FINA 3350 Ch 1-8
Consumer Loans: Fourth Decision: The Loan's Maturity-Shorter vs. *Longer Term* Loans
Longer term loan means: - smaller monthly payments - more interest payments - higher interest rate.
Disadvantages of U.S. Treasury bills, or T-bills
Low rate of return
How Home Equity Loans Work
Lump-Sum Line of credit or HELOC
SMART Financial Goal Example: Saving for a down payment on a new car M
M= Plan to save $5,000 total for the down payment
Personal Financial Planning Process 3. Develop a Plan of Action
Make your spending conform with your budget goals - Flexibility - Protection - Liquidity - Minimization of Taxes
______________ _______ - is basically a liquid asset-one that either is cash or can easily be turned into cash with little or no loss in value.
Monetary asset
Which Cash Management Alternative is described below? alternative to savings account, variable interest rates, check and ATM access.
Money Market Deposit Account (MMDA)
Which Cash Management Alternative is described below? investors receive interest on a pool of investments less an administrative (usually less than 1% of total investment)
Money Market Mutual Funds (MMMF's)
What Other Types of Checks is being described below? Similar to a cashier's check except that it is generally issued by the U.S. Postal Service or some other nonbanking institution.
Money Order
"Banks" or Deposit-Type Financial Institutions Savings and Loan Associations (S&Ls or "thrifts")
Originally established to provide mortgage loans to depositors; today, services offered by S&Ls and commercial banks have become very similar, with both offering almost identical savings alternatives. However, S&L accounts often earn one-quarter percent more than savings accounts at competing commercial banks.
_________________ ____________ - The amount you owe the Bank on purchases made with your credit card. This is the amount outstanding for your repayment, but a portion of it is the minimum repayment that must be settled, otherwise an interest is charged on this minimum repayment. Minimum repayment due
Outstanding Balance
Determine the monthly payment on a 12-month, 14% installment loan for $5,000.
PMT= $448.94 Either use the table (for $1000 and multiply by 5) or TVM N=12 I =14 PV=-5000 PMT=? FV=0 P/Y=12
Present Value formula
PV = FV / (1+r)^n
Present Value of an Annuity
PV of an annuity = Annuity Payment or (PMT) × Present-Value Interest Factor of Annuity (from table)
FV formula
PV(1+i)^n
What Additional Fee is described below? The rate you pay if you don't make your minimum payments on time.
Penalty Rate
_____________ ____________ ____________ - the process of managing your money to achieve personal economic satisfaction
Personal Financial Planning
______________ ______________ ___________ tell you the starting point of your financial journey
Personal financial statements
Consumer buying activities: Research-based buying
Phase 1: Pre-shopping activities Phase 2: Evaluating Alternatives Phase 3: Research based buying Phase 4: Post-purchase activities
Calculating Balanced Owed: Which one is described below? Using the balance at the end of the previous billing period. There is not credit given for current month's payments. (relatively simple, but it is also expensive.)
Previous balance method
Record Keeping definition
Recordkeeping is the process of recording transactions and events in an accounting system.
____________________ - is the process of replacing an existing mortgage with a new loan. Typically, people refinance their mortgage in order to reduce their monthly payments, lower their interest rate, or change their loan program from an adjustable rate mortgage to a fixed-rate mortgage.
Refinancing
____________________ of interest paid on an investment's principal
Reinvestment
Reportable income
Reportable payments are payments to or on behalf of an individual that must be "reported" to the government as income received. Reportable payments are tied to the relationship the individual has with the RF (payment classification).
Compound Annuities Example
You'll need $10,000 for education in 8 years. How much must you put away at the end of each year at 6% interest to have the college money ready? TMV Calc: N = 8 I = 6% PV = 0 PMT = ? FV = 10,000 *PMT = $1010.36*
Bridge/interim loan example
Your current home value is $300,000 and you owe $200,000 on the mortgage. A bridge loan for 80% of the home's value, or $240,000, pays off your current loan with $40,000 to spare. If the bridge loan closing costs and fees are $5,000, you're left with $35,000 to put down on your new house.
SMART Financial Goal Example: Saving for a down payment on a new car S
S= plan to save for a down payment on a new car
Type of Taxes: Taxes on Purchases
Sales tax and excise tax (e.g., gas, cigarettes)
Am I Saving as Much as I Think I Am?
Saving ratio
"Banks" or Deposit-Type Financial Institutions Savings Banks
Savings banks are close cousins to savings and loan associations and are generally found in the northeastern United States. Their primary purpose historically has been to provide mortgage funding to their depositors.
Am I Saving as Much as I Think I Am? Savings Ratio- Formula
Savings ratio= income available for savings and investment / income available for living expenditures
Classification of Bank Card Variations- Which is described below? Backed by the pledge of some collateralized asset.
Secured Credit Card
Cash Management Alternatives: Asset Management Account
a comprehensive financial services package (checking account, credit card, MMFs, etc.) offered by a brokerage firm. •Advantages - Monthly statements, coordination of money management, checks, high return, convenient. •Disadvantages - Costly, minimum initial investment, not insured.
Bank Credit Cards
a credit card issued by a bank or large corporation, generally a Visa or Mastercard.
Smart Buying in Action: Housing Earnest Money
a deposit on the purchase to assure the seller that the buyer is serious about buying the house.
What is a cash flow statement?
a summary of *cash receipts and payments* for a *given period*, such as a month or a year.
Amy is planning on taking out a mortgage for a home valued at $199,000 and is able to make a 16% downpayment. She will be charged 2 points in her expenses. How much will this fee be? a) $3,343.20 b) $3,980 c) $1,671.60 d) $1,990
a) $3,343.20 199,000 x .16 = 31840 199,000-31840 = 167160 167160 x.02 = *3343.20*
Katie earned a salary of $52,000 and plans to file her taxes single. She contributed $3,500 to a traditional Roth IRA. She paid $420 in interest on her student loans. She received $80 in dividends from investments. She plans to take the standard deduction of $6,350. What is her taxable income? a) $41,810 b) $44,070 c) $39,980 d) $43,550
a) $41,810 $52,000+$80 = 52080 52080- 3500 - 6350 = *$41,810*
If you are enrolled at least half-time in school, are unemployed, or meet hardship standards, you can postpone payments on your loans for how long? a) 3 years b) 5 years c) 1 year d) indefinitely
a) 3 years
Which of the following would provide the lowest interest rate? a) NOW account b) money market deposit account c) certificate of deposit d) savings account
a) NOW account
Which of the following is a way to keep you debit card information safe at an ATM? a) all are important ways to be safe b) keep you PIN a secret c) compare receipts regularly to your bank statement d) report lost or stolen cards immediately
a) all are important ways to be safe
When applying for a credit card, you will be asked to provide information on the 5 C's of Credit. Which of those refers to the size of your financial holdings? a) capital b) capacity c) cash outflows d) collateral
a) capital
A current Ratio of 2.1 means that a) for every $1 in current liabilities, you have $2.1 in monetary assets b) 21% of your monetary assets are financed by current liabilities c) 21% of your current liabilities contribute to monetary assets d) for every $1 in monetary assets, you have $2.1 in current liabilities
a) for every $1 in current liabilities, you have $2.1 in monetary assets
Which of the following is *not* an example of personal property? a) house b) ATV c) television d) jewlery
a) house
Which of the following are advantages of credit card? i. provides convenience ii. allows you temporary funds as long as you pay it off each month iii. provides bill consolidation iv. obligates your future a) i, ii, and iii b) ii and iii c) i and iv d) i, ii, iii, and iv
a) i, ii, and iii
Which of the following might we have to adjust for when comparing different rates? i. liquidity ii. compounding iii. taxes iv. minimum balance a) ii and iii b) i and iv c) i, ii, and iii d) i, iii, and iv
a) ii and iii
Which is a way to receive tax-exempt income? a) invest in municipal bonds b) invest in corporate bonds c) establish a trust d) set up a Roth IRA
a) invest in municipal bonds
What is the premise behind Time Value of Money? a) money received today is worth more than money received in the future b) time does not influence the value of money received c) money received in the future is worth more than money received today d) the only factor for how time influences money is inflation
a) money received today is worth more than money received in the future
What kind of car lease requires you to pay the difference between the value of the car when you started the contract and the depreciated value when the lease is over? a) open-end lease b) closed-end lease c) net lease d) walk-away lease
a) open-end lease
What factor has the biggest impact on your credit score? a) payment history b) credit utilization c) credit history d) new credit
a) payment history - 35% amounts owed-30% length of credit history- 15% New credit - 10% Types of Credit used- 10%
There are multiple ways a credit company can determine your balance on which you owe interest. If they use the balance owed at the end of the previous billing period, which method are they using? a) previous balance method b) ending balance method c) adjusted balance method d) average daily balance method
a) previous balance method
Present Value Example You're on vacation in Florida and you see an advertisement stating that you'll receive $100 simply for taking a tour of a model condominium. You discover that the $100 is in the form of a savings bond that will not pay you the $100 for 10 years. What is the PV of the $100 to be received 10 years from today if your discount rate is 6%?
according to the chart, Present value factor is .558 so you take $100 x .558 and get *$55.80*
SMART financial goals: A
action-oriented/attainable
The total variance is at deficit when?
actual spending exceeds the planned spending.
The total variance is at surplus when?
actual spending is less than the planned spending.
Taxable income is a function of three numbers
adjusted gross income (AGI), deductions, and exemptions.
Financial ratios
allow you analyze raw data in the balance sheet or income statement then compare it to targets.
Take home pay
also called net pay, is a person's earnings after deductions for taxes and other items. take-home pay is also called disposable income, the amount a person or household has available to spend.
Cash Management Alternatives: Money Market Deposit Account (MMDA)
alternative to savings account, variable interest rates, check and ATM access. •Advantages - Safe, Earns interest, Check writing privileges •Disadvantages - High minimum balances/penalties, interest rates below alternatives
Capital asset
an asset you own
Audit
an examination of tax return by IRS
Since net worth is not money available to use, what is it?
an indication of your financial position on a *given date*
Cost and Early Payment of Consumer Loans APR
annual percentage rate—simple percentage cost of all finance charges over the life of the loan, on annual basis.
