items of value (assets) and all amounts
statement. owed to others (liabilities). The difference between your total
assets and your total liabilities is your net worth. A cash flow
statement, also called a personal income and expenditure
statement, is a summary of cash receipts and payments for a given
period, such as a month or a year.
Obj. 3 Develop and implement a The budgeting process involves seven steps: (1) set financial
personal budget. goals; (2) estimate income; (3) budget an emergency funds and
savings; (4) budget fixed expenses; (5) budget variable expenses;
(6) record spending amounts; and (7) review spending and saving
patterns.
Obj. 4 Connect money The relationship among the personal balance sheet, cash flow
management activities statement, and budget provides the basis for achieving long-term
with saving for personal financial security. Future value and present value calculations
financial goals. may be used to compute the increased value of savings for
achieving financial goals

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Chapter 02 - Money Management Skills

INTRODUCTORY ACTIVITIES
 Ask students to comment on the “3 Steps to Financial Literacy" feature at the start of the chapter (p.
44).
 Point out the learning objectives (p. 45) in an effort to highlight the key points in the chapter.
 Provide an overview of the “Your Personal Financial Plan Sheets” for this chapter (p. 45).
 Ask students to provide examples of problems that could result from not having a definite system for
storing personal financial records and documents.
 Point out common methods of budgeting that help a household achieve financial goals and prevent
money problems.

CHAPTER 2 OUTLINE
I. A Successful Money Management Plan
A. Components of Money Management
B. A System for Personal Financial Records
1. Money Management Records
2. Personal and Employment Records
3. Tax Records
4. Financial Services Records
5. Credit Records
6. Consumer Purchase Records
7. Housing and Automobile Records
8. Insurance Records
9. Investment Records
10. Estate Planning and Retirement Records
II. Personal Financial Statements
A. Your Personal Balance Sheet: The Starting Point
1. Listing Items of Value
2. Determining Amounts Owed
3. Computing Net Worth
B. Your Cash Flow Statement: Inflows and Outflows
1. Record Income
2. Record Cash Outflows
3. Determine Net Cash Flow
III. A Plan for Effective Budgeting
A. Step 1. Set Financial Goals
B. Step 2. Estimate Income
C. Step 3. Budget an Emergency Fund and Savings
D. Step 4. Budget Fixed Expenses
E. Step 5. Budget Variable Expenses
F. Step 6. Record Spending Amounts
G. Step 7. Review Spending and Saving Patterns
IV. Money Management and Achieving Financial Goals
A. Selecting a Savings Technique
B. Calculating Savings Amounts

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CHAPTER 2 LECTURE OUTLINE Instructional Suggestions

I. A SUCCESSFUL MONEY MANAGEMENT PLAN  Use PPT slides 2-1 to 2-3

(p. 45)
 Money management refers to the day-to-day
financial activities necessary to handle current
personal economic resources while working toward
long-term financial security.

Components of Money Management (p. 45)  Exercise: Have students suggest

methods that could be used to
 Personal financial records, financial statements, and organize and quickly access
spending plans (budget) are the foundation for personal financial documents
and records.
planning and implementing money management
activities.  Use PPT slide 2-4.

A System for Personal Financial Records (p. 46)

 Organized money management requires a system of  PPT slides 2-5 to 2-13.
financial records including the following categories:
1. money management records  Text Highlight: Exhibit 2-1 (p.
2. personal and employment records 47) provides an overview of a
3. tax records system and suggested locations
4. financial services records for storing financial records..
5. credit records
6. consumer purchase records
7. housing and automobile records
8. insurance records  Practice Quiz 2-1 (p. 48)
9. investment records  Text Reference: “Apply
10. estate planning and retirement records Yourself” activity (p. 48).

II. PERSONAL FINANCIAL STATEMENTS (p. 48)  Use PPT slide 2-14.

 A personal balance sheet and cash flow statement  Discussion Question: How
accurate is a balance sheet for
provide information about a person’s or household’s measuring the financial progress
current financial position and a summary of current of an individual or household?
income and spending.
 Text Highlight: Exhibit 2-2 (p.
Your Personal Balance Sheet: The Starting Point (p. 49) explains the process for
creating a balance sheet.
48)
 Use PPT slides 2-15 to 2-19.
 A balance sheet, also known as a net worth
statement, specifies what you own and what you owe.
 Items of value minus amounts owed equals net worth.
 Assets, the first item on the balance sheet, are cash
and other property that has a monetary value.

