Personal finance exam 1

truth in savings

Fees on deposit accounts. The interest rate. The annual percentage yield (APY). Other terms and conditions of the savings plan.

CHAPTER 5

Financial Services: Savings Plans and Payment Accounts

SMART goal setting guidelines

Specific Measurable Action-oriented Realistic Time-based

average tax rate

Total tax due divided by taxable income.

FILING FEDERAL INCOME TAX RETURN

LO 4-3: Prepare a federal income tax return

INFLUENCES ON PERSONAL FINANCIAL PLANNING

LO1-2 Asses personal n economic factors that influence personal financial planning

OPPORTUNITY COSTS & TIME VALUE OOF MONEY

LO1-4 Calculate TVM to analyze personal financial decisions

ACHIEVING FINANCIAL GOALS

LO1-5 ID strategies for achieving personal financial goals for different life situations

SUCCESSFUL MONEY MANAGEMENT

LO3-1 Recognize relationships among financial documents and money management activities

PERSONAL FINANCIAL STATEMENTS

LO3-2 Develop personal balance sheet and cash flow statement

BUDGETING FOR SKILLED MONEY MANAGEMENT

LO3-3 Create and implement budget

Money Management and Achieving Financial Goals

LO3-4 Relate money management and savings activities to achieving financial goals

TAXES AND FINANCIAL PLANNING

LO4-1: Describe the importance of taxes for personal financial planning

INCOME TAX FUNDAMENTALS

LO4-2: Calculate taxable income and amount owed to federal income tax

TAX ASSISTANCE N AUDIT PROCESS

LO4-4: ID tax assistance sources

TAX PLANNING STRATEGIES

LO4-5: Select appropriate tax strategies for various financial and personal situations

FINANCIAL SERVICES FOR FINANCIAL PLANNING

LO5-1: Analyze factors that influence the selection and use of financial services

FINANCIAL INSTITUTIONS

LO5-2: Compare types of financial institutions

SAVINGS PLANS

LO5-3: Assess the costs n benefits of various savings plans

EVALUATING SAVINGS PLANS

LO5-4: ID factors used to evaluate different savings plans

PAYMENT METHODS

LO5-5: Evaluate the costs n benefits of different types of payment accounts

capital gains

Profits from the sale of a capital asset such as stocks, bonds, or real estate ;Short-term capital gains (on investments held for less than a year) are taxed as ordinary income

COMPUTING TAXABLE INCOME STEP#1

Determining adjusted gross income

Roth IRA

allows $5,500 annual contribution, NOT TAX DEDUCTIBLE -earnings on acct are tax free after 5 years -funds may be withdrawn before 59 y/o if disabled or purchase of 1st home -withdrawls are exempt from fed n state tax

cashflow

actual inflow and outflow of cash during a given time period

Interest Calculations

amount in savings x annual interest rate x time period = interest (1)amnt savings: aka principal (2) annual interest rate (3) length of time money is on deposit

tax credit

amount subtracted directly from the amount of taxes owed (ex: child care and dependent care expenses)

tax deduction

amount subtracted from adjusted gross income to arrive at taxable income

future value

amount to which current savings will increase based on a certain interest rate and a certain time period aka compounding FV formula n ex Picture #7

overdraft protection

automatic loan made to checking account customers to cover the amount of checks written and payments in excess of the available balance in the checking account.

time value of money

calculates increases in an amount of money as a result of interest earned

STEP #3

calculating taxes owed

assets

cash and other property with a monetary value

Deposit institutions

commercial banks, savings and loan associations, mutual savings banks, and credit unions.

STEP #2

computing taxable income

EVALUATING TAX SERVICES

consider -What training and experience does the tax professional possess? -How will the fee be determined? (Avoid preparers who earn a percentage of your refund.) -Does the preparer suggest you report various deductions that might be questioned?

