Question

Managerial Accounting Question (Conceptual):

Preparing a personal budget has always worked as a great tool for controlling personal finances. Particularly when we make a big decision, it has always been useful to prepare a budget. For many people in our country, one of the important decisions they make is whether to purchase a car. In India the percentage of people who own a car has increased significantly during the last few years. This is partially because of the starting of operation of Uber in India. Another reason can be availability of car loans. Moreover,the interest on car loan is also tax deductible. Before purchasing a car you should first consider whether buying it is the best choice for you. Suppose you have just graduated from the university and got a decent job. Should you immediately buy a car?   

Write a response of considering the pros and cons and indicating your position regarding the situation, should you buy the car. Provide proper justification. (Explain in as detail as possible.)

( Use the concept of relevant costing and budgeting ,to answer the question. The question is related to decision making)

Answer 1

Personal finance is about meeting personal financial goals, whether it’s having enough for short-term financial needs, planning for retirement, or saving for your child's college education. It all depends on your income, expenses, living requirements, and individual goals and desires—and coming up with a plan to fulfill those needs within your financial constraints. But to make the most of your income and savings it's important to become financially literate, so you can distinguish between good and bad advice and make savvy decisions.

• Few schools have courses in how to manage your money, so it is important to learn the basics through free online articles, courses, and blogs; podcasts; or at the library.
• Smart personal finance involves developing strategies that include budgeting, creating an emergency fund, paying off debt, using credit cards wisely, saving for retirement, and more.
• Being disciplined is important, but it's also good to know when to break the rules—for example, young adults who are told to invest 10% to 20% of their income for retirement may need to take some of those funds to buy a home or pay off debt instead.

1. Devise a Budget

A budget is essential to living within your means and saving enough to meet your long-term goals. The 50/30/20 budgeting method offers a great framework. It breaks down like this:

• 50% of your take-home pay or net income (after taxes, that is) goes toward living essentials, such as rent, utilities, groceries, and transport
• 30% is allocated to lifestyle expenses, such as dining out and shopping for clothes.
• 20% goes towards the future: paying down debt and saving both for retirement and for emergencies

It’s never been easier to manage money, thanks to a growing number of personal budgeting apps for smartphones that put day-to-day finances in the palm of your hand. Here are just two examples: YNAB, aka You Need a Budget, helps you track and adjust your spending so that you are in control of every dollar you spend. Meanwhile, Mint streamlines cash flow, budgets, credit cards, bills, and investment tracking—all from one place. It automatically updates and categorizes your financial data as info comes in, so you always know where you stand financially. The app will even dish out custom tips and advice.

2. Create an Emergency Fund

It’s important to “pay yourself first” to ensure money is set aside for unexpected expenses such as medical bills, a big car repair, rent if you get laid off, and more.

Between three and six months' worth of living expenses is the ideal safety net. Financial experts generally recommend putting away 20% of each paycheck every month (which of course, you’ve already budgeted for!). Once you’ve filled up your “rainy day” fund (for emergencies or sudden unemployment), don’t stop. Continue funneling the monthly 20% towards other financial goals such as a retirement fund.

3. Limit Debt

It sounds simple enough: To keep debt from getting out of hand, don’t spend more than you earn. Of course, most people do have to borrow from time to time—and sometimes going into debt can be advantageous, if it leads to acquiring an asset. Taking out a mortgage to buy a house is one good example. But leasing can sometimes be more economical than buying outright, whether you’re renting a property, leasing a car, or even getting a subscription to computer software.

4. Use Credit Cards Wisely

Credit cards can be major debt traps. But it's unrealistic not to own any in the contemporary world, and they have applications other than as a tool to buy things. Not only are they crucial to establishing your credit rating, but they’re also a great way to track spending, which can be a big budgeting aid.

Credit just needs to be managed correctly, which means the balance should ideally be paid off every month, or at least be kept at a credit utilization rate minimum (that is, keep your account balances below 30% of your total available credit). Given the extraordinary rewards incentives on offer these days (such as cash back), it makes sense to charge as many purchases as possible. Still, avoid maxing out credit cards at all costs, and always pay bills on time. One of the fastest ways to ruin your credit score is to constantly pay bills late—or even worse, miss payments. (See Tip No. 5.)

Using a debit card is another way to ensure you will not be paying for accumulated small purchases over an extended period—with interest.

5. Monitor Your Credit Score

Credit cards are the main vehicle through which your credit score is built and maintained, so watching credit spending goes hand in hand with monitoring your credit score. If you ever want to obtain a lease, mortgage, or any other type of financing, you’ll need a solid credit history behind you. Factors that determine your score include how long you've had credit, your payment history, and your credit-to-debt ratio.