Tax brackets change how often?
annually to reflect changes in the cost of living (inflation)
An ___________ is a series of equal dollar payments coming at the end of each time period for a specific number of time period.
annuity
What do you look at if you want to know how much your savings will have grown by some point in the future?
annuity
what is a sum up a number of future values?
annuity
Automatic savings *(are/are NOT)* in liquid reservoir therefore less likely to spend that money.
are not
Capital gains *(are/are not)* claimed or taxed until the asset is sold.
are not
Federal Deposition Insurance Corporation (FDIC) deposits where?
at a commercial bank
National Credit Union Administration (NCUA) deposits where?
at a credit union
The recourse clause may allow the lender to _________ ________ _________, which means that a certain portion of your salary goes directly to the lender to pay off your debt.
attach your wages
To find APR
average annual finance charges/ average loan balance outstanding
Formula for average daily balance
average daily balance x APR x days in billing cycle / 365
20% debt limit ratio means you should *(take on/avoid)* additional debt
avoid
Your broker is trying to sell you an asset that will pay you $5,000 in 8 years. If it is supposed to generate 8%, what is the most you would be willing to pay for this asset a) $3,005 b) $2,700 c) $2,240 d) $3,150
b) $2,700 TVM: N=8 I=8% PV=? PMT=0 FV=5,000 *PV= 2701, so don't pay more than 2700*
You just invest $2,500 in assets that will generate 7% over the next 20 years. At the end of the 20 years, the investment will pay you in cash for what is in the asset. How much will you be paid? a) $10,116 b) $9,675 c) $3,519 d) $6,510
b) $9,675 TVM: N=20 I=7% PV = 2500 PMT = 0 FV =? FV= *$9,675*
If you are not able to make a 20% downpayment on a mortgage, you will have to have PMI. At what balance-to-value must you reach before the lender is required to remove PMI from your bill? a) 88% b) 78% c) 80% d) 75%
b) 78%
Which of the following is a "snapshot" in time of your financial condition? a) statement of cash flows b) balance sheet c) income statement d) statement of equity
b) balance sheet
This type of check is drawn against the bank's or financial institution's account instead of the payee's. a) certified check b) cashier's check c) money order d) traveler's check
b) cashier's check
Which type of bankruptcy allows you to keep the title to most of your assets but you must follow a court-ordered repayment schedule? a) chapter 7 b) chapter 13 c) chapter 11 d) chapter 9
b) chapter 13
Which ratio tells you the percentage of your assets that have been financed by borrowing? a) long-term debt coverage ratio b) debt ratio c) savings ratio d) current ratio
b) debt ratio
Which of the following is *not* an advantage of a second mortgage? a) can use funds for any purpose b) does not require collateral c) relatively low interest rates d) interest payments are tax deductible
b) does not require collateral
When valuing assets on your personal balance sheet, you should use what value? a) value you paid for the asset b) fair market value c) average of the fair market value over the past year d) value you expect the asset to be worth in one year
b) fair market value
If your credit score is 697, that would be considered a) excellent b) good c) average d) very good
b) good
The percentage of the last dollar you earn that goes towards taxes is known as the a) progressive tax rate b) marginal tax rate c) absolute tax rate d) moderate tax rate
b) marginal tax rate
Which of the following is a *disadvantage* of leasing a car? a) lower monthly payments b) no ownership interest c) able to have more expensive car d) small cash outflow
b) no ownership interest
What is the principal? a) the ending value of the investment or debt instrument b) the face value of the deposit or debt instrument c) amount earned over the life of the interest or debt instrument d) the interest paid on the investment
b) the face value of the deposit or debt instrument
What Other Types of Checks is being described below? A check drawn on a bank's or financial institution's account. Usually costs you a fee of around $10, as will as the amount of the check.
cashier's check
Cash Management Alternatives: Demand deposit account
checking account that pays no interest on your balance.
Chapter 7: Straight Bankruptcy: Most debts wiped out, but what cannot be wiped out?
child support alimony student loans taxes.
A ____________-______ __________ is a rental agreement that puts no obligation on the lessee (the person making periodic lease payments) to purchase the leased asset at the end of the agreement
closed-end lease
Private Loans: Offered by who?
commercial banks and credit unions
The APY formula converts interest rates *compounded* for different periods into _______________ _________ ________, allowing you to easily compare interest rates.
comparable annual rates
A _______________ __________ involves depositing an equal sum of money at the end of each year for a certain number of years, allowing it to grow.
compound annuity
The cornerstone of time value of money is what?
compound interest
present value is the inverse of what?
compounding
Your emergency reserve should be in ____________________ investments, such as certificates of deposit, money market mutual funds, Treasury bills, and short-term bond funds.
conservative
Total debt can be divided into two types of debt
consumer debt and mortgage deb
___________ involves receiving cash, goods, or services with an obligation to pay later.
credit
A __________ __________ gathers information on consumers' financial history, including payment history and sells to customers.
credit bureau
Which consumer loan is the most popular?
credit cards
Chapter 7: Straight Bankruptcy: Must complete what first?
credit counseling
____________ ___________ information on financial situation and dealings.
credit report
Getting the Best Rate on your consumer loans: More Expensive sources
credit unions savings and loans commercial banks.
________ _______- carries an unpaid balance from month to month.
credit user
Assets: All values must be *(past/current)*
current
You set a goal to invest $10,000 each December for the next 30 years in an investment that averages 10%. How much will be in the investment after the 30 years? a) $1,003,274 b) $1,245,908 c) $992,990 d) $1,644,940
d) $1,644,940 TVM: N=30 I=10% PV=0 PMT=10,000 FV=? FV = $1,644,940
The FDIC provides some insurance on deposits at financial institutions. How much can be covered? a) $250,000 total b) $500,000 total c) $300,000 per depositor d) $250,000 per depositor
d) $250,000 per depositor
If I can earn 5.5% interest on an investment, how long will it take my money to double? a) 11.22 years b) 9.56 years c) 15.12 years d) 13.09 years
d) 13.09 years 72 rule 72/5.5% = 13.09 years
Which rates tell us the simple interest rate over the life of a loan/balance of credit? a) EAR b) EFF c) APY d) APR
d) APR
You are trying to decide between two different savings accounts. Account 1 offers an interest rate of 5.38% and compounds quarterly. Account 2 offers an interest rate of 5.34% and compounds monthly. Which should you choose? APY = (1+ r/n)^n - 1 a) Account two with an APY of 5.49% b) Account one with an APY of 5.47% c) Account two with an APY of 5.47% d) Account one with an APY 5.49%
d) Account one with an APY 5.49% One: (1+ .0538/4)^4 - 1 = 5.49% Two: (1+ .0534/12)^12 -1 = 5.34%
What is a 'point' for a mortgage? a) a way to lower the mortgage amount by increasing the interest rate b) the closing costs associated with external services such as appraisals and inspections c) the fee charged to process the application d) a way to 'buy down' the interest rate by increasing the mortgage amount
d) a way to 'buy down' the interest rate by increasing the mortgage amount
If your payments are determined by first determining the total interest to be paid, then adding that to the principal, and finally dividing that by the number of payments, which method was used? a) multiplicative interest b) simple interest c) time value of money d) add-on interest
d) add-on interest
If you are afraid your identity has been stolen, who should you notify? a) your credit company b) the police c) Federal Trade Commision d) all of the above
d) all of the above
Which of the following are consumer protections that were providing following the CARD act of 2009? a) companies must provide you with 45 days of notice before increasing rates b) protections for underage consumers c) notify you of how long it will take to pay off balance if only minimum payments are made d) all of the above
d) all of the above
Why is career planning an important part of financial planning? a) helps you think of the kind of work you find fulfilling and enjoyable b) helps you choose work that will provide you with the standard of living you want c) helps you understand how to get to the job you want d) all of the above are important
d) all of the above are important
Which of the following a a type of loan that is paid back in a single lump-sum at maturity? a) bridge loan b) installment loan c) secured loan d) balloon loan
d) balloon loan
When inflation pushes someone into a new tax bracket, what has occurred? a) capital loss b) purchase power increase c) marginal tax bracket d) bracket creep
d) bracket creep
If you are building a house and plan to sale your current house to help finance it, but do not want to sale it before the new house is built, you could be in need of temporary funds and utilize a a) amoritzation line b) balloon loan c) credit line d) bridge loan
d) bridge loan
If you sell an asset for less than the price at which you purchased it, you experienced a a) capital gain b) marginal gain c) marginal loss d) capital loss
d) capital loss
What is the first step in any smart buying? a) do your homework b) make the purchase c) maintain your purchase d) differentiate want from need
d) differentiate want from need Step 1: Differentiate Want From Need Step 2: Do Your Homework Step 3: Make Your Purchase Step 4: Maintain Your Purchase
What is discounting? a) finding the future value b) finding the number of time periods c) finding the required interest rates d) finding the present value
d) finding the present value
Which of the following would be considered a variable expenditure? a) rent b) internet bill c) flat tire on your car d) grocery bill
d) grocery bill
What is a *crucial* lesson that should have been learned during the recent economic downturn? a) you should only invest in low-risk investments b) investing in stocks is a bad idea c) bad things will happen and that shouldn't influence our investment decisions d) having sufficient emergency funds is critical
d) having sufficient emergency funds is critical
What is a benefit of having a personal income statement? a) helps you see how each of your assets are financed b) shows you the value and growth of your investments c) shows you your current financial condition d) helps you see where you are spending your money
d) helps you see where you are spending your money
Which of the following *must* apply to a person for that person to file as a Head of Household? i. be married ii. have a dependent iii. be unmarried iv. be unemployed a) i and iv b) ii, iii, and iv c) i, ii, and iv d) ii and iii
d) ii and iii
Which of the following is a reason that we care about present value? i. tells us the rate we can earn to reach goals ii. removes estimates of inflation iii. provides value in today's dollars iv. tells us how long a value needs to be invested to reach a goal a) ii. and iv b) i, iii, iv c) i, ii, iii d) ii, and iii
d) ii, and iii
If you are a working adult who is currently taking classes to improve your work skills, you may be able to receive which of the following credits? a) dependent care credit b) earned income credit c) american opportunity credit d) lifetime learning credit
d) lifetime learning credit this is for when you go back to school to *improve work skills*
Which of the following would qualify as a potential itemized deduction? a) FICA taxes b) medical expenses that equate to 7% of AGI c) $80 worth of stolen property d) local income taxes
d) local income taxes for medical expenses to be true it has to be 10% for stolen property it has to be $100
If you are concerned about accidentally writing a check that would result in insufficient funds in your account, you could preemptively enroll in a) stop payments b) safety-deposit boxes c) checking insurance d) overdraft protection
d) overdraft protection
A series of equal dollar payments coming at the end of each, equal time period and continues forever is known as a) fixed annuity b) variable annuity c) annuity due d) perpetuity
d) perpetuity
What is the importance of having some liquidity? a) provides money to spend on spontaneous purchases b) provides very high returns for low levels of risk c) liquidity is not that important d) provides the ability to cover unexpected costs without having to cash-in a long-term investment
d) provides the ability to cover unexpected costs without having to cash-in a long-term investment
Which clause defines what actions a lender can take to claim money from a borrow in the case of default? Example: claim a portion of earned wages a) acceleration clause b) security agreement c) deficiency clause d) recourse clause
d) recourse clause
High Quality life after 60 are _______, _______, and having a ____________ life
health, money and having a meaningful life
Individuals with considerable net worth are listed as what?
high net worth individuals ultra high net worth individuals
Beware of Subprime Mortgages and Predatory Lending: Abusive loans
high-cost loans with little chance of paying off Avoid predatory loans with knowledge.
_______________- dealer offers a trade-in allowance that is higher than the vehicle is worth - Counterbalanced by charging more for new car and/or financing ("no free lunch")
highballing
Private Loans: Rates are usually *(lower/higher)* than federal student loan rates
higher
Liabilities: Long-tem liabilities
home car student loan
List of Assets: Tangible assets
house vehicles furniture jewelry
Ratios help you understand what?
how you are managing financial resources.
