Personal Finance Overview
What does it mean to live paycheck-to-paycheck?
This means making just enough money to pay for your expenses without having anything left over.
Explain the difference between fixed and variable expenses.
Fixed expenses don't change- they are the same from month to month, year to year, etc. An example of this would be your rent or mortgage payment, which is usually the same every month. Variable expenses can change from month to month, for example groceries.
If I want to use the conservative estimate method to estimate my expenses for the next month, should the dollar value for this estimate be higher or lower than what I actually think I will spend? Why?
You would want your estimate to be higher than what you think your expenses will actually be- it is safer that way if your expenses are greater than you expect.
If you worked at a bank and you were about to give a customer a loan, would you rather the loan be secured or unsecured? Why?
If you worked at the bank, it would be better for you if the loan is secured- that means if the client doesn't pay, you can take their collateral as payment.
Why would a car salesperson prefer you to take a loan for your car?
If you take a loan, the company makes more money because you will have to pay interest, which they will receive a portion of.
True or False: When it comes to personal finance, knowledge is more important than self-control.
False- Having knowledge of personal finance isn't helpful without self-control. Remember- personal finance is 20% head knowledge and 80% behavior.
Explain the difference between essential and discretionary expenses.
Essential expenses are things you have to spend money on, for example your house payment. Discretionary expenses are things you can choose to spend money on, for example a new video game.
If I want to use the conservative estimate method to estimate my income for the next month, should the dollar value for this estimate be higher or lower than what I actually think I will make in the month? Why?
The estimate should be lower than what I actually think I will make- it is safer this way in the event that I make less money than I am expecting.
If you were about to take a loan, would you rather it be secured or unsecured? Why?
If you were taking the loan, it would be better for you if it is unsecured- that means you do not have to put up any collateral.
Is a car salesperson likely to take no for an answer the first time you say it?
No, they are often explicitly told not to take no for an answer the first several times they hear it. Many of them are required to attempt at least one "redirect" after hearing the word no. Even if they are not required to keep trying, they have incentive to make the sale.
Fill in the blank: Net worth = assets - ______
Net worth = assets - liabilities
What makes a zero-based budget different than an ordinary budget?
With a zero-based budget, you have a plan for every dollar you are going to make before the month begins. This helps with self-control because you do not have to choose what to do with discretionary money at the end of the month- you already have a plan for it.
Kyle is a contractor who does IT work for customers. He takes contracts by the week and knows he will be working 40 hours at $100 per hour next week. He does not yet know what work he will be doing in the following weeks. Would it be a good idea for him to try to predict the exact value of his income for next month for his budget? Why or why not?
No, it would not. He does not know the exact amount of work he will be doing next month, just next week.
What is depreciation? Do cars tend to depreciate quickly?
Depreciation is when the value of an asset goes down over time, which happens with most assets. Cars tend to depreciate very quickly.
Explain in your own words why the incentives offered to car salespeople often result in them putting themselves before the customer.
Car sales people are often given incentives that encourage them to sell as much as possible or sell the most expensive thing possible. This encourages them to make more and bigger sales, whether or not it is what's best for the customer.
What is discretionary income?
Discretionary income is money you have leftover after your required expenses- it is money that you can spend on whatever you wish, at your discretion.
Why is budgeting for irregular income and expenses more difficult than budgeting for ordinary income and expenses?
Irregular income and expenses are harder to budget for because they are not the same every month, meaning it is harder to plan for them.
Sallie is a contractor who has work scheduled for the next month. She will have to complete the project by the end of the month, and when it is complete, she will receive $4,500. She does not yet know how many hours it will take her to complete the project, but she is certain it will be done by the end of the month. She will not be working on other projects this month. Would it be a good idea for Sallie to try to predict the exact amount of income she will make for next month? Why or why not?
Yes, this would be fine. She does not know the amount of hours she is going to work, but she knows how much she is going to make at the end of the month regardless of hours worked, so she has all the info she needs.
What is equity and what does it mean to have negative equity?
Equity is the amount you own in an asset. For example, if you have paid off $4,000 on a car loan, you have $4,000 in equity on that car. Negative equity means the value of your asset is less than what you currently owe. For example, if you owed $10,000 on a car that is now worth $8,000, that is negative equity. If you sold the car for $8,000 you would still owe $2,000.
Pick one of the car sales tactics we discussed. Then explain how it works and how it benefits the car salesperson.
There are a lot of potential answers to this- Mr. Brown will assess whether you gave enough info for a correct answer.
What is the difference between net worth and net income?
Net income is the amount of money you make- the amount you get on your paycheck. Net worth is the amount of money you already have: your assets minus your liabilities.
Explain in your own words what is meant by the phrase "managing finances without a budget is like playing darts blindfolded."
This is the idea that, if you don't have a budget, you are just hoping things will work out without having a plan for making them work. This is like playing darts blindfolded because, if you were doing so, you would just be hoping you were throwing the dart in the right direction- it might work out, but if it does, it'll most likely just be luck. You also might completely miss the dartboard.
Jorge made $5,000 last month, $6,000 two months ago, and $4,000 three months ago. What should he project his income to be for next month using the average of previous months method?
Explain the concept of bankruptcy and give at least one example of how it can hurt you going forward.
Bankruptcy is when you declare legally that you are unable to pay your debts. Bankruptcy can negatively impact you in a number of ways including lowering your credit score, making it harder to get some jobs, requiring you to sell off assets, etc.
Give an example of one of the incentives we discussed for car salespeople and how a company might use this incentive.
Profit incentive- commission
Job security incentive- sales quota
Reward incentive- competition/prizes