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CHAPTER 2 LECTURE OUTLINE Instructional Suggestions

 Liquid assets are cash and items of value that can
easily be converted into cash.
 Real estate includes a home, condominium, vacation
property, or other land that a person or family owns.
 Personal possessions are the major portion of assets for
most families.
 Investment assets consist of money set aside for long-
term financial needs.
 Liabilities are amounts owed to others but do not
include items not yet due, such as next month’s rent.
 Current liabilities are debts that must be paid within a
short time, usually less than a year.
 Long-term liabilities are debts that are not required to
be paid in full until more than a year from now.
 Your net worth is the difference between your total
assets and your total liabilities: Assets - Liabilities =
Net worth
 The balance sheet of a business is usually expressed
as: Assets = Liabilities + Net worth
 Insolvency is the inability to pay debts when they are
due; it occurs when a person’s liabilities far exceed his
or her available assets.
“Figure It Out” (p. 51)
 A person or household experiences financial  Text Reference Refer students
to a summary of financial ratios
improvement if net worth increases over time. on page 51. (“Figure It Out”
 Debt-equity ratio—liabilities divided by net worth— box) (PPT Slide 2-23)
may be used to indicate a person’s financial situation; a
low debt ratio is desired.
 Current ratio—liquid assets divided by current
liabilities—how well a person will be able to pay
upcoming debts.
 Liquidity ratio—liquid assets divided by monthly
expenses—indicates the number of months that
expenses can be paid if an emergency arises.
 Debt-payment ratio—monthly credit payments
divided by take-home pay—provides an indication of
how much of a person’s earnings goes for debt
payments (excluding a home mortgage).
 Savings ratio—amount saved each month divided by
gross income—financial experts recommend a savings
rate of about 10 percent.

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CHAPTER 2 LECTURE OUTLINE Instructional Suggestions

Your Cash Flow Statement: Inflows and Outflows (p.  Text Highlight: Exhibit 2-3 (p.
51) 52) provides an overview of the
process for creating a cash flow
 Cash flow is the actual inflow and outflow of cash statement.
during a given time period.  PPT slides 2-20 to 2-22.
 A cash flow statement is a summary of cash receipts  Discussion Question: What
and payments for a given period, such as a month or a information does a cash flow
year. statement provide that is not
 Income is the inflows of cash to an individual or a available on a personal balance
sheet?
household. For most people, the main source of
income is money received from a job.  Exercise: Have students list the
 Cash payments for living expenses and other items various sources of income (cash
inflows available for spending)
make up the second component of a cash flow of people in our society.
statement.
 Discussion Question: What
 Fixed expenses are payments that do not vary from relationship exists between the
month to month. balance sheet and cash flow
 Variable expenses are flexible payments that change statement?
from month to month.
 The difference between your income and your cash
outflows can be either a positive (surplus) or negative
(deficit) cash flow. A deficit exists if more cash goes  Practice Quiz 2-2 (pp. 54)
out than comes in during a month. This amount must  Text Reference: “Apply
be made up by withdrawals from savings or Yourself” activity (p. 54).
borrowing.

III. A PLAN FOR EFFECTIVE BUDGETING (p. 54)

 A budget, or spending plan, is necessary for  Use PPT slides 2-24 to 2-31.
successful financial planning. The main purposes of a  Discussion Question: Is every
budget are to help you individual and household forced
to budget, with some more
1. live within your income organized and planned than
2. spend your money wisely others?
3. reach your financial goals
 Exercise: Have students suggest
4. prepare for financial emergencies common financial goals.
5. develop wise financial management habits
 Budgeting may be viewed in seven main steps:
1. Set financial goals
2. Estimate income
3. Budget an emergency funds and savings
4. Budget fixed expenses
5. Budget variable expenses
6. Record spending amounts
7. Review spending and saving patterns

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CHAPTER 2 LECTURE OUTLINE Instructional Suggestions