On most cards, the grace period is canceled when?
if there is unpaid balance from previous month.
With Open credit, you pay interest and finance charges when?
if you do not pay the bill in full when due
An ___________ tax is a tax imposed on individuals or entities (taxpayers) that varies with respective income or profits (taxable income).
income
A cash flow statement provides data on your what?
income and spending patterns, which will be helpful when preparing a budget
Tax deferred
income on which the payment of taxes is postponed
What kind of Annuity is described: pays based on the value of an external index
indexed annuity
Standard deductions and personal exemptions are increased to reflect what?
inflation
_______________ is the inability to pay debts when they are due; it occurs when a person's liabilities far exceed available assets.
insolvency
Although this form of insolvency doesn't mean that the family will end up in bankruptcy proceedings, it likely shows what?
insufficient financial planning
What clause of the loan contract is described as a loan requirement that a *borrower* purchase *credit life insurance* that will pay off the loan in the event of the borrower's death. (mortgage default insurance)?
insurance agreement clause
When you make only the minimum payment on your credit card, you're giving yourself temporary relief. But you're also committing to paying more in ____________ charges later.
interest
Simple interest loan method
interest = principal x interest rate x time
Specialty Mortgage Loan Options Interest Only Mortgage
interest only payment for initial set period, then pay both interest and principal for remainder of loan.
Consumer Loans: Third Decision: *Variable-Rate* vs. Fixed-Rate Loans
interest rate varies based on the market interest rate.
Financial Goals: ___________-______ (1 to 10 years). E.g., Save for older child's college; Save for home improvement; Save for a down payment; Pay off major debt; Finance large items (weddings); Purchase a vacation home
intermediate-term
present value of a future sum of money is *(directly/inversely)* related to both the number of years until payment will be received and the discount rate.
inversely
Cash Management Alternatives: Money Market Mutual Funds (MMMF's)
investors receive interest on a pool of investments less an administrative (usually less than 1% of total investment) •Advantages - High interest rates, check writing, limited risk, convenient. •Disadvantages - Administrative fees, minimum initial investment, not insured, minimum checks.
Budget variance
is the difference between the amount budgeted and the actual amount received or spent.
Insolvency
is the inability to pay debts when they are due; it occurs when a person's liabilities far exceed available assets.
Bankruptcy
is the legal status for an individual or company unable to pay off outstanding debt. It is a status that can only be granted by a state or federal court. Generally, personal bankruptcy is considered a last resort for people inundated with loans or bills.
Adjusted gross income
is your gross income — which includes wages, dividends, alimony, capital gains and retirement distributions — minus certain payments you've made during the year, such as student loan interest or contributions to a traditional individual retirement account.
You could ruin your financial plan if you don't manage _________ funds effectively.
liquid
__________ assets are a necessity of personal financial management
liquid
Short term loan or long term loan? Purchasing a home
long term
Short term loan or long term loan? Retirement savings
long term
Short term loan or long term loan? Starting a business
long term
Short term loan or long term loan? college fund
long term
Short term loan or long term loan? paying off mortgage
long term
Which financial goals are more than 10 years?
long term
Can I meet my debt obligations? Long-term debt coverage ratio- Formula
long-term debt coverage ratio = total income available for living expenses / total long-term debt payments
________________- dealer quotes a low price that increases when add-on costs are included
lowballing
*(Higher/Lower)* tax rate on both the long-term capital gains and on dividends
lower
The head of household status can lead to a *(lower/higher)* taxable income and greater potential refund than the single filing status, but to qualify, you must meet certain criteria.
lower
What does the personal balance sheet and income expense statement (AKA Personal financial statements) *maintain*?
maintain information on financial activities
Paying your income taxes: W-4 form (usually filled out with new employer)— gives you what information?
marital status, number of exemptions claimed
If you are married and living with your spouse, you must file as
married filing jointly or married filing separately.
SMART financial goals: M
measurable
What does the personal balance sheet and income expense statement (AKA Personal financial statements) *measure*?
measure progress toward financial goals
_______________ ____________ - are typically calculated as a percentage of your outstanding balance plus any fees that have been added to your balance.
minimum payments
A ___________ __________ ________ is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper.
money market fund
A dollar received today is. worth *( less / more)* than a dollar received in the future
more
Interest earned on interest *(less/more)* frequently grows money faster
more
If liabilities are > assets =
negative net worth insolvent
Is there a grace period with cash advances?
no
MMMF is it insured?
no, but its diversified
Chapter 7: Straight Bankruptcy: Trustee collects, sells all *(exempt/nonexempt)* property
nonexempt
What does present value strip away?
Strip away inflation to see what future cash flows are worth today.
SMART Financial Goal Example: Saving for a down payment on a new car T
T = By saving $200 a month, I will save $5,000 in 25 months, or 2 years and 1 month.
Consumer Loans: Second Decision: Secured vs. *Unsecured* Loans
not guaranteed by an asset or collateral
Annual Fee: Many don't charge the fee if the card is used at least ________ a year.
once
________ _________ (revolving credit) is a line of credit extended before the purchase.
open credit Examples include credit cards, home equity loans, personal lines of credit and overdraft protection on checking accounts.
An ________-______ _________ is a type of rental agreement that obliges the lessee (the person making periodic lease payments) to make a balloon payment at the end of the lease agreement amounting to the difference between the residual and fair market value of the asset.
open-end lease
Liabilities: Other loans
other installment loans bank loans insurance policy loans
List of Assets: Investments
ownership
Pay yourself first
paying yourself before you begin paying your monthly living expenses and making discretionary purchases.
Effective saving is what?
paying yourself first
Specialty Mortgage Loan Options Graduated Payment Mortgage
payments set in advance, rising for 5-10 years, then level off.
Cash Management Alternatives: Certificates of Deposit (CD)
pays a fixed rate of interest while funds are on deposit for a period of time (30 days to years). •Advantages - Safe, fixed interest rate, convenient. •Disadvantages - Early withdrawal penalty, fixed interest rate, minimum deposit required.
Controlling Your Use of Debt: Debt Limit Ratio
percentage of take-home pay committed to non-mortgage debt.
Steps in Calculating your Taxes: 3. Subtracting Deductions
Take greater deduction between standard and itemized deduction •Itemize deductions—list of deductible expenses: medical expenses, tax expenses, mortgage interest payments, etc. •Standard deduction—government's best estimate of what the average person would deduct if itemizing
________-________ _____ also called net pay, is a person's earnings after deductions for taxes and other items. take-home pay is also called disposable income, the amount a person or household has available to spend.
Take-home pay
_______ _______________ -taxes affect the real rate of return on investments.
Tax Considerations
What is described below: Tax avoidance or tax evasion Minimizing of Taxes Example: using legitimate tax deductions, setting up tax deductions, setting up tax deferral plans, and taking tax credits
Tax avoidance
Steps in Calculating your Taxes: 6. Subtract Your Credits and Determine Your Taxes Due
Tax credits reduce actual taxes paid i.e., amount subtracted directly from the amount of taxes owed. •Child credit •Education credits •Child and dependent care credit •Earned income credit •Health care premium credit Adoption credit
Progressive or graduate tax
Tax rates increase for higher incomes.
____________ __________ is the amount of income used to calculate how much tax an individual or a company owes to the government in a given tax year.
Taxable income
Steps in Calculating your Taxes: 5. Calculating Your Taxable Income, and From That, Calculating Your Base Income Tax
Taxable income = AGI - deductions - exemptions •Base income tax—intersection of filing status and taxable income in the federal income tax tables
Can I meet my debt obligations? Debt to income ratio- Rule
The 36% Rule states that your DTI should never pass 36%.
A ______________ is an annuity that continues to pay forever.
perpetuity
dependent
person you support financially
_____________ ____________ was a specific amount of money that you could deduct for yourself and for each of your dependents
personal exemption
_______________ _____________ An IRS-allowed reduction in your income before your compute your taxes. You are given one exemption for yourself, one for your spouse, and one for each dependent.
personal exemption
____________ ___________ _____________ let you know where you stand
personal financial statements
A cash flow statement, also called a what?
personal income and expenditure statement
If liabilities are < assets =
positive net worth
To compare the relative value of annuities, you need to know the __________ _________ of each.
present value
____________ ________ —the current value in today's dollars of a future sum of money
present value
Cost of Installment Loans: Payment levels are set so loan expires at a ___________ ________.
preset date
__________ ________ the interest rate that banks charge to their most creditworthy, or "prime" customers
prime rate
____________ is the face value of the deposit or debt instrument.
principal
What does the personal balance sheet and income expense statement (AKA Personal financial statements) *provide*?
provide information for preparing tax forms or applying for credit
Compounding may be
quarterly, monthly, daily, or even a continuous basis.
What clause of the loan contract is described as a clause in a loan contract defining what actions a lender can take to claim money from a borrower in the case of default.
recourse clause
Cost of Installment Loans: Repayment of both interest and principal occurs at *(irregular/regular)* intervals
regular
Annual compounding
reinvesting interest at end of each year for more than 1 year
Type of Bankruptcy chapter 13
reorganization
Consumer Loans First Decision: Single payment vs *installment*
repayment of both principal and interest at various intervals. - Loan amortization—with each payment, the interest portion covered decreases and principal portion covered increases
Credit bureaus compile credit __________ and assign a credit __________.
report score
What does the personal balance sheet and income expense statement (AKA Personal financial statements) *report*?
report current financial position in relation to value of items owned and amounts owed
Getting the Best Rate on your consumer loans: Most Expensive sources
retail stores finance companies small loan companies
Some deposits are federally insured
safety
A ________ tax is a tax paid to a governing body for the sales of certain goods and services
sales
Qualified dividends from corporations are taxed at *(different/same)* low rates as long-term capital gains.
same
Special Types of Consumer Loans: Automobile loans
secured loan specifically for purchasing an automobile - Usually 24, 36, or 48 months - Can extend to 5 or 6 years - Low risk to lender because of collateral
Special Types of Consumer Loans: Home Equity loan or second mortgage
secured loan using equity in home as collateral.
Financial Goals: _______-______ (within 1 year). E.g., Accumulate emergency funds equal to 3 months' living expenses; Pay off bills and credit cards; Purchase insurance; Purchase a major item; Finance a vacation
short term
Short term loan or long term loan? Household appliances
short term
Short term loan or long term loan? Insurance payment
short term
Short term loan or long term loan? Loan/credit card payment
short term
Short term loan or long term loan? Rent or mortgage payment
short term
Short term loan or long term loan? Travel
short term
Short term loan or long term loan? Wedding
short term
Which financial goals are within 1 year?
short term
Cash Management Alternatives: U.S. Treasury bills, or T-bills
short-term debt issued by the federal government with maturities from 3-12 months. •Advantages - Risk-free, exempt from state and local taxes, federal tax vary with current rates. •Disadvantages - Low rate of return
Money grows faster as the compounding period becomes *(shorter/longer)*
shorter
Cost of Installment Loans: Use either ___________ interest or ______-____ method to determine what payment will be.
simple add-on
However, if you were separated from your spouse on December 31, 2018 by a separate maintenance decree, you may choose to file as
single.