Present value

current value for a future amount based on a particular interest rate for a certain period of time. -Present value computations, also called *discounting, allow you to determine how much to deposit now to obtain a desired total in the future

CONSUMER SPENDING

demand for goods/services in economy influences employment and income in downturns retraining programs, income assistance and job services help ppl adjust

types of income

earned investment

take-home pay

earnings after deductions for taxes aka net pay

Types of Financial Goals

factors include time frame to achieve and financial need

mutual savings bank

financial institution that is owned by depositors and specializes in savings accounts and mortgage loans.

commercial bank

financial institution that offers a full range of financial services to individuals, businesses, and government agencies.

security

financial instrument that represents debt or equity DEBT: bonds, represent money borrowed by companies/government; bought as an investment EQUITY:(stock) represent ownership in corporation; bought by investors ->stocks and bonds, other examples of securities include mutual funds, certificates of deposit (CDs), and commodity futures

financial plan

formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities. ;seek assistance from a financial planner, or use a money management tool. Picture #9

main purposes of a budget

help you: (1) live within your income; (2) spend your money wisely; (3) reach your financial goals; (4) prepare for financial emergencies; and (5) develop wise financial management habits

taxable income

net amount of income, after allowable deductions, on which income tax is computed

money market account

savings account offered by banks, savings and loan associations, and credit unions that requires a minimum balance and has earnings based on market interest rates

types of financial services

savings, cash availability n payment services, borrowing, investment n other financial services

money market fund

savings-investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments.

types of budgeting systems

-mental budget -physical budget (envelope, folders, container) -written budget (detailed spending plan) -computerized budgeting system (spreadsheet, mngmt software) -online budget (sites, tools) - budgeting app

completing federal income tax return

1. filing status 2. income 3. adjustments to income 4. tax computation 5. tax credits 6. other taxes 7. payments 8. refund or amount you owe 9. signature

Implementing the Plan

1. spending plan: dont overspend 2. Appropriate insurance to avoid financial disaster 3. Be informed about taxes and investments to expand financial resources

50/30/20 rule

50 percent of income be for necessities, 30 percent for wants, and 20 percent for saving and financial goals

Step #3: Compute networth

: difference b/w total assets and total liabilities assets-liabilities=nw assets=liabilities+nw

consumable v durable product goals

: food, clothes, entertainment :appliances, cars intangible goals: personal rship, health education, leisure

adjusted gross income (AGI)

:Gross income reduced by certain adjustments, such as contributions to an individual retirement account (IRA) and alimony payments gross income after certain additions and reductions

automatic teller machine (ATM)

A computer terminal used to conduct banking transactions; also called a cash machine.

tax audit

A detailed examination of your tax return by the Internal Revenue Service.

debit card

A plastic access card used in computerized banking transactions; also called a cash card.

personal financial records system provides

(1)daily business activities n bills (2) planning/measuring financial progress (3) completing required tax reports (4) making effective investment decisions (5) determining available resources for current and future spending

savings bonds

-EE bonds: most common amnt $25+; (1) the interest earned is exempt from state and local taxes and (2) federal income tax on earnings is not due until the bonds are redeemed; may be exempt from federal income tax if the funds are used to pay tuition and fees at a college, university, or qualified technical school for yourself or a dependent -I BONDS: interest rate based on two components: (1) a fixed rate for the life of the bond, and (2) an inflation rate that changes twice a year. Every six months a new, fixed base rate is set for new bonds.

five methods for calculating TVM

(1) Formula Calculation (2) TVM Tables (3) Financial Calculator (4) Spreadsheet Software (5) websites n Apps --> , www.dinkytown.net, www.moneychimp.com/calculator, andcgi.money.cnn.com/tools

3 types of checking accounts

(1) Regular: monthly service charge (2) activity accts: charge fee for each check written n sometimes fee for deposit; those unable to maintain min balance (3)interest-earning checking accounts: require minimum balance

3 major money management activities

(1) Storing personal records/documents (2) Creating statements to measure and assess financial position/progress (3)Spending/Budget plan

Common mistakes when managing current cash needs include

(1) overspending as a result of impulse buying and using credit, (2) having insufficient liquid assets to pay current bills, (3) using savings or borrowing to pay for current living expenses, and (4) failing to put unneeded funds in an interest-earning savings account or investment program

selecting savings technique

(1) payroll deduction: 5-10% (2)apps like acorns to save n invest small amounts (3) saving coins/ spending less

