Exam 1
Joe is in the 22% marginal bracket. He is eligible for a $1,000 tax credit. How much will he save in taxes this year if he takes that credit?
$0 $1,000 $22 $220 $1,000
Joe is in the 22% marginal bracket. He is eligible for a $1,000 tax deduction. How much will he save in taxes this year if he takes that deduction?
$1,000 $0 $220 $22 $220
Sarah has to buy a car to get to work and school, and she can't spend more than $240 a month. If she gets a 4-year loan at 9% interest, what is the largest loan that Sarah can get with her price constraint?
$10566 $11520 $12442 $9644 $9644
Michael has an adjusted gross income of $105000. His Schedule A expenses were as follows: •Interest on home mortgage, $12000 •Property taxes on home, $4600 •State income tax, $8000 •Charitable contributions, $1000 what will he be able to claim for total itemized deductions
$13000 $25600 $23000 He should take the standard deduction. He should take the standard deduction.
The Stevens hold $37000 in their checking account for emergencies and earn 1% interest annually on the account. If they could earn 5% on a longer-term bank certificate of deposit, what is the annual opportunity cost incurred by the couple?
$1480 $1850 $2220 $370 $1480
Donald, age 65, withdraws $14500 for retirement from his Roth IRA this year. How much will he owe in taxes if his current marginal tax rate is 12% and his average tax rate is 9%?
$1740 $0 $435 $1305 $0
Sam itemizes deductions, has a 16% average tax rate, and pays a 24% marginal tax rate. What is his cost of a $2200 charitable donation?
$1848 $1672 $0 $2200 $1672
Kimberly is considering tutoring part-time to earn extra money. She currently makes $45000 in taxable income, and her spouse Ryan earns $60000 in taxable income. If they file a joint tax return, how much will she actually make on an additional $27000 in taxable income?
$21060 $24300 $20520 $23760 $21060
Ruth deposits $200 today into a bank account. If the account earns 6% annually, how much will he have at the end of 10 years?
$2994 $2636 $112 $358 $358
Elizabeth borrows $10600 from her bank to buy a new car. If the loan is for four years at 6.0% annual interest and payments are made monthly, how much will her monthly payments be?
$302 $350 $445 $249 $249
The Anthonys have saved up a 2 months reserve fund but are still short of where they want to be. If their savings account has $6700 in it, and they want their reserve to be 5 times their monthly expenses, how much more do they need to add to the reserve fund?
$3350 $13400 $6700 $10050 $10050
Gary would like to save money to pay for his daughter's college expenses. He estimates that he will need to accumulate $49500 over the next 10 years. How much will he need to invest at the end of each year for 10 years to achieve his savings goal if he can earn 8 percent per year on the investment and he makes end-of-year payments?
$3417 $3258 $3106 $2960 $3417
The bank requires the mortgage debt service ratio to be at or under 38%. Steven currently earns a gross income of $4100 per month. What is the maximum monthly payment amount Steven can expect to qualify for?
$4100 $2542 $1558 $108 $1558
Gary has applied for a $21000 car loan to be repaid in four years in the form of monthly payments at the end of every month. If the interest rate is 9% per year, how much will Gary's total monthly payment be?
$438 $876 $523 $1045 $523
Jason will receive $63000 by way of a distribution from his grandfather's trust in six years. If the prevailing interest rate is 5.3%, how much is this amount worth to Jason today?
$46214 $42966 $86373 $63000 $46214
Linda plans to retire in 31 years. If she saves $6200 per year and earns 7.0% interest, compounded annually, approximately how much money will she have in her account when she retires?
$5000000 $0.4 million $0.6 million $4400000 $0.6 million
Sara has calculated her tax due to be $4600. She has a 12% marginal tax rate and 11.35% average tax rate. But she found out that she is also entitled to a $1600 American opportunity tax credit and already paid $5000 in withholding through her employer. How much will her refund be?
$592 $582 $2000 $400 $2000
Thomas takes home $4220 a month from his full-time job. He has a monthly expenditure of $2750 between his rent, health insurance, and car payments, as well as dinner out with his friends. What is Thomas's monthly net cash flow?
$6970 $2750 $4220 $1470 $1470
Laura does not receive employer-funded health insurance benefits. However, she is offered an opportunity to purchase a health insurance plan for $1250 a month paid out of pretax dollars. How much tax does Laura save annually if her marginal tax rate is 24%?
$7500 $3600 $1250 $15000 $3600
What would the payroll tax obligation be for Joseph who has self-employed income of $106000 for the year?
$8109 $6572 $13144 $16218 $1618
Mark Harris has a checking account worth $3600 and a credit card balance of $5700. What is Mark's net worth?