 Your lifestyle is how you spend your time and money
and is strongly influenced by your career, family, and
personal values.
Step 1. Set Financial Goals (p. 54)
 Financial goals are plans for future activities that
require you to plan spending, savings, and investing.
 How much you budget for various items will depend
on current needs and plans for the future. Sources that
can assist with planning your spending include:
 your cash flow statement
 sample budgets from government reports
 articles in personal financial planning magazines
 estimates of future income and expected inflation

Step 2. Estimate Income (p. 55)

 Text Highlight: Exhibit 2-6
 Available money should be estimated for a given time (page 57) provides suggested
period—such as a month. budget allocations for different
 Income variations (due to seasonal work or sales life situations.
commissions) should be based on the recent past and  Exercise: Have students allocate
realistic expectations. budget categories (using
percentages) for different
Step 3. Budget an Emergency Fund and Savings household situations.
(p. 55)
 An emergency fund and savings for irregular
payments should be first set aside to avoid not having
anything left for savings.

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CHAPTER 2 LECTURE OUTLINE Instructional Suggestions

Step 4. Budget Fixed Expenses (p. 55)

 Definite obligations (rent, mortgage, and credit
payments) should be allocated first.
 Assigning amounts to spending categories can be
based on your cash flow statement, government data,
current magazine articles, and estimates of future
income and expenses.
 A “spending diary” of past expenses can also assist
with this task.
Step 5. Budget Variable Expenses (p. 57)
 Planning for variable expenses is more difficult than
fixed expenses.
 These expenses will fluctuate based on household
situation, time of the year, health, economic
conditions, and other factors.

Step 6. Record Spending Amounts (p. 57)

 A budget variance is the difference between amount
budgeted and the actual amount received or spent. A
deficit exists when actual spending exceeds planned
spending. A surplus is when actual spending is less
than planned spending.
Step 7. Review Spending and Saving Patterns (p. 58)
 The results of your budget may be obvious—having
extra cash, falling behind in payments. Or the results
may need to be reviewed in detail to determine areas
of needed changes. The most common overspending
areas are entertainment and food, especially away-
from-home meals.  Text Reference: The “Personal
 At this point of the budgeting process, you should Finance in Practice” box (p. 58)
also evaluate, reassess, and revise your financial suggests guidelines for a SWOT
goals. analysis for money management
activities and budgeting.
Successful Budgeting (p. 59)
 A successful budget should be:  Question: What factors can
 well-planned contribute to unsuccessful
 realistic budgeting? How can these
situations be avoided?
 flexible
 clearly communicated  Practice Quiz 2-3 (p. 60)
 Text Reference: “Apply
Selecting a Budgeting System (p. 59) Yourself” activity (p. 60)
 Commonly used budgeting systems are: mental,
physical, written, and computerized.

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Chapter 02 - Money Management Skills

CHAPTER 2 LECTURE OUTLINE Instructional Suggestions

V. MONEY MANAGEMENT AND ACHIEVING  Use PPT slides 2-32 to 2-40.

FINANCIAL GOALS (p. 60)
 Personal financial statements and a budget help  Additional Example: People
achieve financial goals with unable to save regularly are
usually:
1. the balance sheet reporting current financial
position—where you are now.  individuals without specific
2. the cash flow statement: telling what was received savings goals
and spent over the past month.  people who always seem to
3. a budget for planning spending and saving to use up savings for
achieve financial goals. unexpected expenses
 People commonly prepare a balance sheet on a  those who overuse credit
periodic basis, such as every three or six months.  people who buy to have the
Between those points in time, a budget and cash flow same things as others
statement help plan and measure spending and saving
activities.  individuals who lack
common financial goals
with other family members
Selecting a Savings Technique (p. 62)
 Since most people find saving difficult, financial  Text Highlight: “From the
advisers suggest several methods: Pages of Kiplinger’s Personal
 write a check each payday and deposit it in a Finance” (p. 61).
distant financial institution
 use payroll deduction, direct deposit
 save coins
 spend less on certain items
Calculating Savings Amounts (p. 62)
 To achieve financial objectives, you should
convert your savings goals into specific amounts.  Practice Quiz 2-4 (p. 63)
 Your use of an interest-earning savings plan is  Text Reference: “Apply
vital to the growth of your money and the Yourself” activity (p. 63).
achievement of your financial goals.