Specialty Mortgage Loan Options Balloon Payment Mortgage Loan
small monthly payments for 5-7 years, then entire loan due.
Paying your income taxes: You have *(a lot/some)* control over how much is deducted for taxes from your wages.
some
SMART financial goals: S
specific
Consumer Loans: Third Decision: Variable-Rate vs. *Fixed-Rate* Loans
stays fixed for entire duration of the loan, not tied to market interest rates.
Negotiate a cost somewhere in range in between what?
sticker price and invoice price
Long-term capital gains tax on profits from the sale of ___________ and ____________, not gains from sale of collectibles.
stocks and bonds
What is described below: Tax avoidance or tax evasion Not paying taxes Example: not reporting income, reporting more expenses than you can, not paying taxes owed
tax evasion
Capital gains tax
tax you pay on your capital gains
After tax return formula
taxable return x (1-marginal tax rate) + nontaxable return.
___________ _________ generally refers to an introductory rate charged on a credit product
teaser rates
Using an Income Statement to Trace Your Money: Financial motion picture
tells you where your money has come from and where it has gone over some period of time.
Marginal Versus Average Taxes: Average tax rate
the average amount of your total income taken away in taxes
The amount of your standard deduction depends on what?
the filing status you qualify for Married couples filing jointly can claim an amount that's twice as large, $24,000, and taxpayers filing as "head of household" (single individuals with dependents) can claim a standard deduction of $18,000.
Smart Buying in Action: Housing Settlement or closing statement
the real estate broker should finish to the buyer for review at least 1 business day before closing.
Smart Buying in Action: Housing Closing
the time at which the title is transferred and the seller is paid in full for the house. The buyer takes possession of the house.
Present-Value Interest factor
the value [1/(1+i)^n] used as a multiplier to calculate an amount present value
For a deceased individual, net worth can be used for the what?
the value of their estate when in probate
If you plan to invest for 11 years, which one is better? Guaranteed annual return of 4%; 10% return for 10 years, with only year loss of 41%; 10% return for 9 years, with only two losses of 23% each year; 10% return for 7 years, with only four losses of 13% each year;
they all give you the same result
SMART financial goals: T
timely
Net worth=
total assets - total liabilities
Formula for personal income statement (cash flow statement)
total cash received during the period - cash outflows during the time period = cash surplus or deficit
Without liquid funds, you might have to compromise your long-term investments to cover _______________ expenses.
unexpected
Liabilities: List only the _________ balances
unpaid
_____________ ______ is generally a portion of the total fee that the buyer must pay. For example, one may commission an artist to paint a portrait and pay a 20% upfront fee, paying the remainder when the portrait is finished. It is also called an advance fee.
upfront fee
_____________ _________- to owe more on a vehicle during the first few years than it is actually worth (also known as "negative equity")
upside down
Liabilities: Current bills
utility bills insurance premiums credit card balances
What kind of Annuity is described: You actually own investments inside the account
variable annuity
Private Loans: Interest rates are the same or vary?
vary
A _________-________ __________ is an auto lease which allows the lessee to return the car at the end of the lease period without any financial obligations based on the car's residual value.
walk-away lease
Fair market value
what an asset could be sold for, rather than what it cost or what it will be worth sometime in the future.
Capital loss
what you lose when you sell a capital asset for a loss
Capital gain
what you make if you sell a capital asset for a profit
Expenditures
where your money goes
Credit information *impacts* what?
whether you get a loan
Chapter 7: Straight Bankruptcy: Means test determine what?
whether your income is low enough for you to file for Chapter 7 bankruptcy
The key difference between estate and inheritance taxes lies in what?
who is responsible for paying it.
Current liabilities must be paid off when?
within the next year
Do unpaid balances plus interest carry over to the next month?
yes
Chapter 13 allows reduce thing principal loan balance on secured debts?
yes (if requirements are satisfied)
Chapter 7 allows reduce thing principal loan balance on secured debts?
yes, but on tangible personal property only
A good credit score doesn't just mean you'll get a loan, it also means what?
you'll pay less for it through lower rates.
Good level of net worth depends on what?
your goals and your place in the financial life cycle
Preparing a Cash Budget
• *Estimate* anticipated after-tax income or take home pay from most recent annual personal income statement. • *Estimate* living fixed and variable expenses. • *Estimate* income available for saving and investing: subtract anticipated living expenditures from anticipated take-home pay.
Renting Versus Buying Buying
• Allows you to build up equity over time • Possibility of property's appreciation • Allows for a good deal of personal freedom to remodel, landscape, and redecorate to suit your taste • Significant tax advantages, including deduction of interest and property taxes • No chance of rent rising over time • Your home is a potential source of cash in the form of home equity loans
Choosing a Professional Planner
• Check accreditations: - Personal financial specialist (PFS) - Certified financial planner (CFP) - Chartered financial consultants (ChFC) • Check experience • Referrals
Using an Income Statement to Trace Your Money
• Financial motion picture—tells you where your money has come from and where it has gone over some period of time. • Income and expenditure, net income statement • Cash basis—based on actual cash flows • Income - expenses
Liabilities: What you owe
• Liability is debt that must be repaid in the future. • Current liabilities must be paid off within the next year. • Long-term liabilities come due beyond a year. • List only the unpaid balances. • Current bills—utility bills, insurance premiums, credit card balances. • Long-term liabilities—home, car, or student loans. • Other loans—other installment loans, bank loans, insurance policy loans.
What Planners Do
• More unique financial situations need professional help. • They give advice. • You still need to know the basics and still bear ultimate responsibility.
Implementing the Cash Budget
• Put it in place for a month. • Compare actual expenditures in each category with budget amounts at the end of the month. • Evaluate whether you change budget estimates or exert self-control. • Stick your desired budget for a month with an envelope system.
Fixing Mistakes—Theirs, Not Yours
•Human and computer errors. •Avoid human errors such as those involved with deposits at ATMs. •Report immediately. Call or write the bank. •By law, write within 60 days of receiving your statement.
How to Prevent Identity Theft
•In a safe place at home, keep a detailed list of all your credit and debit cards and other accounts, including the 24-hour customer service phone number for each. This information will help you cancel your accounts quickly and minimize the danger to your finances. •Don't carry documents that include your Social Security number or any PINs, passwords, or access codes for bank or credit cards. •Keep your birth certificate, passport, and Social Security card in a fireproof strongbox in your home or in a safety-deposit box. If you lose your driver's license, these will be your only official forms of identification. •Check your credit reports with the three national credit bureaus—TransUnion, Experian, and Equifax—for suspicious activity at least once a year. Federal law entitles you to a free annual report; to get it, call (877) 322-8228.
Tax Strategies to Lower Your Taxes: Receive Tax-Exempt Income
•Interest from state and local government (municipal) debt such as bonds is tax-exempt •The higher your marginal tax bracket, the more beneficial tax-free income is. •Calculate the equivalent taxable yield to determine which is the better investment
10 Principles of Personal Finance Principle 3: The Time Value of Money
•Money received today is worth more than money received in the future. •Understand how savings and investments grow over time •Understand compound interest. •Understand spending now and paying later
Rule of 72 How long will it take to double your money?
•Numbers of years for a given sum to double by dividing the investment's annual growth or interest rate into 72.
Advantages of Online and Mobile Banking
•Personal financial management support; •Convenience; •Efficiency; •Effectiveness;
Developing a Cash budget
•Plan for controlling cash inflows and outflows •Allocate dollar amounts for different spending categories
10 Principles of Personal Finance Principle 5: Stuff Happens, or the Importance of Liquidity
•Plan for unexpected events •Have money or liquid funds available •Liquid funds should cover 3 to 6 months of living expenses
Automated Teller Machines
•Provide cash instantly and accessed through a credit or debit card. •Convenient but can be costly. •Banks charge access fee. Using ATM not owned by your bank can cost $5 per transaction. •Attract crime.
Private Loans
•Provides you with funds after you have exhausted all federal financial aid •Offered by commercial banks and credit unions •Interest rate varies •Rates are usually higher than federal student loan rates •Generally do not offer deferment or forbearance options
What To Do If Your Identity Has Been Stolen
•Put fraud alert on credit file. •Close accounts that have been tampered with or you didn't open. •File police report. •File report with the FTC. consumer.gov
Paying your income taxes: Withholding from wages
•Quarterly estimated taxes sent to the IRS •Payments with tax return •Withholdings from stock dividends, retirement funds, and prize winnings
Being Audited
•Randomly selected—higher odds if you have been audited in the past •Asked to send additional information in mail or IRS face-to-face interview. •Reexamine areas in question, get all data and records, appeal audit outcome if necessary
Type of Taxes: Taxes on Property
•Real estate property tax •Personal property tax (applied to items such as vehicles, trailers, motorcycles, etc.)
How Do You Know if You're a Victim of Identity Theft?
•Receive a credit card you didn't apply for. •Denied credit or offered less favorable terms. •Receive calls or letters from debt collectors. •Fail to receive bills or other mail.
Controlling and Managing Your Credit Cards and Open Credit
•Reducing your balance •Protecting against fraud •Trouble signs in credit card spending
Chapter 13: The Wage Earner Plan: Must have
•Regular income •Secured debts under $1,184,200 (2017) •Unsecured debts under $394,725 (2017)
10 Principles of Personal Finance Principle 8: Risk and Return Go Hand in Hand
•Saving and investing grows money. •Investors demand a minimum return above anticipated inflation. •Investors demand higher return for added risk. •Diversification by spreading money in several investments reduces risk
Filing Status
•Single •Married Filing Jointly and Surviving Spouses •Married Filing Separately •Head of Household
What determines your income?
•Skills •Education •The wealthy are married
Disadvantages of Online and Mobile Banking
•Start-up time; •Adapting to online and mobile banking; •Feeling comfortable; •Customer service;
10 Principles of Personal Finance Principle 10: Just Do It!
•Taking the first step towards your goals is difficult. •The following steps become easier. •First step is to pay yourself first—save then spend. •Saving early can make a big difference.
Tax Strategies to Lower Your Taxes: Defer Taxes to the Future
•Tax-deferred retirement plans allow you to defer tax payments to the future. •Roth IRAs allow taxes to be paid on contributions and never again. •Capital gains taxes are postponed until you sell the asset.
Effective marginal tax rate
•The rate you pay when all income taxes are combined (federal, state, city, Social Security taxes, etc.). •Is greater than the marginal tax rate on federal income taxes.
10 Principles of Personal Finance Principle 1: The Best Protection is Knowledge
•Understand the basics of personal finance. •Take responsibility for your lifetime financial plan. •Seek professional advice wisely.
If you're buying a house:
•When you're deciding what you can afford, remember, those numbers are meant as a ceiling, not a floor. •If at all possible, try to avoid the need for private mortgage insurance by putting down at least 20 percent of a home's cost. •When you're looking at what to borrow, borrow what you need, not what you can. Many times lenders will offer you the maximum you can borrow—just go for what you need. •Understand how your real estate agent is being compensated. Generally, it is through a commission, which means the more you pay, the more they make.
Bridge Loan pros
•You can make an offer on the house you want without a sale contingency. •Payments may be interest-only or deferred until you sell.