+$9300 −$9300 −$2100 +$2100 -$2100
how are planners paid
-"fee only" planner charges a set fee for a service or an hourly fee -"Commission only" planner receives compensation from selling financial products -"Fee plus commission" OR "Fee based" planner charges a fee for developing your financial plan and also receives commissions on any financial products sold to yo
how much should you hold in cash
-Advice ranges from two to eight months of regular expenses -Having alternative sources for cash reduces the need to hold cash on hand -Amount of cash reserves depends on income risk -If you have a high risk of job loss, you might consider holding a relatively large amount in cash (For example, sales commissions) -If you have a secure job and alternative sources of funds for emergencies, then you might hold enough cash to meet your transaction requirement
the rule of 72
-Approximates how long it takes to double your money at a given rate of interest -The approximation is 72 divided by the interest ra
rules of effective cash management
-Balance your checking account every month (More likely to stay on budget, Less likely to incur overdraft charges) -Pay your bills on time (Reduces costs and improves credit rating) -Pay yourself first (Set aside money to achieve your financial goals before paying other expenses) -Evaluate alternative accounts and providers (Maximize service and minimize fees)
money market deposit accounts
-Bank demand deposits -FDIC insured -Interest rate varies with money market securities -Fairly high minimum balance required
the power of compound interest
-Compounding: when you earn interest on your investment balance and accumulated interest -The longer you leave money in your account, the greater the interest earnings each year -The higher the rate of interest, the faster your money will grow -The more frequent the compounding period, the faster your money will grow -Annual compounding means that the interest on the balance is calculated once per year at the end of the year
when do you need a financial planner
-Comprehensive planning -Tax and estate planning are complex and dyna
cash management
-Consider having several accounts that vary in liquidity, cost, and interest -Transaction account to pay bills -Highly liquid savings account for short-term emergencies -Higher yield savings for longer term
evaluating financial institutions
-Determine whether the financial institutions can provide all the products you need to manage your cash effectively -Pricing may vary dramatically across institutions, both for interest rates and fees -If you need to transact business in person, consider whether service is good and if hours are sufficient -Evaluate whether locations and ATMs are convenient, and consider the quality of online access
money attitudes and household budgeting
-Differences in money attitudes and spending behavior are a major cause of conflict in relationships and can lead to deceptive behavior -Reduce the risk of problems by setting ground rules with regard to spending and disclosure
regular checking accounts
-Do not pay interest -Monthly service charge may be waived with minimum balance -May charge fees for other services, such as debit cards
annual percentage yield (APY)
-Financial institutions are required to report the APY on all interest-earning accounts -APY adjusts for different compounding periods and any interest-like fees to make comparisons easier -APY=((1+nominal rate)/m)^m-1 -m=number of compounding periods per year
using financial ratios
-Financial ratios provide another important tool for evaluating your financial condition -Calculated from information from your personal financial statements -Compare to recommended target ratios -Track ratios over time to measure progress toward goals
Series EE Bonds
-Fixed rate of interest -Guaranteed to double in value in 20 years
interest-earning checking accounts
-Higher minimum balance requirement -Typically earn less than savings accounts
overdrafts
-If you write a check or use your debit card when there isn't enough money in your account to cover the payment, you will be charged an overdraft fee -You may owe another fee to the retailer or vendor if your payment was rejected -Keep careful track of cash flows, particularly automatic payments -Sign up for overdraft protection on your account, which gives you an automatic loan to cover the overdraft
costs and after-tax interest
-Interest rates and fees vary -Compounding periods - how often interest is calculate
money market mutual funds
-Investors' funds are pooled to purchase short-term, low-risk financial assets -Mutual fund is riskier than savings accounts and CDs (Not FDIC insured, Interest rates not guarantee)
the goal-setting process
-Make a prioritized list of specific goals with measurable outcomes -Categories include spending, borrowing, education, housing, retirement, vacations, estate planning, and charitable giving -Prioritize and determine whether goals are short-term, intermediate-term, or long-term
benefits of holding cash
-Managing monthly transactions -Preparing for cash emergencies -Making a temporary investment
the time value of money (TVM)
-Money received today is worth more than money to be received in the future (Can invest to earn interest, Choice between spending today or spending more in the future) -Money that isn't invested in interest-earning assets will lose purchasing power due to inflation (Must achieve an annual percentage yield (APY) of at least the annual rate of inflation to keep pace)
certificates of deposit (CDS)
-Most common type of time deposit account -Leave money on deposit until maturity -If withdraw funds early, may incur a fee as well as a reduction in interest -At maturity, will automatically roll over into a comparable CD unless financial institution notified otherwise -FDIC insured -CDs of longer duration and/or larger deposit amounts have higher interest rates -Investors can "ladder" CDs of differing maturity to reduce liquidity risk without giving up much return
marginal tax rates
-Not all of your income is taxable, and your taxable income is not all taxed at the same rate -The marginal tax rate is the rate that applies to your next dollar of taxable income
costs of holding cash
-Opportunity cost of investing those dollars to earn a higher rate of return -Easier to spend when most accessible
there should be a particular purpose for everything you save
-Paying bills -Tracking your budget -Preparing tax returns -Making investment decisions -Making insurance or warranty claims -Proving ownership of asset
Cash management problems and solutions
-Receipt of a bad check -If the check is rejected for insufficient funds, you will be charged a fee even though you were not at fault -Stop payment on a check also requires a fee -If you need to send or receive money in a hurry -Wire funds between banks for a fee -Western Union and MoneyGram have high fees -Those without bank accounts (and "underbanked") spend 5% of net income on unnecessary fees
where should you keep financial records
-Records should be easily accessible when necessary (File cabinet, Electronic files: Back up to disk or remote server) -Your filing system should be simple rather than complex -Important documents and valuables should be more secure (Safe deposit box; a private storage area maintained at a remote secure location, Lockbox; a fireproof, lockable safe kept in your home)