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Chapter 02 - Money Management Skills

CONCLUDING ACTIVITIES
 Discuss “Your Personal Finance Dashboard" and possible financial planning actions (p. 63).

 Point out the chapter summary (p. 64) and key terms in the text margin.

 Assign and discuss selected end-of-chapter Problems, Questions, Case in Point, and Continuing Case.
 Encourage students to maintain a “Daily Spending Diary” (p. 69 and Appendix D)
 Discuss “Your Personal Financial Plan” worksheets.
 Use the Chapter Quiz in the Instructor’s Manual.

YOUR PERSONAL FINANCIAL PLAN WORKSHEETS FOR USE WITH

CHAPTER 2

Sheet 5 Financial Documents and Records

Sheet 6 Creating a Personal Balance Sheet
Sheet 7 Creating a Personal Cash Flow Statement
Sheet 9 Developing a Personal Budget

CHAPTER 2 QUIZ ANSWERS

True-False Multiple Choice

1. F (p. 46) 6. A (p. 54)
2. T (p. 48) 7. C (p. 49)
3. F (p. 50) 8. D (p. 50)
4. T (p. 51) 9. B (p. 52)
5. T (p. 57) 10. B (p. 55)

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Chapter 02 - Money Management Skills

Name Date

CHAPTER 2 QUIZ

TRUE-FALSE
_____1. Most financial records should be kept in a safe-deposit box.
_____2. A personal balance sheet reports the financial position of a person or family
on a given date.
_____3. Assets represent amounts owed to others that must be paid within the next
year.
_____4. Spending less than your income will increase net worth.
_____5. A budget deficit exists when actual spending exceeds projected spending.

MULTIPLE CHOICE
_____6. A(n) __________ is a specific plan for spending.
a. budget
b. balance sheet
c. income statement
d. bank statement

_____7. An example of a liquid asset would be

a. a home.
b. an automobile.
c. a checking account.
d. retirement account.

_____8. __________ represents amounts owed to others.

a. Current assets
b. Expenses
c. Mutual funds
d. Liabilities

_____9. A personal cash flow statement presents

a. amounts earned from savings.
b. income and payments.
c. assets and liabilities.
d. amounts owed to others.

_____10. Definite financial obligations are referred to as

a. variable expenses.
b. fixed expenses.
c. equity.
d. investment assets.

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Chapter 02 - Money Management Skills

SUPPLEMENTARY LECTURE

Financial Ratios to Measure and Evaluate Financial Progress

Type Calculations Example

A. Debt-equity ratio liabilities divided by net worth $50,000/$40,000 = 1.25

Interpretation: These items express the relationship between your debts and personal net worth. A
lower debt ratio is desired.

B. Current ratio liquid assets divided by current $7,000/$4,000 = 1.75

liabilities

Interpretation: Indicates how well you will be able to pay upcoming debts. A higher number is more
desirable.

C. Liquidity ratio liquid assets divided by monthly $7,000/$2,800 = 2.5

expenses

Interpretation: Indicates the number of months a person will be able to pay expenses if an emergency
situation arises. Again, a higher number is desired especially if uncertainty exists regarding continual
employment.

D. Solvency ratio total assets divided by total $98,000/$67,000 = 1.46

liabilities

Interpretation: Shows the relationship between the value of assets and what is owed. A higher number
is desired.

E. Debt Payments ratio monthly credit payments divided $450/$2,500 = 0.18

by monthly take

Interpretation: Expresses portion of monthly earnings going for credit payments. A lower ratio is
desired.

F. Savings ratio additions to savings plans divided $2,080/$32,800 = 0.065

by take-home pay

Interpretation: Presents the portion of annual earnings that has been saved.

G. Investment assets ratio investment assets divided by net $77,000/$101,000 = 0.76

worth

Interpretation: Indicates portion of net worth that contributes to long-term financial goals.

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Chapter 02 - Money Management Skills

Supplementary Lecture: Money Management Troubles and Debt

Difficult economic conditions often create

difficult personal financial situations, often in
the form of increased debt.

