Chapter Bonus D – Managing Personal Finances
1. The value of education is often exaggerated when searching for a good job.
2. The average lifetime income of someone with an undergraduate degree is about $1.6
million higher than for someone with only a high school diploma.
3. The U.S. government provides several types of financial incentives to encourage people
to attend college.
4. About half of the U.S. population accumulates enough money to afford a comfortable
retirement.
5. The first step in getting control of your finances is to prepare a budget.
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6. Over 35% of U.S. households do not have a retirement account.
7. Your personal balance sheet will reflect the same fundamental accounting equation as the
balance sheet for a business: assets = liabilities + owners’ equity.
8. On your personal balance sheet, your assets should include anything of value that you
own.
9. If your personal liabilities exceed your assets, your are on the road to financial security.
10. Your computer and car should both be listed on the asset side of your personal balance
sheet.
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11. Credit-card debt represents an asset on a consumer’s balance sheet.
12. A major source of revenue on your personal income statement is your salary or wages
from your job.
13. One step toward the goal of taking control of your finances is to keep track of all your
expenses.
14. If you find yourself regularly running out of cash, your only real option is to focus your
attention on finding ways to increase your income.
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15. Once you have evaluated your current financial situation and know your sources of
income and expenses, you have reached the point where you can establish a personal
budget.
16. One way to motivate yourself to start saving is to visualize your goals and think about
how much money it will take to achieve them.
17. Managing the finances of a household is similar to managing the finances of a small
business.
18. With respect to personal financial planning, the first thing to do with any extra money
you have is to start a savings plan.
19.
Chapter Bonus D – Managing Personal Finances
In order to get in the habit of saving, personal financial advisors suggest that you save
first and wait to pay off any debts until you’ve accumulated at least $10,000 in cash,
savings accounts, CDs and other liquid assets.
20. It is usually better to use any money left after paying monthly bills to pay off debts that
carry high interest rates rather than putting that money into a savings account.
21. Financial planners regularly suggest that you borrow money to pay for large purchases.
22. The best way to save money is to pay yourself first.
23. Most financial experts will tell you to save about 1 month of earnings for contingency
purposes.
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28. Listing all of your personal assets is the first step in preparing your own income
statement.
Feedback: Assets are found on the balance sheet, not the income statement.
29. Tracking business and personal spending by categories is an important technique to
control expenditures.
Feedback: Individuals and businesses often experience cash flow problems. One way to get
control of your cash outflows is to keep track of every cent you spend. Developing certain
categories can make this task easier and more informative.
30. Your personal budget is the same thing as your personal income statement.
Feedback: An income statement identifies actual revenue (everything you earned from your
job, investments, etc.) and subtracts costs, and expenses to determine your actual net income
over a given period. A budget is a financial plan that helps you think about how you can
achieve future goals.
31.
Chapter Bonus D – Managing Personal Finances
Financial planners encourage individuals to borrow only to cover immediate expenses.
Feedback: If you have to borrow money, only borrow to buy assets that have the potential to
increase in value or generate income, such as a house.
32. For individuals, budgets are usually more trouble than they are worth.
Feedback: Creating a financial plan and tracking expenses can be tedious. However, you will
gain the benefit of controlling your finances in order to reach your goals.
33. A good way to save money is to spend all of your regular income, but have a strict rule to
put any money from unexpected or unusual sources (such as overtime pay, bonuses, gifts,
gambling payouts, or contest prizes) into a savings account.
Feedback: The best way to save money is to pay yourself first. That is, take your paycheck
and immediately take out money for savings. Unexpected or unusual income cannot be
counted on, and would be too erratic and uncertain to ensure an adequate level of saving.
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34. You should never borrow to cover regular expenses, but it makes perfectly good sense to
use credit to cover unexpected expenses such as car or home repairs.
Feedback: Financial experts advise that it is better to budget for emergencies by establishing a
contingency fund of highly liquid assets such as savings accounts or money market funds to
cover most unexpected expenses. Except in highly unusual circumstances, borrowing should
only be used to buy assets that will appreciate in value or generate income.
35. Even though they are in debt, most of today’s college graduates are capital-rich.
36. Most people find it relatively easy to live frugally.
37. In order to accumulate enough wealth to get started toward achieving their goals many
people have to make significant sacrifices in their standard of living for several years.
38.
Chapter Bonus D – Managing Personal Finances
Once they’ve accumulated enough money, buying a low-priced home is often a good
investment for young adults.
39. Personal financial planners recommend renting a home, rather than incurring the cost of
buying a home.
40. Before getting married, a couple should discuss and agree upon a financial strategy.
41. After marriage, one great financial strategy is to live on one income and to save the
other.
42. If possible, it is almost always better to buy a single home rather than a duplex.
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68. Investors who desire a very stable and predictable income from their investments (such as
people who are nearing retirement) would be reluctant to invest heavily in the stock
market.
Feedback: The stock market has consistently proven to be a good place to invest money for
long-term growth. However, as evidenced by the recent sharp decline in stock prices, the
stock market definitely has its ups and downs. Also, though some analysts are bullish, many
experts predict that the market will grow more slowly over the next few years than it has in
the past, increasing the time it will take to recover from any market reversals. Younger
investors who are patient will still have time to recover from short-term drops in the stock
market. However older investors do not have as long a time horizon and may want a more
stable and predictable place to invest their money.
69. During the most recent drop in stock prices, Homer took the opportunity to buy a wide
variety of stocks even though many of his friends and relatives were selling. Homer’s
investment strategy appears to be consistent with contrarian views.
Feedback: The contrarian approach is to buy when everyone else is selling and sell when
others are buying. Most people tend to sell when the stock market suffers a big drop, but
contrarians look at such a drop as an opportunity to buy at a low price. This approach takes
courage, but it can be a way to great financial success. After all, the way to make money is to
buy low and sell high.
70.
Chapter Bonus D – Managing Personal Finances
During the first few years of a home mortgage, almost all the payments go for interest on
the loan. This high interest is a reason it is better for young people to rent rather than
buy.
Feedback: The federal government allows homeowners to deduct interest on their mortgage
from income, thus reducing their income tax liability. Thus, the fact that almost all of the
mortgage payment in the first few years goes to interest means that the homeowner can deduct
almost the entire cost of the mortgage payment from his or her taxable income.
71. One of the keys to financial success is never to apply for a credit card.
Feedback: Credit cards can be expensive if they are used extensively. However, credit cards
can be a convenient and safe way to make certain types of purchases, and if users pay off the
monthly balance before interest is charged, they can avoid the expense of finance charges.
Many merchants demand credit cards as a form of identification. Credit cards also provide a
record keeping system for purchases. Finally, credit cards offer some protection against theft:
if cash is stolen, it is simply gone; if a credit card is lost or stolen, the holder can simply
cancel the card, thus limiting the loss.
72. The best strategy to follow in using credit cards is to pay only the minimum amount
required each month.
Feedback: Relatively high interest rates are charged on credit card balances not paid within
the grace period. Paying only the monthly minimum can result in very high finance charges.
