Financial Thermometers, Surviving the Unexpected, Planning and Records

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Financial Thermometers, Surviving the Unexpected,
Planning and Records

• Financial Planning Mr. Yates

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Using Ratios A Financial Thermometer

• Question 1 Do you have adequate liquidity to
  meet emergencies?
• Question 2 Do you have the ability to meet your
  debt obligations?
• Question 3 Are you saving as much as you think
  you are?

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Question 1 Do You Have Adequate Liquidity?

• Ratios to determine whether or not you have
  enough monetary assets
• (1) to pay for an unexpected large expense or
• (2) to tide you over during periods of reduced or
  eliminated earnings.
• Current ratio
• Months living expenses covered ratio

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Current Ratio

• monetary assets
• current liabilities
• This ratio shows you whether you have enough
  liquid assets to cover expenses currently due.

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Current Ratio Interpretation

• Ratio greater than 2 recommended
• Track the trend and if going down make changes

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Months Living Expenses Covered Ratio

• monetary assets
• months living expenses
• This ratio tells you how many months of living
  expenses you can cover with your present level of
  monetary assets.

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Months Living Expenses Covered Ratio
Interpretation

• The rule of thumb 3 to 6 months of expenses
• Factors that affect the rule of thumb
• Available credit cards or home equity loans
• Potential for higher earnings on less liquid
  accounts
• Stability of income
• Track the trend and if going down make changes.

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Question 2 Can You Meet Your Debt Obligations?

• Ratios to determine whether or not you can meet
  current or long-term debt obligations
• Debt ratio
• Long-term debt coverage ratio

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Debt Ratio

• total liabilities
• total assets
• This ratio tells you whether you could pay off
  all your liabilities if you liquidated all your
  assets.

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Debt Ratio Interpretation

• Represents percentage of assets financed with
  borrowing
• Track the trend ratio should go down with age

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Long-term Debt Coverage Ratio

• total income available for living expenses
• total long-term debt payment
• This ratio tells you how many times you could
  make your debt payments with your current income.

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Long-term Debt Coverage Ratio Interpretation

• Ratio of 2.5 or greater recommended
• Track the trend and if going down make changes
• Consider the inverse the percentage of
  take-home pay needed to repay debt

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Question 3 Are You Saving As Much As You Think?

• Ratio to determine whether you are saving as much
  of your income as you think
• Savings ratio

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Savings Ratio

• income available for savings
• income available for living expenses
• This ratio tells you what proportion of your
  after-tax income is being saved.

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Savings Ratio Interpretation

• U.S. rate typically 3 - 8
• Varies with stage of the financial life cycle and
  goals

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Record Keeping

• The three reasons for accurate record keeping
• Preparing taxes
• Tracking expenses
• Providing information for others to use in the
  event of an emergency

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Record Keeping (contd)

• The two steps of record keeping
• Tracking your personal financial dealings
• Storing your financial records in an accessible
  manner

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Ways to Track Expenditures

• Using checks and credit cards Those expenditures
  leave a paper trail
• Using cash Record expenditures in a notebook or
  ledger
• Generating a monthly income and expense statement
• Using computer programs to track all financial
  transactions
• Learning how and where to keep records

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Personal Income Taxes

• Keep all tax-related receipts and records for 6
  years.
• Always keep accurate tax records in the event of
  an audit.

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A Financial Plan A Plan for the Future

• Evaluate your financial health balance sheet,
  income statement, and ratios.
• Define your financial goals you must know how
  much you can save.
• Develop a plan of action use the income
  statement and a cash budget.
• Implement your plan Just do it!
• Review your progress, reevaluate, and revise your
  plan back to the balance sheet, income
  statement, ratios, and budget.

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A Cash BudgetA Plan for Today

• A plan for controlling cash inflows and outflows
• Purpose To balance income with expenditures AND
  savings

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Putting It All Together Budgeting

• Evaluate your financial health and your financial
  plan
• Develop a cash budget
• Implement a cash budget

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Developing a Cash Budget

• Examine last years total income and adjust for
  the current year.
• Estimate your tax liability.
• Identify all fixed expenditures.
• Identify all variable expenditures.
• Look for ways to reduce your variable expenses.
• Consider the effect of credit payments on future
  income.

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Calculating the Bottom Line
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Implementing a Cash Budget

• Try the budget for one month.
• Adjust the plan or your expenses as necessary to
  maintain the plan.
• Try the envelope system.

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Managing Your Own Affairs Versus Hiring a
Professional

• Your 3 options
• Go it alone, make a plan and have it checked by a
  professional.
• Work with a professional and develop a plan.
• Let the professional do it all.

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Paying Your Financial Planner

• Fee-only planners derive income from charging the
  client for the service provided or for a
  financial plan.
• Commission-based planners derive income from the
  sale of financial products.
• Some planners charge a combination of fees and
  commissions.

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Choosing a Professional Planner

• Pick a competent planner with accreditation(s)
  from a professional organization(s).
• Pick a planner with whom you are comfortable.
• Pick a planner with experience.

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Choosing a Professional Planner (contd)

• Before hiring a planner, ask lots of questions
  about his/her history.
• Call professional organizations to get
  recommendations.

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Summary

• Balance sheet determines net worth based on a
  comparison of assets and liabilities
• Income statement summarizes cash inflows and
  cash outflows
• Financial ratios diagnose your financial health

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Summary (contd)

• Record keeping implement strategies to
  accurately track expenses and maintain necessary
  financial records for the future
• Cash budget provides a plan for achieving your
  goals by balancing cash inflows and outflows
• Financial planners can provide many levels of
  assistance for your planning needs