Checklist 4.1 You Might Be Able to Use Form 1040A If ...
•You don't itemize deductions. •Your taxable income is below $100,000. •You have capital gain distributions but no other capital gains or losses. •Your only tax credits are for child, education, earned income, child and dependent care expenses, elderly, and retirement savings contributions. •Your only deductions are for IRA contributions or student loan interest. •Your income was limited to wages, salaries, tips, and the like; interest; dividends; capital gain distributions; IRA distributions; pensions and annuities; unemployment compensation; and Social Security benefits.
Bridge loan cons
•You'll pay high interest rates and APR. •You may have to pay for an appraisal along with closing costs and fees. •You may own two houses — with two mortgage payments — for a bit. •You're limited to 80% LTV, which requires more than 20% equity to yield enough money for the house you want.
Checklist 4.1 You Might Be Able to Use Form 1040EZ If ...
•Your filing status is either single or married filing jointly. •You don't itemize deductions. •Your taxable income is below $100,000. •You are under age 65. •Your taxable interest income is less than $1,500. •You have no dependents. •You aren't making a deductible contribution to an IRA or a deduction for student loan interest. •You don't have alimony, taxable pension benefits, or Social Security benefits to report.
Parts of Personal Financial Planning
•money; •management; •personal/family; •economic satisfaction; •future; •plan.
Cash Management
The routine, day-to-day administration of cash and near-cash resources, also known as liquid assets, by an individual or family.
Rule of three
The rule of three in business and economics is a rule of thumb suggesting that there are always three major competitors in any free market within any one industry
Federal Deposit Insurance Corporation How much deposit insurance coverage do I qualify for?
The standard deposit insurance amount is $250,000 per depositor, per FDIC-insured bank, per ownership category.
Which Cash Management Alternative is described below? Series EE and I bonds are safe, low risk savings products issued by the Treasury with low denominations.
U.S. Savings Bonds
Which Cash Management Alternative is described below? short-term debt issued by the federal government with maturities from 3-12 months.
U.S. Treasury bills, or T-bills
How long does it take to receive a discharge for Chapter 13?
Upon Completion of All plan payments (usually 3-5 years)
___________ ______________ insurance is designed to provide you with protection in the event that your comprehensive motor vehicle insurer makes a total loss payment in respect of your vehicle and the event causing the loss occurred during the period of insurance. the replacement vehicle value less the total loss payment.
Value Protect
______________ APR - loan has an interest rate that may change at any time.
Variable
The ____-____ is an IRS form you complete to let your employer know how much money to withhold from your paycheck for federal taxes.
W-4
Paying your income taxes: Withholdings are determined by income level and information from what?
W-4 form
Present value
What's it worth in today's dollars?
Common Predatory Mortgage Lending Practices: Yield-Spread Premiums or Kickbacks to Brokers
With many predatory mortgages, the mortgage broker gets a kickback from the lender for delivering loans with excessively high interest rates.
Common Predatory Mortgage Lending Practices: Loan Flipping
With predatory mortgage lending, lenders may "flip" a loan by unnecessarily refinancing it with no benefit to the borrower.
Credit information *affects* what?
your interest rate
How Financial Planners are Paid
• Fee-only planners • Fee-and-commission planners • Fee offset planners • Commission-based planners
Renting Versus Buying Renting
• Mobility; can relocate without incurring real estate selling costs • No down payment required • May involve a lower monthly cash flow—you pay only rent; a homeowner pays the mortgage, taxes, insurance, and upkeep • Avoids the risk of falling housing prices • Many times extensive amenities such as swimming pools, tennis courts, and health clubs are provided • No home repair and maintenance • No groundskeeping • No property taxes • You are immune to losses due to housing price depreciation
Managing Liquid Assets: Common Mistakes
• Overspending • Using savings or borrowing to pay for current expenses • Failing to put unneeded funds in an interest bearing or investment account
Stages of Wealth Management: Stage 1- The Early Years (Wealth Accumulation)
• Prior to age 54 • Develop a regular savings pattern: - How much can I save? - Is that enough? - Where should I invest those savings dollars? • Cost of raising children *Saving rule: 10% of your gross income
Stages of Wealth Management: Stage 2- Approaching Retirement (The Golden Years)
•. Transition years between ages 55-64 •. Depends on preparation for retirement •. Reassess financial goals and decisions—retirement, insurance protection, and estate planning
Amended return
•Amended Return—Form 1040X—file within 3 years of original tax date •Amend the state and local forms as well
10 Principles of Personal Finance Principle 9: Mind Games, Your Financial Personality, and Your Money
•Behavioral biases lead to big financial mistakes. •Mental accounting impacts financial decisions. •"Sunk cost effect" pours good money after bad money because of bias.
Tax Strategies to Lower Your Taxes: Shift Income to Family Members in Lower Tax Brackets
•Can be complex and involve lawyers and establishment of trusts. •Simpler way is to make gifts—recipients do not pay taxes on gifts either. •Allowed to give $14,000 tax free per year to as many recipients as donor wishes. Gift some of your estate while still alive.
Be successful in your career
•Do your best work. •Project the right image. •Understand and work within the power structure. •Gain visibility. •Take new assignments. •Be loyal and supportive of your boss. •Acquire new skills and keep up with technology. •Develop a strong network. •Be ethical.
ATM security
•Keep Your Card Secure •Treat your ATM card like cash. •Always keep your card in a safe place. •Keep your PIN a secret. •Memorize your code. Never write it on your card or store it with the card. Never tell your code to anyone. And never let someone else enter your code for you. •Report a lost or stolen card at once. •Check your receipts against your monthly statement to guard against ATM fraud.
10 Principles of Personal Finance Principle 4: Taxes Affect Personal Finance Decisions
•Know the effect of taxes on the rate of return of investments. •Compare investment alternatives on an after-tax basis. •Understand tax laws.
Look to Capital Gains and Dividend Income
•Long-term capital gains rate is lower than ordinary income tax rate •No tax for those in the 10 and 15 percent tax brackets •15 percent tax for those in the 25 to 35 percent tax brackets •20 percent tax for those in the 36.9 percent tax bracket
Importance of the Interest Rate: Higher interest rate =
"Daily double"
Open-end leases are also called what?
"finance leases"
A closed-end lease might also be called what?
"true lease," "walkaway lease," or "net lease."
Chapter 13: The Wage Earner Plan: Must have: Secured debts under $_______________
$1,184,200
Tax Credit vs. Tax Deduction
$100 Tax Credit •Reduces Your Taxes by $100 $100 Tax Deduction •Amount Your Taxes are Reduced is Based on Your Tax Bracket •Example: $100 x .25 = $25 of tax savings
If you're selling your house and decide to work with a realtor:
•Look for a realtor that works full-time and has at least 3 years' experience. Ask how many transactions the realtor made during the previous year and the year before that—a good realtor sells at least 30 homes per year. •Make sure that there is an "out clause" in the contract, which allows you to terminate the contact whenever you want—you don't want to lock in a bad agent for 6 months. •Pick a realtor who works and lives in your area.
If Your Credit Card Application is Rejected
- Apply for a card with another financial institution. - Find out why you have been rejected. °Set up an appointment with credit card manager. °Address the problem.
Financial Freedom Pyramid 4. Plenty of Savings (top)- keys to success
- Automating your financial systems to maintain financial freedom - *Automation*
Calculating Balanced Owed: Different ways
- Average daily balanced method - Previous balance method - Adjusted balance method
Additional Fees
- Cash Advance Fee - Late Fee - Over-the-Limit Fee - Penalty Rate
Establishing and Using a Checking Account
- Choosing a financial institution - Balancing your checking account
Managing Liquid Assets
•Making choices from among alternatives, maintaining and managing the results of those choices. •Low risk and low return but the more cash your have, the more you're tempted to spend.
Tax Strategies to Lower Your Taxes
•Maximize deductions. •Look to capital gains and dividend income. •Shift income to family member in lower tax brackets. •Receive tax-exempt income. •Defer taxes to the future.
Debt Resolution Rule
- Control debt obligation, excluding borrowing for education and home financing, by forcing you to repay all outstanding debt obligations *every 4 years.* - Logic is that consumer credit should be *short-term*.
Pros of Credit Cards
- Convenience - Used as identification Phone and internet purchases - Temporary funds - Use product before paying for it - Bill consolidation - Pay less today and earn interest elsewhere - Extended warranties, travel insurance, and rewards.
When choosing a financial institution, consider:
- Cost - Convenience - Consideration - Safety
Disadvantages of Asset Management Account
- Costly - minimum initial investment - not insured
Sources of Quick Cash: Borrow
- Credit card advance - Personal loan
Until price of the new car is settled:
- Don't mention any trade-in - Don't mention dealer financing
Choosing a Major and a Career
- Effective self-assessment - Interests, skills, values, personal traits - Desired lifestyle - Research career alternatives and match with your skills and interests - Research potential earnings
The 3 C's of choosing a financial institution: Cost
- Fees - Rates - Minimum balances - Per-check charges
Determining What You Can Afford What is the maximum amount that a bank will lend me?
- Financial history - Ability to pay - Appraised home value
Negotiation may lower price or add features
- Have ALL the necessary information - Deal with a person who has the authority to give you a lower price or additional features
Advantages of Money Market Mutual Funds (MMMF's)
- High interest rates - check writing - limited risk - convenient.
Tax Strategies to Lower Your Taxes: Maximize Deductions—Reduce Taxable Income to Its Minimum
•Use tax-deferred retirement programs. •Use your home as a tax shelter. •Shift and bunch deductions
Advantages of Money Market Deposit Account (MMDA)
- Safe - Earns interest - Check writing privileges
Sources of Quick Cash: Liquidate savings examples
- Savings account - CDs - Mutual fund
Do I have enough liquidity to meet emergencies? Month's living expenses covered ratio- You should aim for
- Should aim for 3 to 6 months of liquid assets - Less if enough credit and insurance
Leasing a Motor Vehicle Advantages
- Small cash outflow (security deposit vs. down payment on loans) - Lower monthly payments than buying (renting a car) - Lease provides detailed records - helps if you use your car for business purposes - Able to obtain a more expensive car more often
Personal Financial Planning Process 4. Implement your plan
- Stick to it - use your financial plan as a road map to achieve goals - Keep goals in mind and work towards them
Expenditures: Where Your Money Goes Cash surplus (or deficit)
- Subtracting total expenses from total income gives you the cash surplus (or deficit) for the period. - An excess amount of income over expenses that results in increased net worth. - An excess amount of expenses over income, resulting in insufficient funds as well as in decreased net worth.