The process of getting out of debt may

include actions to:

- Evaluate your credit situation

- Track your spending

- Plan to make payments on time

- Consider other income sources

- If appropriate, seek assistance

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Chapter 02 - Money Management Skills

ANSWERS TO PRACTICE QUIZZES, PROBLEMS,

QUESTIONS, AND CASES

PRACTICE QUIZZES

Practice Quiz 2-1 (p. 48)

1. What are the three major money management activities?
The three major money management activities are (1) storing and maintaining financial records and
documents, (2) creating personal financial statements, and (3) creating and implementing a budget.
(p. 45)

2. What are the benefits of an organized system of financial records and documents?
An organized system of financial records provides a basis for: (1) handling daily business activities,
such as bill paying; (2) planning and measuring financial progress; (3) completing required tax
reports; (4) making effective investment decisions; and (5) determining available resources for
current and future spending. (pp. 46)

3. For each of the following records, check the column to indicate the length of time the item should be
kept. “Short-time period” refers to less than five years.

Document Short time period Longer-time period

Credit card statements X
Mortgage documents X
Receipts for furniture, clothing X
Retirement account information X
Will X

Practice Quiz 2-2 (p. 54)

1. What are the main purposes of personal financial statements?
(1) Report your current financial position in relation to the value of the items you own and the
amounts you owe; (2) measure your progress toward your financial goals; (3) maintain information
on your financial activities; (4) provide data that you can use when preparing tax forms or applying
for credit. (p. 48)

2. What does a personal balance sheet tell you about your financial situation?
A balance sheet consists of assets (items of value), liabilities (amounts owed to others), and net worth
(the difference between the total assets and total liabilities.) (pp. 48-50)

3. For the following items, identify each as an asset (A), liability (L), cash inflow (CI), or cash outflow
(CO):

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Chapter 02 - Money Management Skills

_CO_ monthly rent __L__ automobile loan

_CI__ interest on savings account __A__ collection of rare coins
__A_ retirement account __L__ mortgage amount
_CO_ electric bill __A__ market value of automobile

4. Jan Franks has liquid assets of $6,300 and monthly expenses of $2,100. Based on the liquidity
ratio, she has 3 months in which living expenses could be paid if an emergency arises.

Practice Quiz 2-3 (p. 60)

1. What are the main purposes of a budget?

The main purposes of a budget are to help you: (1) live within your income; (2) spend your money
wisely; (3) reach your financial goals; (4) prepare for financial emergencies; and (5) develop wise
financial management habits. (p. 54)

2. How does a person’s life situation affect goal setting and amounts allocated for various budget
categories?
Different life situations will affect household goals and plans for spending based on needs and
desires of those involved. Delayed marriage might mean more spending for travel and leisure;
deferred parenthood might be due to plans for advanced career training and returning to school;
divorce will affect housing size needs and could mean child care expenses.

3. For each of the following household expenses, indicate if the item is FIXED expense or a
VARIABLE expense.

VARIABLE food away from home FIXED cable television

FIXED Rent VARIABLE electricity
FIXED health insurance premium VARIABLE auto repairs

4. The Nollin family has budgeted expenses for a month of $4,560 and actual spending of $4,480.
This would result in a budget SURPLUS or DEFICIT (circle one) of $ 80

Practice Quiz 2-4 (p. 63)

1. What relationship exists among personal financial statements, budgeting, and achieving financial
goals?
The balance sheet and cash flow statement provide information about a person’s current financial
situation. These allow a person to plan his or her budget to set spending and saving plans that relate
to achieving financial goals.

2. What are some suggested methods to make saving easy?

Suggested savings methods include “pay yourself first,” payroll deduction, saving coins, and
eliminating spending on a certain item. (p. 62)

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Chapter 02 - Money Management Skills

3. If a person desires to obtain the following information, check the box for the document that would be
most useful.

Financial information needed Balance sheet Cash flow Budget

statement
Amounts owed for medical expenses X
Spending patterns for the past few months X
Planned spending patterns for the next month X
Current value of investment accounts X
Amounts to deposit in savings accounts X

DISCUSSION QUESTIONS (p. 65)

1. Describe some common money management mistakes that can cause long-term financial concerns?

Spending more than their income is the main mistake people make. In addition, the overuse of credit,
impulse buying, and not monitoring spending are other concerns.