revising your budget
-Review financial goals and progress -Increase emergency fund for unexpected eve
safety
-Risk of default, whether deposits are federally insured -Fixed or variable interest rate
U.S. savings bonds
-Short-term, low-risk, and exempt from state and local income taxes -Held for minimum of one year, and subject to three-month interest penalty if redeemed in less than five yea
measuring debt
-debt ratio measures the percent of your total assets you've financed with debt -debt ratio=total debts/total assets -debt payment ratio estimates the percentage of after-tax income used to cover required monthly minimum debt payments -debt payment ratio= total monthly debt payments/after-tax monthly income
what are the benefits of personal financial planning
-develop and achieve financial goals (buying a home, making major consumer purchases, supporting a growing family, and saving for retirement) -social and psychological benefits (less stress, improved relationships, & improved self-esteem)
mortgage debt
-mortgage debt service ratio measures the percentage of gross income that you pay in mortgage debt service -The rent/mortgage payment is often a household's largest monthly expense -Mortgage debt service is the mortgage payment (principal and interest), property taxes, and homeowner's insurance premiums -Mortgage lenders require that total debt payments are less than a percentage of gross income (usually 33% to 38%) -mortgage debt service ratio=(principal+interest+taxes+insurance)/(gross monthly income)
loan payments
-most common type of annuity is a loan payment -amortization -to calculate loan payment, solve the present value of annuity (PVA) for PMT -most loans require monthly payments (to adjust, divide the interest rate by 12 and multiply the number of years by 12, most financial apps have monthly payment option)
calculating percentage change
-percentage change= (new value-old value)/old value -percentage change=(new value/old value)-1 -to calculate changes over several years, you may want to convert the percentage change to an annual percentage change for the time period -annual percentage change=(1+percentage change)^(1/n)-1
regressive tax
-places a disproportionate burden on taxpayers with lower incomes -A tax is regressive if the same tax rate is applied to all taxpayers -Sales taxes are regressive since the tax is a larger share of low-income families' disposable incomes -Payroll taxes for Social Security and Medicare (FICA) are also regressive
taxable income
-reduced by the standard deduction or itemized deductions -taxpayers with a lot of medical expenses, charitable contributions, mortgage interest expense, state and local income taxes, property taxes, and other allowable deductions will reduce their taxes by itemizing deductions -includes any capital gain, or increase in value, from the sale of taxable investments during the year (rental property, shares of stock, you can exclude up to $250,000 of the gain on the sale of your primary residence)
time deposit account
-requires a minimum period of time before funds can be withdrawn -Interest is forfeited and a fee may be charged if funds are withdrawn before the end of the minimum period -Certificates of deposit (CDs) are time deposi
If the taxes your employer withheld through your paycheck for the year exceed your total tax for the year, you will ___________________.
be in trouble for tax evasion. be subject to an audit. need to write the IRS a check or get on a payment plan. be eligible for a tax refund. be eligible for a tax refund
cash basis
cash flows recorded when received or paid
steps in calculating federal income taxes owed
1. income form all sources less tax-exempt income=total income 2. subtract: adjustments tot total income=adjusted gross income 3. subtract: standard deduction or itemized deductions=taxable income 4. look up your tax on the tax table= tentative tax 5. subtract: applicable tax credits=total taxes owed 6. subtract: taxes already paid or withheld from income=balance due or refund
Which step is missing in the following diagram?
1. organize your financial information and set short-term and long term goals 2. 3. identify and evaluate alternative strategies for achieving your goals 4. implement your financial plan 5. monitor your progress and revise your plan as needed analyze your financial status
If your tuition bill went up from $12000 to $13560 in one year, the rate of tuition inflation was
11.7% 1.3% 13.0% 6.5% 13.0%
Kenneth's monthly gross income is $3800, and his monthly disposable income is $3200. He saves approximately $400 a month. What is his savings ratio?
12.50% 10.53% 25.00% 66.67% 12.50%
You were single and had taxable income of $11750 in 2019. How much tax did you owe, assuming that you didn't qualify for any tax credits?
1421 1216 1175 1410 1216
Nicole sold shares of Disney Company that were given to her 20 years ago by her grandmother to pay for her down-payment on her new home. She has a 22% marginal tax rate and a 15.1% average tax rate. How much tax will she pay on her $51000 gain in the stock?
15% 0% 15.1% 22% 15%
A family of three has monthly expenses of $5200 and $14200 saved in the bank. If they should run into financial need (like the loss of a job), how long will they be able to survive if they do not change their lifestyle?
2.7 months 5.4 months 1.7 months 3.4 months 2.7 months
If Susan earns $40 per hour in additional overtime pay on top of her standard taxable income of $28800 in 2019, what marginal federal income tax rate would she pay on her additional income? Assume her additional income does not exceed $9000.
22 % 24 % 12 % 10 % 12%
According to the book, how long should financial records be held for tax purposes:
3 years 4 years 5 years 6 years 7 years Indefinitely 7 years
elements of a comprehensive financial plan
3. build and protect wealth (write a will, invest to achieve long-term goals, protect income & wealth from losses, buy property and liability insurance) 2. secure basic needs (make purchase and credit decisions, manage cash for liquidity and emergencies, select financial institutions for checking and savings accounts) 1. establish a firm foundation (acquire necessary decision-making skills and tools, understand the personal financial planning process, set short-term and long-term goals)
Your bank pays a nominal rate of 3.40% interest on a savings account. If the interest is compounded monthly, what is the annual percentage yield (APY) of this account?
3.40% 3.49% 3.45% 3.80% 3.45%
Carol estimates that her take-home pay for the coming year will be $1420 per month. She expects total monthly expenses to be as follows: housing and utilities, $800; food, $200; auto, gas, and insurance, $220; credit card payment, $60; and other expenses $100. The balance on her credit card is $2700, and she currently pays 18 percent interest on this balance. Carol would like to reduce her credit card debt. If she decides to budget all of her net monthly cash flow to this goal, how long will it take (in months) to pay off her credit card?