Consumer Credit Rights
- Take credit complaints directly to the creditor. - Federal laws protect consumers with complaints about credit
Consumer buying activities: Practical purchasing strategies
- Timing purchases °Price variations by time of year (summer clothing, holiday items...) - Store selection °Location, price, selection, services - Brand Comparison °Private-label or store brands (sold by one chain) vs. national brands - Label Information °Open dating (shelf life of products) - Price Comparison
Closing Costs Title Insurance
- Title company defines boundaries of property - Title search to insure property is free of claims - Protects against future defects in title
Closing Costs
- Title insurance and search fee - Attorney's and appraisers fees - Property survey - Pest inspection - Recording fees - Transfer taxes - Credit report - Lender's origination fee - Escrow account for tax and insurance reserve - Pre-paid interest - Real estate broker's commission - Title Insurance - Deed - Escrow Account
Evaluate your financial health by using the balance sheet and income statement:
- To set financial goals - To achieve financial goals - Develop a plan of action and cash budget using the income statement - Monitor your progress using the balance sheet and income statement
Disadvantages of Credit Cards
- Too easy to spend money - Too easy to lose track of spending - High interest rate - Obligating future income - Heavy budgetary problems with uncontrolled spending
Drawbacks of Chapter 7
- Trustee can sell nonexempt property. - does not provide a way to catch up on missed payments to avoid foreclosure or repossession
Determining What You Can Afford
- What is the maximum amount that a bank will lend me? - Should I borrow up to this maximum? - How big a down payment can I afford?
What the CARD Act Means for you
- Your credit card company has to tell you when they plan to increase your rate or other fees. (45 days) - Your credit card company has to tell you how long it will take to pay off your balance. - No interest rate increases for the first year. - Increased rates apply only to new charges. - Restrictions on over-the-limit transactions. - Caps on high-fee cards. - Protections for underage consumers. - Standard payment dates and times. - Payments directed to highest interest balances first. - Your credit card company cannot charge you a fee of more than $25 in most cases. - No inactivity fees.
Financial Freedom Pyramid 3. Predictable savings (2nd from top)- Keys to success
- building wealth and securing your financial freedom - *Growth*
Choosing a Source of Open Credit: Single Purpose Cards
- can be used only at a specific company. - Companies issue their own cards to avoid merchant's discount fees. - Terms vary, some offer revolving credit. - Typically, no annual fee.
Choosing a Source of Open Credit: Traditional Charge Account
- can be used to make purchases or get services only at the issuing company such as utility companies and doctors who provide services and bill later. - Convenient for both issuer and payee. - Pay monthly bill in full or pay interest/fee.
Other types of checks
- cashier's check - certified check - money order - traveler's checks
Advantages of Variable rates
- cheaper than fixed rate loans - flexibility in repayment - may work well for the long term
Financial Freedom Pyramid 2. Unpredictable Savings (2nd from bottom)- Keys to success
- control net worth ($10k) - taking control of your money and your future - *manage*
Do I have enough liquidity to meet emergencies?
- current ratio - month's living expense covered ratio
Can I meet my debt obligations?
- debt ratio - long-term debt coverage ratio - debt to income ratio
Financial Freedom Pyramid 1. No Savings (base)- keys to success
- deciding it's time for a change and taking action - *action*
Federal Income Tax Structure
- deductions - progressive or graduate tax - tax brackets
Financial Freedom Pyramid 4. Plenty of Savings (top)- symptoms
- financially free - living a life you love - no longer dependent on 9-5 - *Savings- Flood*
Advantages of Fixed Rate loans
- fixed monthly installments - protection from interest rate fluctuations - better cash flow management
Financial Freedom Pyramid 2. Unpredictable Savings (2nd from bottom)- symptoms
- have some extra money & income - struggling to budget - not financially prepared for disaster - *Savings: trickle*
Sources of Quick Cash
- liquidate savings - borrow
Benefits of Home Equity Loans
- low rates - Approval - large amounts - safety for lenders - potential tax benefit
Financial Freedom Pyramid 3. Predictable savings (2nd from top)- Symptoms
- money under control - not enough savings - not investing enough to reach financial freedom - *Savings: Flow*
Example of consumer loans
- mortgages - credit cards - auto loans - student loans - home equity loans - personal loans
Beware of Subprime Mortgages and Predatory Lending: Subprime mortgage
- mortgages taken out by borrowers with low credit scores. - Predatory lenders take advantage of these borrowers.
Financial Freedom Pyramid 1. No Savings (base)- symptoms
- no savings - struggling with net worth - buried in debt, living paycheck to paycheck - *Savings: drought*
10 Principles of Personal Finance
1) The Best Protection Is Knowledge 2) Nothing Happens Without a Plan 3) The Time Value of Money 4) Taxes Affect Personal Finance Decisions 5) Stuff Happens, or the Importance of Liquidity 6) Waste Not, Want Not—Smart Spending Matters 7) Protect Yourself Against Major Catastrophes 8) Risk and Return Go Hand in Hand 9) Mind Games, Your Financial Personality, and Your Money 10) Just Do It!
Individuals and families can increase their net worth by:
1) increasing their savings; 2) reducing spending; 3) increasing the value of investments and other possessions; and 4) reducing amounts owed.
Personal Balance sheet is also called what?
1) net worth statement 2) statement of financial position
Payday Loans By the Numbers: Median number of days borrowers are indebted annually
199 days
Typically a grace period is how many days from date of bill?
21-25
How long does it take to receive a discharge for Chapter 7?
3-4 months typically
Payday Loans By the Numbers: Annual percentage rate (APR) yields on typical $15 per $100, 14-day payday loans
391%
A month's living expenses covered ratio of 4 indicates that you can pay for ___ months' worth of living expenditures.
4
FICO score Very Poor Range
500-579
FICO Score Poor range
580-619
Special Types of Consumer Loans: Payday Loans
A dangerous kind of single-payment loan
monetary assets
A monetary asset is basically a liquid asset-one that either is cash or can easily be turned into cash with little or no loss in value.
_________________ _________ ______________ - are also known for charging a low initial rate that helps entice borrowers and increase the marketability of ARMs over traditional mortgages.
Adjustable Rate mortgages (ARMs)
Calculating Balanced Owed: Which one is described below? Interest payments are charged against the balance at the end of the previous billing period less any payments and returns made. Variations—include new purchases or exclude
Adjusted balance method
___________ ____________ is the difference between the amount budgeted and the actual amount received or spent.
Budget variance
Eligibility restrictions for Chapter 13?
Cannot have more than $394,725 of Unsecured Debt or $1,184,200 of Secured Debt
Can I meet my debt obligations? Long-term debt coverage ratio
Defined as total income available for living expenses divided by total long-term debt payments.
Must you file a tax return?
Depends on income, filing status, age, whether you can be claimed as dependent
Cash Management Alternatives: NOW (negotiable order of withdrawal) accounts
Disadvantages: minimum balance required, monthly fee, opportunity cost, interest less than alternatives
What is a discount rate?
Discount rate is the interest rate used to bring future money back to present.
Eligibility restrictions for Chapter 7?
Disposable income must be low enough to pass the chapter 7 means tests
APY is also named as __________ for credit card issuer
EAR (effective annual rate)
_______________ ________ - a reserve or rainy-day fund with money set aside to be used in an emergency, when an unexpected expense is incurred or when normal income is disrupted.
Emergency fund
Balancing your checking account
Ending balance from Bank Statement + Total deposits and credits since the bank statement date - Total outstanding checks and debts = Adjusted Statement Balance
Common Predatory Mortgage Lending Practices: Prepayment Penalties
Excessive fees that the borrower must pay if the loan is paid off early or refinanced. The purpose of these prepayment penalties is to lock the borrower into the high-interest loan.
Smart Buying in Action: Buying a Vehicle Step 1: Differentiate Want from Need
Features and qualities wanted Features and qualities needed
The 3 C's of choosing a financial institution: Safety-The Final Consideration
Federal deposit insurance
_____________ _____________ means that you get to make life decisions without being overly stressed about the financial impact because you are prepared
Financial Freedom
_____________ ________ are the road maps that show you the way
Financial plans
_____________ _______ allow you analyze raw data in the balance sheet or income statement then compare it to targets.
Financial ratios
Cost and Early Payment of Consumer Loans: Discount method
Interest is subtracted from loan amount received
Warren Buffett on interest
Interest rates are the 'most important' thing in determining stock values
Smart Buying in Action: Housing Step 2: Do Your Homework
Investigate the potential home and all that goes along with it - Neighborhood, community lifestyle, satisfy needs. - How much you can afford to pay?
_____________ __________- dealers cost -Consumer Reports - Edmund's New Car Prices
Invoice Price
Net worth *(is / is not)* money available to use
Is not, but an indication of your financial position on a given date
Formula for Personal Balance Sheet
Items of value (what you owe) - amounts owed = net worth (your worth)
Cash Advance
Many credit cards allow you to get cash advances at ATMs. - Cash advances at ATMs are just like taking out a loan - Higher interest rate charged immediately on cash advances - Up-front fee of 2 to 4 percent of the amount advanced - Pay down the balances for purchases before paying down the higher interest rate cash balance
_____________'______________ ______ the percentage of the sale that the merchant pays to the credit card issuer.
Merchant's discount fee
What Additional Fee is described below? A fee imposed whenever you go over your credit limit.
Over-the-limit fee
_______________ ___________- is any lending practice that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions for a loan that a borrower doesn't need, doesn't want or can't afford.
Predatory Lending
Common Predatory Mortgage Lending Practices: Not Considering the Borrower's Ability to Pay
Predatory mortgage lenders often loan more than the borrower can afford to repay. In fact, predatory mortgage lenders have been known to encourage borrowers to lie about their income to borrow more than they can afford.
Classification of Bank Card Variations- Which is described below? Offers credit limits as high as $100,000 or more in addition to numerous added perks, including emergency medical and legal services, travel services, rebates, and insurance on new purchases.
Premium or Prestige Card
SMART financial goals: R
Realistic
Cash Management Alternatives: U.S. Savings Bonds
Series EE and I bonds are safe, low risk savings products issued by the Treasury with low denominations. •Advantages - Safe, affordable, no taxes, convenient, redeem at any bank, no commissions or fees. •Disadvantages - Low liquidity, long maturity, semi-annual compounding.
Consumer Loans: Fourth Decision: The Loan's Maturity-*Shorter* vs. Longer Term Loans
Shorter term loan means: - larger monthly payments - less interest payments - lower interest rate
Do I have enough liquidity to meet emergencies? Current Ratio- Range
Should be greater than 1.0 Aim for above 2.0
___________ ___________ - is determined by multiplying the daily interest rate by the principle by the number of days that elapse between payment
Simple interest
Open end credit
Use as needed until line of credit max reached
Which type of federal loan does not require the student to pay interest during school? a) direct subsidized b) direct unsubsidized c) direct PLUS d) all of the above
a) direct subsidized
An estate tax is levied on the total value of a deceased person's money and property and is paid out of the decedent's assets before what?
any distribution to beneficiaries
What is the maximum amount of time the debt resolution rule gives you to pay off outstanding debt? a) 5 years b) 4 years c) 3 years d) 6 years
b) 4 years
Which would not be covered by the FDIC? a) NOW accounts b) money market mutual funds c) savings account d) money market deposit accounts
b) money market mutual funds not insured but invested in a diverse portfolio
List of Assets: Monetary assets
cash or liquid assets
What kind of loan is described below? formal contracts detailing *how much* you're borrowing and *when* and *how* you're going to pay it back.
consumer loans
Chapter 13: The Wage Earner Plan: For creditors, what does it provide?
controlled repayment with court supervision
_________________ and __________ ________- generally pays off all the balance
convenience and credit user
________________ _______ variable-rate loan that can be converted to a fixed-rate loan.
convertible loan
The 3 C's of choosing a financial institution
cost, convenience, consideration, and safety
Which of the following would have the lowest liquidity? a) US treasury bill b) money market mutual fund c) certificate of deposit d) US savings bond
d) US savings bond
Higher balances on credit lines = *(higher/lower)* costs
higher
Which financial goals are 1-10 years?
intermediate term
Type of Bankruptcy Chapter 7
liquidation
How Home Equity Loans Work: Lump-sum
take a large sum of chas up front and repay the loan over time with fixed monthly payments
In the investment world, "______ _____________" refers to investments on which applicable taxes (typically income taxes and capital gains taxes) are paid at a future date instead of in the period in which they are incurred.
tax deferred
It's called ______ _____________ growth, and it's what enables your investments to grow over time without losing money to the IRS along the way.
tax deferred
Nondeposit-Type Financial Institutions Mutual Funds
A mutual fund is an investment fund that raises money from investors, pools that money, and invests it in a collection of stocks and/or bonds that is managed by a professional investment manager. Mutual funds earn dividends on stocks and interest on bonds, and they pay out this income to the fund owners in distributions.