2. What do you believe to be the major characteristics of an effective system to keep track of financial
documents and records?

Students should be encouraged to point out that a system should be relatively simple, should allow quite
access to items, and should be updated regularly.

3. How might financial ratios be used when planning and implementing financial activities?

These ratios can be an indication of financial progress. Some should be high (such as savings ratio),
while others should be low (debt-equity ratio).

4. Discuss with several people how a budget might be changed if a household faced a decline in income.
What spending areas might be reduced first?

This activity can help students better understand problems associated with money management and cash
flow. In addition, students can obtain practical advice on coping with this situation. Opinions on this item
will vary. Students should be ready to accept different points of views that reflect a person’s life situation,
goals, and personal values.

5. What are long-term effects of low savings for both individuals and the economy of a country?

Low savings for individuals will result in not having funds available for emergencies and poor long-term
financial security. For the economy, a low savings/investment rate will limit the funds available for use
by companies to expand and create jobs.

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Chapter 02 - Money Management Skills

PROBLEMS (p. 65)

1. Based on the following data, determine the amount of total assets, total liabilities, and net worth. (LO
2.2)
Liquid assets, $3,870 Investment assets, $8,340
Current liabilities, $2,670 Household assets, $87,890
Long-term liabilities, $76,230

a. Total assets $________________

b. Total liabilities $______________

c. Net worth $__________________

Total assets = $100,100 ($3,870 + 8,340 + 87,890)

Total liabilities = $78,900 ($2,670 + $76,230)
Net worth = $21,200 ($100,100 - $78,900)

2. Using the following balance sheet items and amounts, calculate the total liquid assets and total current
liabilities: (LO 2.2)
Money market account $2,600 Medical bills $262
Mortgage $158,000 Checking account $780
Retirement account $87,400 Credit card balance $489

a. Total liquid assets $___________________

b. Total current liabilities $_________________

a. Total liquid assets $3,380

b, Total current liabilities $751

3. Use the following items to determine the total assets, total liabilities, net worth, total cash inflows, and
total cash outflows. (LO 2.2)

Rent for the month, $650 Monthly take-home salary, $2,185

Spending for food, $345 Cash in checking account, $450
Savings account balance, $1,890 Balance of educational loan, $2,160
Current value of automobile, $8,800 Telephone bill paid for month, $65
Credit card balance, $235 Loan payment, $80
Auto insurance, $230 Household possessions, $3,400
Video equipment, $2,350 Payment for electricity, $90
Lunches/parking at work, $180 Donations, $160
Personal computer, $1,200 Value of stock investment, $860
Clothing purchase, $110 Restaurant spending, $130

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Chapter 02 - Money Management Skills

a. Total assets $___________________

b. Total liabilities $___________________

c. Net worth $___________________

d. Total cash inflows $___________________

e. Total cash outflows $___________________

Total assets = $18,950 ($450 + 1,890 + 8,800 + 2,350 + 1,200 + 3,400 + 860)
Total liabilities = $2,395 ($235 + $2,160)
Net worth = $16,555 ($18,950 - $2,395)
Total cash inflows = $2,235
Total cash outflows = $2,040 ($650 + 345 + 230 + 180 + 110 + 65 + 80 + 90 + 160 + 130)

4. For each of the following situations, compute the missing amount. (LO 2.2)

a. Assets $65,000; liabilities $18,000; net worth $47,000

b. Assets $86,500; liabilities $67,800 ; net worth $18,700

c. Assets $34,280; liabilities $12,965; net worth $21,315

d. Assets $90,999; liabilities $38,345; net worth $52,654

5. Based on this financial data, calculate the ratios requested: (LO 2.2)

Liabilities, $7,800 Net worth, $58,000

Liquid assets, $4,600 Current liabilities, $1,300
Monthly credit payments, $640 Take-home pay, $2,575
Monthly savings, $130 Gross income, $2,850

a. Debt ratio ___________________ b. Current ratio ___________________

c. Debt-payments ratio _______________ d. Savings ratio ___________________

a. Debt ratio 7,800/58,000 = 0.134 b. Current ratio 4,600/1,300 = 3.54

c. Debt-payments ratio 640/2,575 = 0.2485 d. Savings ratio 130/2,850 = 0.046

6. The Fram family has liabilities of $128,000 and a net worth of $340,000. What is the debt ratio? How
would you assess this? (LO 2.2)