35 77 23 27 35
After 3 years of compounded interest, you have a total of $5572.24. If the initial investment was $4600, what interest rate is the money earning?
7% 9% 11% 10% 7%
Which of the following financial records do you need to keep for more than five years?
Automobile repair receipts Receipts for tax deductions Utility bills Credit card receipts receipts for tax deductions
Which of the following characteristics of the Medicare payroll tax make it regressive?
Benefits paid to high-income tax payers are greater than those paid to low-income taxpayers. The same tax rate is paid by all taxpayers, regardless of income. There is a cap on income subject to the tax. Low-income tax payers pay a lower tax rate than high-income taxpayers. The same tax rate is paid by all taxpayers, regardless of income.
You have estimated that you need $5,400 in liquid assets for an emergency fund. You currently have only $1,400, which is invested in a savings account earning 3 percent nominal interest, compounded monthly. Your current budget leaves $340 per month to apply to this goal. If you plan to add this money to your savings at the end of every month, how much will you have after one year?
Calculate the future value of $1,400 and $340 monthly additions for 12 months at a 3% APY (0.25% monthly periodic rate). 5,579
Integrity of the profession is essential to its long-term success. Which professional is not required to pass a comprehensive exam and adhere to a rigorous code of ethics?
Certified Public Accountants (CPAs) Attorneys All these professionals are required. Certified Financial Planner (CFP®) All these professionals are required.
What type of account is not FDIC insured
Checking Account Money Market Mutual Fund Money Market Deposit Account Certificate of Deposit Money Market Mutual Fund
Pick the assets from this list that would be considered liquid assets (pick the three best):
Checking account Home Automobile Saving account Cash Retirement investment account checking account, saving account, & cash
Which of the following tax credits would be most applicable to lower-income working parents? (Select any two.)
Child Tax Credit Retirement Savings Contribution Credit American Opportunity Credit Earned Income Credit Education Credit Alternative Minimum Credit child tax credit, earned income credit
Depository Insitutions
Commercial banks, savings institutions, credit unions, internet-based financial institutions
Why are cash management accounts in depository institutions usually considered less risky than those in other institutions?
Depository institution accounts are insured by the FDIC. Depository institutions do not offer personal loans. Depository institutions pay better rates of interest than nondepository institutions. Depository institutions focus on low-risk loans. Depository institution accounts are insured by the FDIC.
In determining your taxable income, which of the following do you subtract from your adjusted gross income to arrive at taxable income?
Either the standard deduction or itemized deductions The standard deduction, itemized deductions, or any eligible tax credits One exemption for each person in the household Any eligible tax credits Either the standard deduction or itemized deductions
As you build your financial plan, you'll need to consider the unique characteristics of your household that may influence spending and saving. Which of these factors is not unique to your household?
Family makeup Values and attitudes Life cycle stage Inflation and interest rates inflation and interest rates
liquidity
Features that limit liquidity include minimum balance requirements, limitations on withdrawals, and number of transactions allowed
For a typical family, which of the following categories of regular expenses usually increases with inflation? (Select any two.)
Food Mortgage payments Student loan payments Transportation food & transportation
Darren can afford to make $400 monthly payments on a car loan for the next three years. He wants to know how much he can borrow today. Which of the following time value of money calculations should he use to figure this out?
Future value. Future value of an annuity. Present value of an annuity. Present value. Present value of an annuity.
Janine plans to invest a certain amount of money at the end of each month for five years. She wants to know how much her investment will be worth at the end of the five years. Which type of time value of money calculations should she use to figure this out?
Future value. Future value of an annuity. Present value of an annuity. Present value. future value of an annuity
The opportunity cost of holding a lot of money in a cash emergency fund rather than a higher-earning investment account is
current interest. lower risk. higher risk. lost interest. lost interest
what problems can be caused by poor financial planning
difficulty in meeting current financial obligations, Stress, anxiety, depression, embarrassment, Trouble handling financial emergencies, Victim of "get rich quick" scams, Children may miss high-quality educational opportunities and extracurricular activities without advance financial plannin
Which is NOT a benefit of hiring a professional financial planner?
Hiring a professional shortens the planning process by reducing the client involvement on goals, strategy development, and decision making. Advice given by the planner may result in increased investment earnings. Hiring a professional reduces the time and effort required to stay informed about financial matters such as investments, taxes, and insurance. Advice given by the planner may result in reduced taxes. Hiring a professional shortens the planning process by reducing the client involvement on goals, strategy development, and decision making.
You get the financial benefit of compounding when you
earn interest on your original investment and also on interest received on that investment in earlier periods. pay your bills on time so that you do not incur late fees. earn interest. invest in companies that pay dividends. earn interest on your original investment and also on interest received on that investment in earlier periods.
factors to consider for getting a financial planning professional
education, certification, experience, reputation, and fees
Personal finance is a specialized area of study that focuses
exclusively on investments and retirement planning. on financial management, household budgets, and investments. exclusively on investment management and household budgets. on individual and household financial decisions, such as budgeting, saving, spending, taxplanning, insurance, and investments. on individual and household financial decisions, such as budgeting, saving, spending, taxplanning, insurance, and investments.