Am I Saving as Much as I Think I Am? Savings Ratio
A ratio aimed at determining how much you are saving; defined as income available for savings and investment divided by income available for living expenditures.
Do I have enough liquidity to meet emergencies? Current Ratio
A ratio aimed at determining whether you have adequate liquidity to meet emergencies; defined as monetary assets divided by current liabilities.
Can I meet my debt obligations? Debt Ratio
A ratio aimed at determining whether you have the ability to meet your debt obligations; defined as total debt or liabilities divided by total assets.
What becomes the starting point for calculating your tax bill?
AGI
Steps in Calculating your Taxes: 2. Calculating Adjusted Gross Income (AGI)
AGI = Gross income less allowable adjustments Adjustments include: •Retirement contributions •Student loan interest paid •Moving expenses •Health Savings Account contributions •Unreimbursed educator expenses •IRA Contributions
Online Banking
Access to your accounts to: •check balances, •transfer funds, •paying bills, and •view your financial information Through the internet, a mobile phone, or other electronic device. Allows you to choose an internet-only bank
Cash Management Alternatives: Checking Accounts
Advantages: •Liquid, Safe, Low minimum balance, Convenient •Non-interest bearing—demand deposits
Classification of Bank Card Variations- Which is described below? Issued in conjunction with a specific charity or organization. It carries the sponsoring group's name and/or picture on the credit card itself and sends a portion of the annual fee or a percentage of the purchases back to the sponsoring organization.
Affinity Card
_________-______ __________- the actual return you earn on taxable investments once taxes have been paid. It is equal to taxable return*(1-marginal tax rate) + nontaxable return.
After-tax return
Benefits of Chapter 13
Allows debtors to keep their property and catch up on missed mortgage, car and non dischargeable priority debt payments
Benefits of Chapter 7
Allows debtors to quickly discharge qualifying debts and get a fresh start
What clause of the loan contract is described as a loan requirement stating that if the borrower misses one payment, the entire loan comes due immediately?
An acceleration clause
___________ ________ A fixed annual charge imposed by a credit card.
Annual Fee
____________ _____________ _________ -the true simple interest rate paid over the life of the loan. It's a reasonable approximation of the true cost of borrowing.
Annual Percentage Rate (APR) For example, a credit card may charge 1% a month, and its APR is 1% x 12 months, or 12%.
_____________ ______________ __________ - The amount you earn on an investment in one year, expressed as a percentage.
Annual Percentage Yield (APY)
FV of an annuity
Annual payment (PMT) × Future-Value Interest Factor of an annuity (from table)
Balancing your checking account:
- Keep track of every transaction - Compare monthly statement with register, then reconcile register balance with bank balance.
Smart Buying in Action: Buying a Vehicle Step 4: Maintain Your Purchase
- Keep vehicle in best running condition. - Don't ignore signs of trouble. - Your first line of protection is the warranty. - Know your rights under the Lemon laws.
Smart Buying in Action: Housing Step 1: Differentiate Want From Need
- Know what you want before you look. - Affordability, location, neighborhood, conveniences, schools
Advantages of Checking Accounts
- Liquid - Safe - Low minimum balance - Convenient - Non-interest bearing—demand deposits
Advantages of Saving Accounts
- Liquid - Safe—federally insured ($250,000) - Earns higher interest than a Checking Account
Cash Management Alternatives: Saving Accounts - Advantages
- Liquid - Safe—federally insured ($250,000) - Earns higher interest than a Checking Account
The 3 C's of choosing a financial institution: Convenience
- Location - Access to ATMs - Availability of safety-deposit boxes - Availability of direct deposit services - Availability of overdraft protection
Disadvantages of U.S. Savings Bonds
- Low liquidity - long maturity - semi-annual compounding.
Consumer buying activities: Research-based buying Phase 4: Post-purchase Activities
- Maintenance and operation - After-sale service alternatives - Resolution of purchase concerns
Post Purchase Activities
- Maintenance and ownership costs are associated with some purchases - Correct use yields improved performance and fewer repairs - Investigate, evaluate, and negotiate a variety of servicing options - Complain if not satisfied with a purchase You can expect to spend over $200,000 on car expenses over your lifetime!
Controlling Consumer Debt
- Make sure it fits in with your goals and budget. - Understand how costly consumer debt is. - Borrowing limits future financial flexibility. - Clues you might be in financial trouble.
Importance of Personal Financial Planning
- Manage the unplanned - Cover your assets - Accumulate wealth for special expenses - Invest intelligently - Save for retirement - Minimize your payments to Uncle Sam
Smart Buying in Action: Housing
- Many people equate home ownership with financial success. - Housing costs can take up over 25% of after-tax income. - Home ownership is also an investment—biggest investment you will ever make. - Use smart-buying approach.
Disadvantages of Savings Account
- Minimum holding time - You may be required to keep your money deposited for a minimum time period before you can withdraw it. - Charges/fees - Low interest rate
Cash Management Alternatives: Saving Accounts - Disadvantages
- Minimum holding time - You may be required to keep your money deposited for a minimum time period before you can withdraw it. - Charges/fees - Low interest rate - inconvenient
List of Assets
- Monetary assets - Investments - Retirement plans - Tangible assets (physical assets)
Closing Costs Escrow Account
- Money deposited with lending institution for payment of taxes and insurance
Smart Buying in Action: Housing Recurring Costs
- Monthly mortgage payments - PITI (principle, interest, taxes, insurance)
Advantages of Asset Management Account
- Monthly statements - coordination of money management - checks - high return - convenient.
Smart Buying in Action: Buying a Vehicle Step 3: Make Your Purchase- Keys to getting a good lease
- Negotiate value for car before signing lease - Minimum down payment - Warranty—define "normal wear and tear" - Termination fee - Depreciation factor - Rent or finance charge
Consumer buying activities: Research-based buying Phase 3: Determining Purchase Price and Selection
- Negotiation (cars: start with dealer invoice, NOT sticker price) - Payment alternatives (cash, loan, lease) - Acquisition and installation
Leasing a Motor Vehicle Disadvantages
- No ownership interest - Must meet requirements to qualify (similar to credit) - May have additional costs for extra mileage, "wear and tear", turning car in early, moving, or certain repairs
Smart Buying in Action: Housing Step 4: Maintain Your Purchase
- Pay attention to refinancing options - Consider refinancing if rates fall 2 percent or more - Incur closing costs again
To file as head of household, you must:
- Pay for more than half of the household expenses - Be considered unmarried for the tax year, and - You must have a qualifying child or dependent.
The 3 C's of choosing a financial institution: Consideration
- Personal attention provided - Financial advice that you are comfortable accessing
Bank Card Variations- classifications
- Premium or Prestige Card - Affinity Card - Secured Credit Card
Personal Financial Planning Process 1. Evaluate your financial health
- Prepare a personal balance sheet - determine what you're worth and prepare a personal income statement - Use ratios to monitor your financial health - determine where your money comes from and where it does
Consumer buying activities: Research-based buying Phase 2: Evaluating Alternatives
- Price analysis (range of prices and differences in cost) - Comparison shopping (especially complex and expensive items)
Consumer buying activities: Research-based buying Phase 1: Pre-shopping Activities
- Problem identification: prioritize needs and wants - Information gathering: information is power! WHERE to go? - Follow the RULE OF THREE (all major products and services)
Special Types of Consumer Loans: Home Equity loan or second mortgage Disadvantages
- Puts your home at risk. - Limits *future financing flexibility.*
Credit scoring
- Reduces the lender's uncertainty - Lender able to make credit available to good risk customers at lower interest rates.
Cost of Installment Loans
- Repayment of both interest and principal occurs at regular intervals. - Payment levels are set so loan expires at a preset date. - Use either simple interest or add-on method to determine what payment will be.
Personal Financial Planning Process 5. Review your progress, reevaluate, and revise your plan
- Review progress - Reevaluate and revise for change in your life - Be prepared to formulate a different plan to meet your goals
Advantages of U.S. Treasury bills, or T-bills
- Risk-free - exempt from state and local taxes - federal tax vary with current rates.
Advantages of U.S. Savings Bonds
- Safe - affordable - no taxes - convenient - redeem at any bank - no commissions or fees.
Advantages of Certificates of Deposit (CD)
- Safe - fixed interest rate - convenient.
Smart Buying in Action: Housing Coming up with the down payment
- Save, gifts from family and friends - At least 5% of closing costs have to come from homebuyer - "Gift letter"
Common Predatory Mortgage Lending Practices
- Steering - Excessive Points and Broker Fees - Not considering the borrower's ability to pay - Yield-spread premiums or Kickbacks to brokers - Balloon Loans - Loan Flipping - Prepayment Penalties - Upward only adjustable rate mortgages (ARMs) - Bait and Switch Costs
Keys to Getting the Best Rate
- Strong credit rating - Relatively risk-free to lender °Use variable-rate loan °Short loan term °Collateral - Large down payment
Record Keeping
- Without records difficult to prepare taxes. - You track expenses and know how much and where you are spending. - Easier for someone to step in during an emergency and understand your financial situation.
Chapter 13: The Wage Earner Plan: For the individual, what does it provide?
- relief from harassment of bill collectors - retain possession of assets
Smart Buying in Action: Housing Maintenance and Operating Costs
- repairs, renovations, upgrades, landscaping
Disadvantages of Variable rates
- requires regular monitoring - sharp fluctuation installments - cash flow management risk
Pitfalls of Home Equity Loan
- significant debt - fees
Two documents you create yourself are what?
- the personal balance sheet - the income and expense statement.