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Chapter 02 - Money Management Skills

$128,000 / $340,000 = .376 represents a ratio of less than 40 percent, which would need to be assessed in
relation to previous trends and the ratio of comparable households.

7. Carl Lester has liquid assets of $2,680 and current liabilities of $2,436. What is his current ratio? What
comments do you have about this financial position? (LO 2.2)

$2,680 / $2,436 = 1.1, which could be viewed as lower than would be desirable.

8. For the following situations, calculate the cash surplus or deficit: (LO 2.2)

Cash Inflows Cash Outflows Difference (surplus or deficit)

$3,460 $3,306 ___ x $242 surplus
$4,693 $4,803 __ x $47 deficit
$4,287 $4,218 $69 surplus

9. The Brandon household has a monthly income of $5,630 on which to base their budget. They plan to
save 10 percent and spend 32 percent on fixed expenses and 56 percent on variable expenses. (LO 2.3)

a. What amount do they plan to set aside for each major budget section?

Savings $__________

Fixed expenses $__________

Variable expenses $__________

Savings $ 563
Fixed Expenses $1,801.60
Variable Expenses $3,152.80

b. After setting aside these amounts, what amount would remain for additional savings or for paying off
debts?

$112.60

10. Fran Powers created the following budget and reported the actual spending listed. Calculate the
variance for each of these categories, and indicate whether it was a deficit or a surplus. (LO 2.3)

Item Budgeted Actual Variance Deficit/Surplus

Food $360 $298 _______ _______
Transportation 320 334 _______ _______
Housing 950 982 _______ _______
Clothing 110 134 _______ _______
Personal 275 231 _______ _______

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Food $62 surplus; transportation $14 deficit; housing $32 deficit; clothing $24 deficit; personal
expenses $44 surplus.

11. Ed Weston recently lost his job. Before unemployment occurred, the Weston household (Ed; wife,
Alice; two children, ages 12 and 9) had a monthly take-home income of $3,165. Each month, the money
went for the following items: $880 for rent, $180 for utilities, $560 for food, $480 for automobile
expenses, $300 for clothing, $280 for insurance, $250 for savings, and $235 for personal and other items.
After the loss of Ed’s job, the household’s monthly income is $1,550, from his wife’s wages and his
unemployment benefits. The Westons also have savings accounts, investments, and retirement funds of
$28,000. (LO 2.3)

a. What budget items might the Westons consider reducing to cope with their financial difficulties?

Common cutbacks occur in the areas of food, clothing, savings, and personal spending.

b. How should the Westons use their savings and retirement funds during this financial crisis? What
additional sources of funds might be available to them during this period of unemployment?

Savings funds should be used to pay fixed expenses and necessities. Retirement funds should only be
used if a lengthy unemployment time is encountered or if large, expected expenses occur. Other sources
of funds may include loans, sale of investments, or sale of no longer needed household items.

12. Use future value and present value calculations (see tables in the appendix for Chapter 1) to
determine the following: (LO 2.4)

a. The future value of a $600 savings deposit after eight years at an annual interest rate of 6 percent.

$600  1.594 = $956.40

b. The future value of saving $1,800 a year for five years at an annual interest rate of 5 percent.

$1,800  5.526 = $ 9,946.80

c. The present value of a $2,000 savings account that will earn 3 percent interest for four years.

$2,000  0.885 = $1,770

13. Brenda plans to reduce her spending by $50 a month. What would be the future value of this reduced
saving over the next 10 years? (Assume an annual deposit to her savings account, and an annual interest
rate of 3 percent.) (LO 2.4)

$50 X 12 = $600 X 11.464 (future value of annuity) = $6,878.40

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14. Kara George received a $5,000 gift for graduation for her uncle. If she deposits this in a account
paying 3 percent, what will be the value of this gift in 12 years? (LO 2.4)

$5,000 X 1.426 = $7,130

CASE IN POINT (p. 67)

Adjusting the Budget

1. What situations might have created the budget deficit for the Constantine family?

Possible answers include: a lack of planning, not monitoring spending actions, not setting financial goals,
and unexpected expenses due to an emergency or other circumstances.