All of your income is taxable at the same rate.
false
If your itemized deductions exceed the standard deduction, you should take the standard deduction.
false
the marginal tax rate is the rate that applies all of your of taxable income.
false
Federal income tax returns must be:
filled out by hand, if not completed electronically. typed or completed electronically. typed if not completed electronically. filled out by hand, typed, or completed electronically. filled out by hand, typed, or completed electronically.
schedule 1
for additional income and adjustments to income
schedule a
for itemized deductions
values
fundamental beliefs about what is important
In TVM, the negative sign (-) before a number entered in the calculator indicates a(n) __________.
future value inflow of money asking price outflow of money outflow of money
In forecasting future budget items, assuming that they will increase from their current values at the rate of inflation, you can use the formula for:
future value of a lumpsum. present value of a lumpsum. annual percentage rate (APR). percentage change. future value of a lumpsum.
cash inflows
gross income (before taxes) from all sources
Which of the following is usually a variable monthly expense for typical households?
gym membership fee gas for car rent car payment gas for car
Your employer offers dental insurance for $510 per year pretax through your employee benefit plan. However, your employer does not contribute toward the cost, and your marginal tax rate will be 22 %. Buying the dental insurance through payroll deduction
will save you $112 in taxes, so the net cost is $398. will cost you 22 % of $510, so you will save $398. will cost you 22% of $510, so the net cost is $622. does not offer any financial advantage to you. will save you $112 in taxes, so the net cost is $398.
gross income
your income from all sources, some categories of income are excluded from total income
The purpose of reconciling a budget is to:
implement the budget plan. adjust income so that your surplus does not exceed your budgeted savings. adjust income and spending so that your expenses do not exceed your income. balance your assets to your debt and net worth. adjust income and spending so that your expenses do not exceed your income.
If assets on a personal balance sheet increase by $39050 and liabilities increase by $19750, then net worth will
increase by $39050. decrease by $19300. increase by $19300. decrease by $19750. increase by $19300
We set Beginning or End in the TVM calculation to:
indicate if the payment is an inflow or an outflow. indicate how often the interest rate will change. change how often the cash flow occurs. indicate if the payment is occurring at the beginning or end of the period. indicate if the payment is occurring at the beginning or end of the period.
Why is it important to break larger financial goals into smaller subgoals? (Select any three.)
It will help you develop and organize your plan for achieving the larger goal. Subgoals are easily attainable. It will make each step more manageable so you won't get discouraged. You can see progress more quickly. Larger financial goals are unattainable. Modern attention spans rarely last long enough to attain larger goals. It will help you develop and organize your plan for achieving the larger goal. Subgoals are easily attainable,It will make each step more manageable so you won't get discouraged, & You can see progress more quickly.
You are in the 24 percent marginal tax bracket and itemize deductions. What impact will an additional $1050 tax credit have on your federal income taxes owed?
It will increase my taxes owed by $252. It will reduce my taxes owed by $1050. It will reduce my taxes owed by $252. It will have no effect on my taxes owed. It will reduce my taxes owed by $1050.
internet-based financial institutions
Lower costs and competitive loan and deposit rat
Based on his taxable income calculation on his tax return, Mark owes $2360 in federal income taxes for the year. His employer reported to the IRS that it withheld $3260 from his paychecks this year. Which of the following statements is correct?
Mark will receive a refund of $900. Mark owes an additional $900. Mark will not have to file a tax return. Mark's employer will owe a penalty for under withholding. Mark will receive a refund of $900.
Which of the following is not a federal filing status?
Married filing separately Married filing jointly Married filing together Single married filing together
Betty and Mark are planning their budget for the next year. Their monthly fixed-rate mortgage payment is currently $1200 with monthly utilities amounting to $100. Assuming an inflation rate of 2%, what should they project for next year?
Mortgage payment of $1200 and taxes plus insurance of $102 Mortgage payment of $1200 and taxes plus insurance of $100 Mortgage payment of $1224 and taxes plus insurance of $100 Mortgage payment of $1224 and taxes plus insurance of $102 Mortgage payment of $1200 and taxes plus insurance of $102
unearned income
interests, dividends, capital gains, rents, royalties, and net business income
The standard deduction for married couples filing a joint tax return is
less than twice the standard deduction for single filers. more than twice the standard deduction for single filers. twice the standard deduction for single filers. the same as the deduction for head of household. twice the standard deduction for single filers.
Typically, ______ the risk of an investment and _________ the risk of the institution, the ________ interest is paid on the investment.
lower; higher; lower higher; lower; lower lower; lower; lower lower; lower; higher lower; lower; lower
Cassandra is 19 years old. Her parents claim her as a dependent on their tax form, and her earned income this year was $13,000. Does she need to file a tax return?
No, because her parents claim her as a dependent. Yes, because she is over age 18. Yes, because her income exceeded the limit for not having to file. No, because her income was under $13,200. Yes, because her income exceeded the limit for not having to file.
Series I Bonds
Offer protection from inflation by adjusting the face value on which interest is calculated
Which of the following factors should be considered in selecting a professional to help you with your personal finances? (Select any three.)
Personality Fee structure Certifications Location Education Gender fee structure, certifications, & education
What is not a common method of identity theft?
Phishing Data Breaches Kidnapping Stealing Kidnapping
what factor doesn't impact budget decisions
Political affiliation Money attitudes Amount of income Family size political affiliation
Ten years from now, Catherine expects to receive $20,000. She wants to know how much that sum would be worth today. Which of the following time value of money calculations should she use to figure this out?