Path to financial security

(1)Do something (2) Avoid excuses (3) Rate your current situation (spender or saver) (4) Set your mission

3 Main Decision Areas in personal finance

(1)Spending (daily living, major expenditures, recreational) (2)Saving (emergencies, long-term fin security) (3)Sharing (local/global programs 2 assist needy)

personal financial statements n budget allow u to achieve financial goals with:

(1)balance sheet: current position (2)cash flow statement: in n out flow (3) budget: planning, spending, saving

economic conditions (see Exhibit 1-5) that most often influence personal financial decisions

(1)consumer prices, (2)consumer spending, and (3)interest rates.

Step 2: determine amounts owed

(1)current liabilities: debts to be paid in a short time less than 1yr (2) long-term liabilities: debts not required paid in full until over 1 yr

advantages of personal financial planning

-Increased effectiveness in obtaining, using, and protecting your financial resources throughout your life. -Increased control of your financial activities by avoiding excessive debt, bankruptcy, and dependence on others for economic security. -Improved personal relationships resulting from well-planned and effectively communicated financial decisions. -Enhanced freedom from financial worries obtained by looking to the future, anticipating expenses, and achieving your personal economic goals.

main ways to increase net worth

-Increasing your savings. -Reducing spending. -Increasing the value of investments and other possessions. -Reducing the amounts you owe.

goals for tax planning

-Knowing the current tax laws and regulations that affect you. -Maintaining complete and appropriate tax records. -Making purchase and investment decisions that can reduce your tax liability.

purpose of financial statements

-Report your current financial position in relation to the value of items you own and amounts you owe. -Measure your progress toward financial goals. Maintain information about your financial activities. -Provide data you can use when preparing tax forms or applying for credit.

types of CDS

-Rising-rate or bump-up CDs -Liquid CDs -Zero-coupon CD -Indexed CDs Callable CDs -beware of promotional CDs

savings and loan association (S&L)

A financial institution that traditionally specialized in savings accounts and mortgage loans.

certificate of deposit (CD)

A savings plan requiring that a certain amount be left on deposit for a stated time period to earn a specified interest rate.

states w no income tax

Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming

audit rights appeal

Decide whether you will bring your tax preparer, accountant, or lawyer. Be on time for your appointment; bring only relevant documents. Present tax records and receipts in a logical, calm, and confident manner; maintain a positive attitude.

Financial Regulators

Federal Reserve System, Federal Deposit Insurance Corporation, National credit union admin, etc. Pic#4

itemized deductions

Expenses that can be deducted from adjusted gross income, such as medical expenses, real estate property taxes, home mortgage interest, charitable contributions, casualty losses, and certain work-related expenses

opportunity cost of financial services

Higher returns for long-term savings will usually be achieved at the cost of low liquidity, the inability to obtain your money quickly. The convenience of nearby ATMs or a local bank branch should be considered in relation to service fees. The "no-fee" checking account that requires a non-interest-earning $500 minimum balance means lost interest earnings.

values

Ideas and principles that a person considers correct, desirable, and important.

Chapter 3

Money Management Strategy: Financial statements and Budgeting

earned income

Money received for personal effort, such as wages, salary, commission, fees, tips, or bonuses.

avoid audit by:

Organize all tax-related information for easy access. Follow instructions carefully. Many people deduct total medical and dental expenses rather than the amount of these expenses that exceeds a certain percentage of adjusted gross income. Be sure to include the correct Social Security number(s) and to record amounts on the correct lines. Use the proper tax rate schedule or tax table column. Consider the alternative minimum tax that may apply to your situation. Be sure to pay self-employment tax and tax on early IRA withdrawals. Check your math and accuracy of software data entries several times. Sign your return (both spouses must sign a joint return). For e-filers, this will require a PIN or verification using last year's tax information. Attach necessary documentation, such as your W-2 forms and required schedules. If you owe money: Make the check payable to "United States Treasury." Put your Social Security number, the tax year, and a daytime telephone number on your check—and be sure to sign the check! If you are due a refund: Make sure you enter the bank routing and account numbers correctly. Keep a copy of your return. Finally, check everything again—and file on time! Care taken when you file your income tax can result in "many happy returns."