2. What amounts would you suggest for the various categories for the family budget?

While student answers will vary, some suggested actions might include reduced spending in certain areas
(food away from home, cable and internet, and more careful spending for groceries) along with a revised
budget and perhaps actions to increased household income.

3. Describe additional actions for the Constantine family related to their budget or other money
management activities.

Possible answers might include: involve all family members in the budgeting process, assessing current
and future insurance needs, setting financial goals and regular savings to achieve those goals.

CONTINUING CASE (p. 68)

1. According to the text, a personal balance sheet is a statement of your net worth. It is an accounting of
what you own as well as what you owe.

Using the information provided, prepare a personal balance sheet for Jamie Lee.

Solution:
The formula for a personal balance sheet (as seen on page 49) is as follows:

Items of Value (what you own) - Amounts owed (what you owe) = Your net worth (your wealth)

ASSETS LIABILITIES = NET WORTH

(WHAT YOU OWN) MINUS (WHAT YOU OWE) (YOUR WEALTH)
CHECKING ACCOUNT: $1,250 STUDENT LOAN:
$5,400
EMERGENCY FUND CREDIT CARD
SAVINGS ACCOUNT: $3,100 BALANCE: $400
CAR: $4,000
$8,350 - $5,800 = $2,550
Jamie Lee has a positive net worth of $2,550.

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2. Using the table found in Ratios for Evaluating Financial Progress on page 51, what is Jamie Lee’s
debt ratio?

When comparing Jamie Lee’s liabilities and her net worth, is the relationship a favorable one?

Solution:

The formula for calculating her debt ratio is as follows:

Liabilities/Net Worth = Debt Ratio

$5,800 / $2,550 = 2.27

Jamie Lee’s debt ratio is 2.27.

No, it is not a favorable relationship; her liabilities are over twice as much as her net worth.

3. Using the table found in Ratios for Evaluating Financial Progress on page 51, what is Jamie Lee’s
savings ratio?

Using the rule of thumb recommended by financial experts, is she saving enough?

Solution:

The formula for calculating her savings ratio is as follows:

Amount Saved Each Month/ Gross Income = Savings Ratio

$175/ $2,125 = 0.08
Jamie Lee’s savings ratio is .08 or 8%.
The amount to deposit in to savings per month, as recommended by financial experts, is between 5% and
10% of the gross income amount.
Jamie is saving 8% of her gross income amount, so she is in an optimal range.

4. Using Exhibit 2-6: Typical After-Tax Budget Allocations for Different Life Situations found on page
57, calculate the budget allocations for Jamie Lee, using her Net Monthly Salary (or After-tax Salary)
amount.

Is she within the recommended parameters for a student?

BUDGET CATEGORY RECOMMENDATION JAMIE LEE’S WITHIN

% FOR STUDENT AMOUNT RECOMMENDED
PARAMETERS?
HOUSING 0-25% ($275+$175)/$1,560 = YES
(RENT, UTILITIES) 25%
TRANSPORTATION 5-10% $100/$1,560 = 6% YES

ENTERTAINMENT AND 5-10% $85/$1,560 = 5% YES

RECREATION
SAVINGS 0-10% $175/$1,560 = 11% NO

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Focus on Personal Finance 5th Edition Kapoor Solutions Manual

Chapter 02 - Money Management Skills

Jamie Lee is within all the recommended parameter set for a student life situation in the budget
categories of housing, transportation, entertainment, and savings. Her savings is slightly over the
recommendation of 10%, with her ratio calculating at 11%.

Note: These calculations use after tax (Net Monthly Salary) amounts versus other ratios shown in the text
that utilize gross monthly amounts.

DAILY SPENDING DAIRY (p. 69)

This activity will help students better plan their spending for both short-term and long-term financial
decisions.

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