Present value of an annuity. Future value of a lump sum. Present value of a lump sum. Future value of an annuity. Present value of a lump sum.
savings institutions
Primarily mortgage lenders, but offer many of the same accounts and services as commercial banks
The United States federal income tax system is a _______________ tax.
Progressive Aggressive Regressive Oppressive Progressive
What are the requirements to make a series of payments an annuity (pick the two best):
Regular intervals Continually increase with each subsequent payment Equal dollar amounts Always inflows Always outflows regular intervals, equal dollar amounts
Which of the following should not be a major factor when choosing a personal financial planner?
Reputation Education Affiliation Certification affiliation
Another name for the Liquidity Ratio is:
Savings Ratio Banking Ratio Emergency Fund Ratio Cash Flow Ratio Emergency Fund Ratio
Which of the following is a nondepository institution? (Select any two.)
Savings and loan Online payment processor Local bank Mutual fund company online payment processor & mutual fund company
Pick the time frames that personal financial ratios use typically (pick the two best):
Semi-annual Decade Point-in-time date Quarterly Annual point-in-time date, annual
Which of the following is not one of the recommended SMART guidelines for personal financial goals?
Specific Attainable Realistic Manageable manageable
SMART goals
Specific, Measurable, Attainable, Realistic, Time-specific
What is an old-fashioned budgeting method individuals still use today?
Spreadsheet Bob's Best Budgeting Envelope System Canister System Envelope system
You are calculating your potential return on your stock investments. If you calculate different possible returns based on assuming a variety of interest rates and stock market conditions, this is an example of
marginal analysis. reasonable assumptions. opportunity cost. sensitivity analysis. sensitivity analysis.
Suppose that you choose to spend $3,000 on a vacation, taking it out of your savings account. The reduction in your savings and the lost interest that you could have earned on the money are examples of
marginal reasoning. opportunity costs. sensitivity analysis. rate of return. opportunity costs.
non-depository institutions
mutual funds, life insurance company, brokerage firm, financial services firm, online payment processor
budget variance
occurs when your actual expenses are different from your budgeted expenses
financial services firm
offers one-stop shopping for checking and savings accounts, insurance products, loans, and mutual fund investments
The elements of a comprehensive financial plan are as follows:establish a firm foundation, build and protect wealth, and
open a checking account. invest in stocks. buy life insurance. secure basic needs. secure basic needs
attitudes
opinions and psychological differences
annuity due
payments occur at the beginning of each period
ordinary annuity
payments occur at the end of each period
One of the biggest mistakes people make in their finances is that they are too _____ in their assumptions.
pessimistic specific optimistic conservative optimistic
online payment processor
provides a limited set of cash management services, primarily to facilitate the transfer of funds
Rosa graduated at the top of her high school class, and has set the following goal as part of her financial plan:"graduate from college with a B.S. in Business Management." Which aspect of the SMART goal model is missing from her goal?
The goal is not attainable. The goal is not specific. The goal is not measurable. The goal is not time-specific. the goal is not time-specific
define fair market value
The price today that you can sell the asset for. The price a dealer will give you for the asset. The price you paid for the asset. The price you hope it is worth. The price today that you can sell the asset for.
Which of the following does NOT need to be reported as income for federal income tax purposes?
Tips received Bonus received from employer Monetary graduation gifts received Unemployment insurance payment Monetary graduation gifts received
net cash flow = total cash inflow LESS ______
Total Taxable Income Total Cash Outflows Total Net Income Total Fixed Expenses total cash outflows
What is not a cost of keeping money in a checking account?
Transaction fee for ATM transaction Minimum balance requirement for free checking Fees for various services like stop payments FDIC insurance FDIC insurance
What is the quickest method to transfer money to a person with a different bank?
Wire transfer ATM deposit of check Cashier's check Certified check Wire transfer
Which of the following is the best way to avoid incurring overdraft fees?
Withdraw all of your funds as cash when you are paid. Check your account balance online before writing a check or using your debit card. Arrange for overdraft protection from your financial institution. Balance your account regularly and always take into account electronic payments. Arrange for overdraft protection from your financial institution.
The best place to keep important valuables such as passports, birth and marriage certificates, wills, and deeds is a
safe deposit box. lockbox. jewelry box. hidden safe. safe deposit box
earned income
salary, wages, self-employment income, tips, bonuses, and commissions
life insurance company
sells life insurance policies, intended to provide financial security for dependents in the event of the death of the policy owner
minus certain allowed adjustments
student loan interest, IRA, and SEP contributions
long-term
student loan, home mortgage
You have implemented a new budget, but after tracking your spending for the last two months, you find that you have spent more than budgeted on clothing and utilities. This is called a budget
subsidy. reconciliation. variance. disaster. variance
why are financial goals important
success requires setting goals and making a plan to achieve those goal
purpose also determines how long to keep financial records
tax records should be kept 7 years
In TVM calculations, future value is:
the expected value at the current point in time. the expected value at some future point in time. the current market value inflated to some future point in time. the best guess of what something might cost in the future. the expected value at some future point in time.
form 1040
the main federal income tax form
net worth is
the market value of assets minus debts. annual income minus debts. cash inflows minus cash outflows. the market value of everything you own. the market value of assets minus debts
net worth
the value of your assets less all you owe to others, a measure of wealth
why do people avoid financial planning
they don't believe their math and finance skills are adequate, they fear failure, they expect someone else to take care of it, they aren't interested, they don't know whom to trust, they are too busy, they are overwhelmed with the quantity of information and don't know where to start
True or False: A safe deposit box is safer than a lockbox.
