Your friend has prepared his monthly budget and asks you if he has overlooked anything in this planning. Which of the following questions points out his most serious omission?
| | A | B |
|---|------------------------|---------:|
| 1 | Cash Inflows | |
| 2 | Disposable income | $4,165 |
| 3 | Interest on savings | $0 |
| 4 | Income from stocks | $50 |
| 5 | Total Cash Inflow | $4,215 |
| 6 | | |
| 7 | Cash outflows | |
| 8 | Mortgage | $1,000 |
| 9 | Homeowner's Insurance | $60 |
| 10| Car payment | $373 |
| 11| Car insurance | $125 |
| 12| Stock purchases | $200 |
| 13| Life and health insurance| $150 |
| 14| Retirement plan | $500 |
| 15| Utilities | $235 |
Answer (2)
Calculate total cash outflows: $1000 + 60 + 373 + 125 + 200 + 150 + 500 + 235 = $2643.
Determine net cash flow: $4215 - 2643 = $1572.
Identify common budget omissions: food, transportation, personal care, etc.
Conclude that the most serious omission is food and groceries, as it's a fundamental and potentially large expense. Food and groceries
Explanation
Analyze the Budget We are given a monthly budget and need to identify the most serious omission in the planning. The budget includes cash inflows (disposable income, interest on savings, income from stocks) and cash outflows (mortgage, homeowner's insurance, car payment, car insurance, stock purchases, life and health insurance, retirement plan, and utilities).
Calculate Total Cash Inflow First, let's calculate the total cash inflows. The total cash inflow is given as $4,215.
Calculate Total Cash Outflow Next, we need to calculate the total cash outflows. We sum all the expenses listed in the table: 1000 + 60 + 373 + 125 + 200 + 150 + 500 + 235 = 2643 So, the total cash outflow is $2,643.
Determine Net Cash Flow Now, let's find the net cash flow by subtracting the total cash outflows from the total cash inflows: 4215 − 2643 = 1572 The net cash flow is $1,572. This represents the amount of money left over after accounting for the listed expenses.
Identify Potential Omissions We need to identify potential omissions from the budget. Common omissions include expenses like food, transportation (gas, maintenance), personal care, entertainment, clothing, medical expenses, and debt payments (credit cards, loans). Since the net cash flow is $1,572, we need to consider which of these unlisted expenses could significantly impact the budget.
Determine the Most Serious Omission Considering the potential omissions, the most significant one is likely to be food and groceries. Food is a recurring and often substantial expense that can easily exceed several hundred dollars per month, depending on the individual's or family's eating habits. Other omissions like transportation, personal care, entertainment, clothing, and medical expenses can also be significant, but food is a fundamental need and often represents a larger portion of monthly spending.
Conclusion Therefore, the most serious omission in the budget is the lack of an allocation for food and groceries. This is a fundamental expense that can significantly impact the budget's accuracy.
Examples
Budgeting is a crucial skill for managing personal finances effectively. For instance, if you're planning a road trip, you need to estimate costs like gas, accommodation, food, and activities. By creating a detailed budget, you can ensure you have enough funds for the trip and avoid overspending. Similarly, businesses use budgeting to forecast revenue and expenses, helping them make informed decisions about investments and resource allocation. Understanding and applying budgeting principles can lead to better financial stability and achievement of financial goals.
The most serious omission in your friend's budget is the lack of an allocation for food and groceries, which is a fundamental expense that can significantly impact financial planning. Identifying overlooked costs like these is crucial for accurate budgeting. It's essential to include a specific amount for food to ensure all basic needs are met and to reflect a realistic financial situation.
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