CHAPTER 4

PLANNING YOUR TAX STRATEGY

creating and implementing a budget

Pic #13 4 Phases- 7 steps

Changing economic conditions and financial decisions

Pic #5

choosing financial institutions

Pic #? Exhibit 5-5

Financial planning process

Picture #1

creating a personal balance sheet

Picture #10 3 steps

Types of Risk

Picture #2 Inflation-Interest Rate- Income- Personal- Liquidity

Financial Planning Info Sources

Picture #3 Media,Financial Institutions, Financial Specialists

The Financial System

Picture #4 Providers>Fin Intermediaries &> Financial Mrkts >>Users

Opportunity costs and financial results should be assessed when making financial decision

Picture #6 Personal/Financial Opportunity cost Financial acquisitions

Components of personal financial planning

Picture #8

changing interest rates n decisions related to financial services

Picture #? Exhibit 5-4

Financial institutions n banking services

Picture Exhibit 5-1

Chapter1

Planning your personal finances

SWOT analysis

Strengths Weaknesses Opportunities Threats

investment decisions

TAX-EXEMPT INVESTMENTS (not subject to federal income taxes) TAX-DEFERRED INVESTMENT (less beneficial than tax exempt)

Personal FinTech

Technology impacts every aspect of life, including financial decisions. FinTech involves apps, software, and computers for banking services and financial activities. Artificial intelligence, robotics, the Internet of Things, drones, 3-D printing, blockchain, wearable technology, and other innovations will influence how you earn, save, spend, and invest. Robo-advisors, for example, offer personalized, online advice based on your income, assets, debt, financial goals, and risk tolerance

Personal financial planning

The process of managing your money to achieve personal economic satisfaction; allows for control of financial situation

tax saving strategies

Time the receipt of income and payment of taxable expenses in relation to your current and future tax rate. Take advantage of tax credits for which you qualify. Maximize contributions to tax-deferred retirement programs. Consider tax-exempt investments, such as municipal bonds. page 149 Defer capital gains and accelerate capital losses. Take advantage of the tax benefits of owning your own business. Plan purchases, such as a house or health care, with tax implications in mind. Search out all possible itemized deductions.

Characteristics of successful budgeting

well planned, realistic, flexible, clearly communicated

opportunity cost

what a person gives up by making a choice

liquidity

ability to readily convert financial resources into cash without a loss in value

factors for life sit/style; spending/saving

age, income, household size, and personal beliefs

asset management account

aka cash management account ;all-in-one account that includes savings, checking, borrowing, investing, and other financial services for a single fee

balance sheet

aka net worth statement or statement of financial position ;reports what an individual or a family owns and owes Own-Owe=net worth

cash flow statement

aka personal income and expidenture statement ;summary of cash receipts and payments for given period (months to year)

investment income

aka portfolio income. ;Money received in the form of dividends, interest, or rent from investments.

exclusion

aka tax exempt income An amount not included in gross income.

rate of return

aka yield; percentage of increase in the value of savings as a result of interest earned

most tax friendly states

alabama, tennessee, idaho, south carolina, georgia

most frequently overlooked tax deductions

are state sales taxes, reinvested dividends, out-of-pocket charitable contributions, student loan interest paid by parents, military reservists' travel expenses, child care credit, estate tax on income in respect of a decedent, state tax you paid last spring, refinancing points, and jury pay paid to employer

exemption

deduction from adjusted gross income for yourself, spouse and qualified dependents

money management

day-to-day financial activities necessary to manage current personal economic resources while working toward long-term financial security

deflation

decline in prices can have damaging economic effects; prices drop consumers hoard cash expecting to drop more

budget variance

difference b/w amount budgeted and the actual received or spent

Pgysical investments

houses land gold rare coins

tax-deferred income

income that will be taxed at later date

savings alternatives

picture.. exhibit 5-6

share draft account

interest-bearing checking account at a credit union.

tax shelter

investment that provides immediate tax benefits and a reasonable expectation of a future financial return

trust

legal agreement that provides for the management and control of assets by one party for the benefit of another.