true
short-term
unpaid bills
brokerage firm
a company that facilitates investors' purchases of stocks, bonds, and other investments
budget
a plan for future spending and saving
annuitity
a series of payments of equal dollar amounts made at regular intervals for a period of time
Identify whether each of the following is an asset, a debt, or neither.
a. Credit card balance b. Weekly employment earnings c. Car d. Rent paid to landlord e.Checking account a. debt b. neither c. asset d. neither e. asset
measuring savings
-savings ratio measures the percentage of your after-tax income that is allocated to savings -track over time to assess your savings goals -try to increase over time; 10% is a recommended goal -savings ratio=monthly savings/ after-tax monthly income
credit unions
-special form of mutual depository institution -Offer similar accounts and services as banks, but are nonprofit -Lower loan rates and higher deposit rate
personal financial statements
-summarize your financial information, and provide a baseline for comparison. -Where you stand -Plan for the future -You will need to provide financial information to others, such as banks considering your application for a loan, or organizations evaluating your qualifications for a scholarship
marginal tax effects and financial decisions
-tax laws include rules that can help reduce taxes (contributions to certain retirement plans, certain education costs) -always consider the marginal tax effect, or reduction in taxes owed as a result of a financial decision -aftertax income=before tax income*(1-tax rate)
future value of an annuity
-the amount the payments are worth in the future -equivalent to the sum of the FV of each payment of annuity -the value at a particular time in the future of a series of equal payments invested at a specific interest rate -FVA=PMT*((1+i)^n-1)/i
average tax rate
-the percentage of total taxable income paid in taxes -average tax rate=taxes paid/taxable income
what is personal financial planning
-the process of developing and implementing an integrated, comprehensive plan designed to meet financial goals, improve financial well-being, and prepare for financial emergencies -it focuses on individual and household financial decisions -budgeting, saving and spending -tax-planning, insurance, and investments
tax bracket
-the range of taxable income to which a particular marginal tax rate applies -get adjusted for inflation and tax law changes
adjusted gross income
-the total of your earned income, unearned income, and minus certain allowed adjustments
future value of a lump sum
-the value at a particular time in the future if invested today at a specific interest rate -future value of a lump sum= PV*(1+i)^n -pv=present value, i=interest rate, n=number of periods
assets
-things you own (cash, bank accounts, car, house) -listed from most liquid to least
liquid assets
-those that can easily be converted to cash without loss of value (checking account, savings account) -less-liquid assets include investments, cars, and houses
tax planning
aims to minimize the average tax rate for a given level of income
factors affecting household budgets
-unplanned outlays can interfere with ability to achieve financial goals -other factors: family size & makeup, age & education of household members, sources & amount of income, money attitudes
Assess Charles's personal finances using the following balance sheet information. -assets (bank account=2,500, car=6,000, personal assets=2,000) -debts (current bills=1,500, student loan=10,000, car loan=3,725)
-what is Charles' net worth = -4,725 -how much does Charles have in liquid assets=2,500 -calculate Charles's debt ratio=1.45 -calculate Charles's liquidity ratio, assuming that his monthly expenses total 1,000= 2.5
internal revenue service (IRS) forms
-which form you use depends on your filing status and your income, deductions, and credits -tax software can make it easier and faster to identify the appropriate forms to file, complete your return, and e-file
liablilities/debts
amounts you owe (unpaid bills, credit card balances, student loans, car loan, home mortgage)
Arnold receives a retirement pension benefit of $500 per month. This payment is an example of
an annuity. present value. the time value of money. interest on investments. an annuity
mutual fund
an investment company that sells shares to investors and then invests the pool of funds in a selection of stocks, bonds, or other asset
The rule of 72 ________
approximates how long it takes to triple your money at a given rate of interest. is the estimated life expectancy financial planners assume when creating financial plans. approximates how long it takes to lose your money in 72 years. approximates how long it takes to double your money at a given rate of interest. approximates how long it takes to double your money at a given rate of interest.
filing requirements
-your filing status identifies your household type -single, married filing jointly, married filing separately, head of household, or qualifying widow(er) with dependent child -you may have to file a return if you are a dependent
If you examine your bank statement and notice several large charges to your account that you did not make, it's likely
automated bill payments. interest charge for debit card. identity theft. overdraft fees. identity theft
You were single and had an adjusted gross income of $36000 in 2019. You calculated that your taxable income was $24000 and that you owed $9638 in federal income taxes. What is the average tax rate you paid and what was your marginal tax rate?
