Question

Describe some common money management mistakes that can cause long-term financial concerns. (LO2.1)

What do you believe to be the major characteristics of an effective system to keep track of financial documents and records? (LO2.1)

How might financial ratios be used when planning and implementing financial activities? (LO2.2)

What are long-term effects of low savings for both individuals and the economy of a country? (LO2.4)

Answer 1

1: The use of excessive credit can lead to long term financial concerns. Excessive borrowing will create a burden on the business or individual in terms of regular interest that has to be paid as well as reducing the creditworthiness. Speaking of an individual lack of retirement planning is the other mistake that can lead to long term financial problems when the retirement time arises. The other mistake that can have serious consequences is lack of investment. Having idle funds and not investing them wisely will lead to an opportunity loss of interest that could be earned on investment.

2: The system of keeping track of financial documents and records should be reviewed regularly. It should be an active system rather than a passive system and this will allow the individual or the business to keep track of movements in the financial records. The security of the records is of prime importance so that the records are not lost and can be accessed easily at the same time.

3: Financial ratios are extremely beneficial for businesses and individuals to help in personal financial planning. The main benefit offered by financial ratios is that it allows one to understand the current efficiency of the plan and make changes to make the financial activities effectively. An important ratio is the debt payments ratio which allows one to understand what portion of the take home pay is being used to pay off debt. As for a business it allows one to understand how much debt is being used as a percentage of total capital.

4: For an individual lack of savings will create insecurity for the individual in case of an emergency such as a lost job for a sudden medical emergency. For an economy lack of savings implies that the banks have lesser funds to invest into new businesses and development of the economy as a whole. Hence lack of savings will deplete the capital base of the economy and result in overseas borrowings which will finally reduce the Foreign Exchange Reserves of the economy.