bankruptcy

legal status of a person who is not able to pay debts owed; Federal laws exist that allow you to either restructure your debts or remove certain debts

other institutions

life insurance companies, investment companies, brokerage firms

Step 1: list items of value

liquid assets, RE, personal possessions, investment assets

The Fed

maintains an adequate money supply -achieved by influencing borrowing, interest rates, and the buying/selling of govt securities -attempts to make adequate funds available for consumer spending and business expansion while keeping interest rates and consumer prices at appropriate level

striver

minimal financial resources, needs to carefully plan use of available funds

discretionary income

money leftover after paying housing, food n necessities

current income investments

pay regular dividend or interest

withholding

pay-as-you-go system requires an employer to deduct federal income tax from your pay and send it to the government. The withheld amount is based on the number of exemptions and the expected deductions claimed on the W-4 form

special tax situation

pic #? Exhibit 4-9

checking account selection factors

pic #x exhibit 5-10

selecting savings plan

pic exhibit 5-7

Payment alternatives

pic exhibit 5-9

Creating a cashflow statement of income n outflows

picture # step1: record income step2: record cash outflows (fixed/variable expenses) step3: determine net cash flow (surplus or deficit)

understanding different interest rates

picture #?

safe deposit boxes

private storage area at a financial institutions with maximum security for valuables

compounding

process that calculates interest based on previously earned interest.

buying decision most directly affected by taxes

purchase of residence, use of credit and job-related expenses

excise tax

purchase tax :imposed on specific goods and services, such as gasoline, cigarettes, alcoholic beverages, tires, and air travel.

marginal tax rate

rate used to calculate tax on the last (n next) dollar of taxable income in that bracket

traditional IRA

regular IRA deduction is available only to people who do not participate in employer-sponsored retirement plans or who have an adjusted gross income under a certain amount. ;limit was $5,500. Older workers, age 50 and over, are allowed to contribute up to $6,500 as a "catch up"

share account

regular savings account at a credit union.

INTEREST Rates

represent the cost of money supply and demand influence interest rates

passive income

resulting from business activities in which you do not actively participate

Inflation

rise in general level of prices; buying power of the dollar decreases cause: increase in demand without a comparable increase in supply most harmful to those with fixed incomes - Hidden inflation (food, gas, health care) results in personal inflation higher than govt consumer price index(CPI)

explorer

seeking to get to the next level of financial success

standard deduction

set amount on which no taxes are paid.

timing

short term (vacation,small debt, 1yr) intermediate (1-5 yr) long-term (plans 5+ yrs, retirement, kid edu/savings, vacation home. etc)

sources to prepare taxes

software, services

budget

specific plan for spending income

adult life cycle

stages in the family situation and financial needs of an adult (ex: grad, engagement/marriage, child, career/move, health, divorce, retirement)

diversify portfolio

stocks, bond mutual funds, real estate, and collectibles such as rare coins

long-term growth investments

stocks, mutual funds, real estate etc

achiever

strong financial resource base

economics

study of how wealth is created and distributed

estate tax

tax imposed on the value of a person's property at the time of his or her death.

inheritance tax

tax levied on the value of property bequeathed by a deceased person; paid for the right to acquire the inherited property

401k plan

tax-deferred retirement plan sponsored by an employer. This plan allows you to contribute a greater tax-deferred amount ($18,500 in 2018) than you can contribute to an IRA. Older workers, age 50 and over, are allowed to contribute up to $24,000. However, most companies set a limit on your contribution, such as 15 percent of your salary and have matching contribution

taxes in 4 major categories

taxes on purchases, taxes on property, taxes on wealth, and taxes on earnings.

insolvency

the inability to pay debts when they are due because liabilities far exceed value of assets

tax evasion

use of illegal actions to reduce one's taxes

tax avoidance

use of legitimate methods to reduce one's taxes

rule of 72

use to see how long it will take to double $ in savings ex: annual inflation rate of 4%-> (72/4=18 yrs) prices WILL double in 18 yrs

credit union

user-owned, nonprofit, cooperative financial institution that is organized for the benefit of its members.