Credit scores are calculated between 300 and 850. Here's one rough way to look at it:

• 720 = good credit
• 650 = average credit
• 600 or less = poor credit

To pay bills, set up direct debiting where possible (so you never miss a payment) and subscribe to reporting agencies that provide regular credit score updates. By monitoring your report, you will be able to detect and address mistakes or fraudulent activity. Federal law allows you to obtain free credit reports from the three major credit bureaus: Equifax, Experian, and TransUnion. Reports can be obtained directly from each agency, or you can sign up at AnnualCreditReport, a site sponsored by the Big Three; you can also get a free credit score from sites such as Credit Karma, Credit Sesame, or Wallet Hub. Some credit card providers, such as Capital One, will provide customers with complimentary, regular credit score updates, too.

6. Consider Your Family

To protect the assets in your estate and ensure that your wishes are followed when you die, be sure you make a will and—depending on your needs—possibly set up one or more trusts. You also need to look into insurance: auto, home, life, disability and long term care insurance. And be sure to periodically review your policy to make sure it meets your family's needs through life's major milestones.

Other critical documents include a living will and healthcare power of attorney. While not all these documents directly affect you, all of them can save your next-of-kin considerable time and expense when you fall ill or become otherwise incapacitated.

And while they're young, take the time to teach your children about the value of money and how to save, invest, and spend wisely.

7. Pay Off Student Loans

There are myriad of loan-repayment plans and payment reduction strategies available to graduates. If you’re stuck with a high-interest rate, paying off the principal faster can make sense. On the other hand, minimizing repayments (to interest only, for instance), can free up other income to invest elsewhere or to put into retirement savings while you're young and will get the maximum benefit from compound interest (see Tip No. 8, below). Some federal and private loans are even eligible for a rate reduction if the borrower enrolls in auto pay. Flexible federal repayment programs worth checking out include:

• Graduated repayment—progressively increases the monthly payment over 10 years
• Extended repayment—stretches the loan out over a period that can be as long as 25 years

8. Plan (and Save) for Retirement

Retirement may seem like a lifetime away, but it arrives much sooner than you’d expect. Experts suggest that most people will need about 80% of their current salary in retirement. The younger you start, the more you benefit from what advisors like to call the magic of compounding interest—how small amounts grow over time. Setting aside money now for your retirement not only allows it to grow over the long term, but it can also reduce your current income taxes if funds are placed in a tax-advantaged plan fund like an Individual Retirement Account (IRA), a 401(k) or a 403(b). If your employer offers a 401(k) or 403(b) plan, start paying into it right away, especially if they match your contribution. By not doing so, you're giving up free money! Take time to learn the difference between a Roth 401(k) and a traditional 401(k), if your company offers both.

Investing is only one part of planning for retirement. Other strategies include waiting as long as possible before opting to receive Social Security benefits (which is smart for most people), and converting a term life insurance policy to a permanent life one.

9. Maximize Tax Breaks

Due to an overly complex tax code, many individuals leave hundreds or even thousands of dollars sitting on the table every year. By maximizing your tax savings, you'll free up money that can be invested in the reduction of past debts, your enjoyment of the present and your plans for the future.

You need to start each year saving receipts and tracking expenditures for all possible tax deductions and tax credits. Many business supply stores sell helpful "tax organizers" that have the main categories already pre-labeled. After you're organized, you'll then want to focus on taking advantage of every tax deduction and credit available, as well as for deciding between the two when necessary. In short, a tax deduction reduces the amount of income you are taxed on, whereas a tax credit actually reduces the amount of tax you owe. This means that a $1,000 tax credit will save you much more than a $1,000 deduction.

10. Give Yourself a Break

Budgeting and planning can seem full of deprivations. Make sure you reward yourself now and then. Whether it's a vacation, purchase, or an occasional night on the town, you need to enjoy the fruits of your labor. Doing so gives you a taste of the financial independence you're working so hard for.

Last but not least, don't forget to delegate when needed. Even though you might be competent enough to do your own taxes or manage a portfolio of individual stocks, it doesn't mean you should. Setting up an account at a brokerage, spending a few hundred dollars on a certified public accountant (CPA) or a financial planner—at least once—might be a good way to jump-start your planning.

Three key character traits can help you avoid innumerable mistakes in managing your personal finances: discipline, a sense of timing, and emotional detachment.

Personal Finance Principles

Once you've established some fundamental procedures, you can start thinking about philosophy. The key to getting your finances on the right track isn't about learning a new set of skills. Rather, it's about learning that the principles that contribute to success in business and your career work just as well in personal money management. The three key principles are prioritization, assessment, and restraint.

Prioritizing means that you're able to look at your finances, discern what keeps the money flowing in, and make sure you stay focused on those efforts.

Assessment is the key skill that keeps professionals from spreading themselves too thin. Ambitious individuals always have a list of ideas about other ways they can hit it big, whether it is a side business or an investment idea. While there is absolutely a place and time for taking a flyer, running your finances like a business means stepping back and truly assessing the potential costs and benefits of any new venture.

Restraint is that final big-picture skill of successful business management that must be applied to personal finances. Time and time again, financial planners sit down with successful people who somehow still manage to spend more than they make. Earning $250,000 per year won't do you much good if you spend $275,000 annually. Learning to restrain spending on non-wealth-building assets until after you've met your monthly savings or debt-reduction goals is crucial in building net worth.