average tax rate 40.2%; marginal tax rate 12% average tax rate 26.8%; marginal tax rate 12% average tax rate 26.8%; marginal tax rate 24% average tax rate 40.2%; marginal tax rate 24% average tax rate 40.2%; marginal tax rate 12%
financial planning process
-Step 1: Organize Your Financial Information and Set Short-term and Long-term Goals (Determine your starting point: Identify where your money is coming from, Identify where it is going, and Collect and organize your financial information, Think about why you have these goals -Step 2: Analyze Your Current Financial Status (Evaluate how well you're doing, Identify areas you need to work on, Establish baseline (what you have) to track progress) -Step 3: Identify and Evaluate Alternative Strategies for Achieving Your Goals (Reduce spending or increase income, Identify alternative strategies for achieving each goal, Compare the costs and benefits of each strategy) -Step 4: Implement Your Financial Plan (Meet your basic household needs, build wealth over time, and protect your income and assets) -Step 5: Monitor Your Progress and Revise Your Plan as Needed (Life changes affect financial planning objectives and strategies)
identity theft
-Victims of identity theft have been denied loans, lost job opportunities, and had their finances and credit ruined -Common methods of identity theft: -Dumpster diving; Seeking bills and statements in trash -Skimming; Electronically stealing card numbers and PINs -Phishing ; Sending fraudulent emails to get information -Rerouting; Receiving a victim's mail -Stealing; Theft of wallets and purses, personnel records -Pretexting; Using false pretenses to obtain financial information, such as by posing as researcher or bank -Data breaches; Hacking into companies and government
determining whether you need to file
-You need to file a return if any of the following apply: -Your earned income was more than $12,200 (for 2019) -Your unearned income was more than $1,050 -Your total income was more than the larger of (1) $1,050, or (2) your earned income + $350 -Taxes were withheld from your income and you would like a refund -You qualify for a tax credit
do you need to file a tax return
-Your taxable income is zero if your earned income is no more than your standard or itemized deduction(s) -You should file to get a tax refund if you made less than these amounts but had taxes withheld from your pay
cashing management
-a foundational component of your financial plan -includes all decisions related to cash payments and short-term liquid investments
demand deposit account
-allows withdrawals at any time -Liquid, so pays low interest rates -Regular savings accounts are demand deposits
forecasting future income and expenditures
-annual and/or monthly forecasts -estimate changes in future income -estimate fixed and variable expenses -record-keeping format
organization of the personal balance sheet
-assets are listed from most liquid to least -liquid assets -debts are categorized as short-term and long-term
making effective decisions
-base your decisions on reasonable assumptions (Avoid excessive optimism) -Apply marginal reasoning (Only consider the marginal, or additional, benefit or cost that will result from the decision you make) -Consider opportunity costs (Measure what you have to give up in order to take a particular action) -Use sensitivity analysis (Evaluate outcomes from different assumptions) -Consider decision-making styles (There are advantages and disadvantage to each type: Avoider vs. Spontaneous; Rational vs. Agonizer)
tax rate schedules
-based on filing status, tax bracket, and marginal tax rates -tax rates are lower for the first portion of income, and higher for additional income
implementing your budget
-calculate net cash flow=total cash inflows less total cash outflows -reconciling a budget is the process of adjusting income and spending so that expenses do not exceed income
net cash flow
-calculated by subtracting total cash outflows from total cash inflows -net cash flow=total cash inflows-total cash outflows
the personal cash flow statement
-financial statement used to evaluate the relationship between your income and sending (shows inflows and outflows of cash over a time period, cash basis)
cash outflows
-fixed expenses; same from month to month (example: rent, loan payments) -variable expenses; typically discretionary spending (example: groceries, gas, entertainment)
commercial banks
-get their funds from checking and savings account deposits -provide financial services, including business and personal loans, mortgages, and credit car
progressive tax
-higher marginal tax rates are imposed on taxpayers with higher income -the U.S. income tax system is progressive, using increasing marginal tax rates, credits, and deductions
monitoring your budget
-identify small cash leakages as soon as possible -Ensure large irregular cash expenses do not cause financial hardship -Track actual spending and compare to budgeted spending
household net worth
-if positive, represents how much you would have left over after paying all of your debts -if negative, assets are insufficient to pay off all debts -the larger your net worth, the better off you are financially -net worth=total assets-total debts
economic factors and your financial plan
-inflation; increase in price levels over time -it affects income, spending & saving (to improve standard or living, growth of income must outpace growth in expenses, if the rate of return on your savings is lower than the inflation rate, you are losing purchasing power) -in the U.S., inflation is measured by the change in consumer price index (CPI tracks prices of a representative basket of more than 400 goods and services used by urban households, including food, housing, consumer goods, gasoline, and clothing)
other economic factors affecting your financial plan
-interest rates; the cost of borrowing money, a measure of your earnings, the return on investment, determined by supply and demand, economic conditions, and the actions of the federal reserve -the economy and the job market (economic recessions and expansions affect employment and income levels) -political unrest and global issues (political uncertainty and global events increase risk)
present value of an annuity
-is the amount you must set aside today at a specific interest rate to be able to withdraw a particular amount of money each period for a given number of period -PVA=PMT*(1-(1/1+i)^n)/i -PMT=annuity payment, i=interest rate, n=number of periods
present value of a lump sum
-is the amount you would need to invest today at a specific interest rate to grow to a specific amount in the future -PV of lump sum=FV*(1/1+i)^n -fv=future value, i=interest rate for 1 period, n=number of periods
factors that influence financial planning decisions
-life cycle factors; income & wealth change over time due to career and family dynamics -demographic characteristics; age, family size, income, and wealth affect expenses -values and attitudes; regarding money and its use
measuring liquidity
-liquidity ratio tells you how many months you could pay your monthly expenses using your liquid assets -liquidity ratio=liquid assets/monthly expenses
valuing your assets and debts
-market value of an asset; the price today that can sell your asset, usually not the same as the purchase price -on a personal balance sheet, debt is listed as the principal outstanding
time value calculation methods
-mathematical formula: enter interest rates as decimals, don't round until the end of the calculation -financial calculator: usually the quickest and easiest method, most popular are the TI BAII Plus and the HP 10B, Mobile apps are available for phones and tablets -spreadsheet: microsoft excel includes built-in TVM formulas
personal balance sheet
-measures your wealth details of assets and liabilities