"Banks" or Deposit-Type Financial Institutions
-Commercial banks -Savings and Loan Associations (S&Ls or "thrifts") -Savings Banks -Credit Unions
Getting a Job
-Start early - Notify potential employers that you are serious and organized - Prepare and practice for interviews - Research the company - Dress appropriately, be confident, and follow-up
Types of Taxes
-Taxes on Purchases -Taxes on Property -Taxes on Wealth -Taxes on Earnings
Assets: What you own
-assets are your possessions- include even if you owe money on them -always use "fair market value" = what you could get if you could see today (eBay) -all values must be current --> need to account for appreciation and depreciation (cars tend to depreciate)
Two basic types of credit
-closed end credit -open end credit
Disadvantages of fixed rate loans
-expensive than variable rate - high exit fee and pre-payment penalties - banks often have the right to change rates
Financial Institutions Non-Deposit type financial institutions
-mutual fund companies -brokerage firms -insurance companies offer similar services as those offered by banks.
Personal Balance sheet: A statement of your financial position on a given date. It includes the (1) ________ you own, the (2) _______ ___ __________ you have incurred, and your level of wealth, which is referred to as (3) _____ ________.
1) assets 2) debt or liabilities 3) net worth
7 Financial Planning components
1. Cash Flow Planning 2. Risk Management 3. Retirement planning 4. College planning 5. Investing 6. Estate Planning 7. Tax Planning
Steps in Calculating your Taxes
1. Determining Gross or Total Income 2. Calculating AGI 3. Subtracting Deductions 4. Claiming your Exemptions 5. Calculating your Taxable Income, and From That, Calculating your Base Income Tax 6. Subtract your Credits and Determine your Taxes Due
Personal Financial Planning Process
1. Evaluate your financial health 2. Define your financial goals 3. Develop a plan of action 4. Implement your plan 5. Review your progress, reevaluate, and revise your plan
Hiring a Professional (Three options for working with professions)
1. Go it alone and have your plan checked by a professional. 2. Work with a professional to develop a plan. 3. Leave it all in the hands of a pro.
Financial Freedom Pyramid
1. No savings (base) 2. unpredictable savings (2nd from bottom) 3. predictable savings (2nd from top) 4. plenty of savings (top)
Record Keeping Steps
1. Track your financial dealings. Credit card and check expenditures are easy to track, but cash expenditures are more difficult to track. 2. File and store your financial records so they are readily accessible.
You borrow $8,000 via the discount method, so you recieve $7,100. You must repay the full value in 6 months. What is the APR? Round to 2 decimals at the end. 10.92% 13.44% 12.68% 11.49%
12.68% 8000-7100= 900 900/7100 = *12.68%*
Debt limit ratio should be below what?
15%
Mortgage Decisions: Length or Term of the Loan
15- or 30-year maturity on mortgage? - Prepayment opportunities - Size of monthly payment - Interest rate
Electronic Funds Transfer (ETF)
Any financial transaction that takes place electronically. Advantages •Transactions take place immediately. •Don't have to carry cash or write a check. •Pay all kinds of bills
Which Cash Management Alternative is described below? a comprehensive financial services package (checking account, credit card, MMFs, etc.) offered by a brokerage firm.
Asset Management Account
Calculating Balanced Owed: Which one is described below? Interest is paid by summing the outstanding balances owned each day during the billing period and dividing the number of days in the period. (used by about 95% of all bank card issuers).
Average daily balance method
Your credit card company cannot increase your rate for the first 12 months after you open an account unless A) your card has a fixed interest rate tied to an index and the index goes down. B) your card's introductory rate expires and your rate reverts to the "go-to" rate the company disclosed when you got the card. C) you are more than 15 days late in paying your bill. D) all of the above.
B) your card's introductory rate expires and your rate reverts to the "go-to" rate the company disclosed when you got the card.
_______________ is the legal status for an individual or company unable to pay off outstanding debt. It is a status that can only be granted by a state or federal court. Generally, personal bankruptcy is considered a last resort for people inundated with loans or bills.
Bankruptcy
Cost and Early Payment of Consumer Loans: Discount method example
Borrow $10,000 for one year, interest rate 12%. You will only receive $8,800. In one year, you have to repay the entire principal of $10,000. APR = $1,200/$8,800 = 13.64%
Which of the 5 C's of Credit is described below? Can you repay the loan?
Capacity
Which of the 5 C's of Credit is described below? What are your assets and net worth?
Captial
What Additional Fee is described below? A charge for making a cash advance, paid as either a fixed amount or a percentage of the cash advance.
Cash Advance Fee
Which Cash Management Alternative is described below? pays a fixed rate of interest while funds are on deposit for a period of time (30 days to years).
Certificates of Deposit (CD)
What Other Types of Checks is being described below? A personal check that has been certified as being good by the financial institution on which it's drawn.
Certified check
Which of the 5 C's of Credit is described below? Do you pay bills on time?
Character
Common Predatory Mortgage Lending Practices: Steering
Charging high interest rates (9 to 20 percent) on subprime mortgages for borrowers who have good enough credit to qualify for prime-rate loans.
Which of the 5 C's of Credit is described below? What assets do you have to secure the loan?
Collateral
________________ _____________ ________ - use the annual percentage yield (APY) to easily compare.
Comparable interest rates
_______________ ___________ - is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.
Compound interest
Which of the 5 C's of Credit is described below? Lenders will review how general economic conditions will affect your ability to repay your loan
Conditions
_________________ _______- pays off the credit card balance each month (avoids interest).
Convenience user
___________ ___________ numerical evaluation of 'scoring' of applicants based on their credit history.
Credit Scoring
"Banks" or Deposit-Type Financial Institutions Credit Unions
Credit unions are established by a wide variety of organizations such as churches, universities, trade unions, and corporations. They are open only to members of that organization and are quite similar to commercial banks and S&Ls. Because of their tax-exempt status as not-for-profit organizations, they are generally more efficient, often pay higher interest rates, have lower fees, and have more favorable loan rates than commercial banks.
Do I have enough liquidity to meet emergencies? Current Ratio- Formula
Current ratio = monetary assets / current liabilities
What happens to the property in Bankruptcy of Chapter 13
Debtors keep all property but must pay unsecured creditors an amount equal to value of nonexempt assets
Can I meet my debt obligations? Debt Ratio Should *(increase/decrease)* as you get older
Decrease
What clause of the loan contract is described as a loan requirement stating that if you default on a secured loan, not only can the lender repossess whatever is secured, but also, if the sale of that asset doesn't cover what is owed, you can be billed the *difference*?
Deficiency payment clause
__________ taxes are taxes paid when purchases are made on a specific good, such as gasoline
Excise
What Act is described below? - procedures for correcting billing errors. - Withhold payment for item in question. - Notify card issuer within 60 days of statement date. Use "billing inquiry" or "billing error" address on credit card bill. - Should receive notification within 30 days. - Card issuer investigates within 90 days—account is credited or not with explanation.
Fair Credit Billing Act (FCBA)
What Act is described below? negative information remains on report for 7 to 10 years.
Fair Credit Reporting Act (FCRA)
What Act is described below? - you can request one free copy for your credit report from national bureaus and contact them for inaccuracies. - Bureau must investigate and correct. - File a statement to explain negative information that is accurate, not corrected.
Fair and Accurate Credit Transaction Act (FACT)
FV = PV x what?
Future-Value Interest Factor (FVIF)
Smart Buying in Action: Buying a Vehicle Step 3: Make Your Purchase
Get a fair price: - Know the dealer cost or invoice price - Dealer holdback—2 to 3% that manufacture gives the dealer on the sale of an automobile - Approach dealers and get quotes - Negotiate
Who can file Chapter 7?
Individuals and Business Entities
Who can file Chapter 13?
Individuals only (including sole proprietors)
Special Types of Consumer Loans: Home Equity loan or second mortgage Advantages
- Interest is tax deductible - Lower interest than other consumer loans.
Choosing a Source of Open Credit: Travel and Entertainment cards
- Interest-free grace period. - Issuers receive annual fee and merchant's discount fee. - American Express, Diners Club, and Carte Blanche are the primary issuers.
Payday Loans By the Numbers: Median fees on a typical 14-day loan
$15 per $100 borrowed
Payday Loans By the Numbers: Median size of a payday loan
$350
Chapter 13: The Wage Earner Plan: Must have: Unsecured debts under $_______________
$394,725
Payday Loans By the Numbers: Median fees incurred by a payday loan consumer
$458
Marginal Versus Average Taxes: Marginal Tax Rate
(or marginal tax bracket)—the percentage of the last dollar earned that goes to pay taxes
Special Types of Consumer Loans: Payday Loans terms
- $100 to $500 loan till next payday - Post-dated check with fee and principal left with payday lender - Due in 1 or 2 weeks - Annualized interest rates up to 400%
Smart Buying in Action: Housing Choice should be based on:
- *Lifestyle* (do you like or want to do maintenance tasks?) - *Financial factors* (e.g., affordability, tax deductions, equity) - *Mobility vs. permanence* (are you able to "settle down"?) - Renting = *less costly in short run* (monthly payment) - Home *ownership* =long-term financial advantages (tax deductions and equity growth over time)
Paying for Your College Education
- 529 plan - Prepaid tuition plans - College savings plans - Coverdell Education Savings Account (ESA)
Things you might consider in the wealth distribution phase
- How retirement plan savings should be reinvested and managed - A schedule of sensible withdrawals - Measures for tax efficiency and reduction - An estate plan to permit tax-efficient transfer of assets to heirs - Protection against risk-exposure
Getting Upside Down on a Car Loan
- A car depreciates in value very quickly, especially in your first three years of owning it. When you buy a car with a low down payment - or no down payment at all - you immediately owe nearly the entire purchase price, but it's already worth less. For example, if you buy a $20,000 car and only put a thousand dollars down, you'll be upside down as soon as you drive the car off the lot. You owe $19,000, but the car is only worth $16,000. - It's easy to overpay if you don't do your research before buying a car. Your overpayment doesn't make the car worth any more in the fair market, so if you pay $24,000 for a car that's now worth $16,000 you're upside down and already facing a big problem. - It's not always your fault. When an unscrupulous car dealer takes advantage of you, you can end up owing more than you should. - When you add too many frivolous options to your car, you increase your final total, but not the value of the car. That's a recipe for being upside down even faster. - If you're already upside down on one car loan and you try to get a new loan, dealers will often roll the shortfall from the old car to the new car without even telling you.
Disadvantages of Money Market Mutual Funds (MMMF's)
- Administrative fees - minimum initial investment - not insured - minimum checks
Your Credit Score Affects:
- Affects rates you pay on credit cards - Affects size of credit line - Affects insurance rates - Affects mortgage rate - Strong credit score—lower interest rate
Smart Buying in Action: Housing Private Mortgage Insurance
- Allows you to borrow more than 80% of appraised home value - Charges .3 to 1.5% of the loan amount
Specialty Mortgage Loan Options
- Balloon Payment Mortgage Loan - Graduated Payment Mortgage - Growing Equity Mortgage - Shared Appreciation Mortgage - Interest Only Mortgage
Choosing a Source of Open Credit
- Bank Credit Cards - Bank Card Variations - Travel and Entertainment Cards - Single purpose cards - Traditional Charge Account
How your credit score is computed
- Based on models developed by Fair Isaac Corporation. - FICO Score but name and your score varies with bureau. - Scores range from 300-850.
Specialty mortgages are adjustable-rate loans:
- Big jump in monthly payments if interest rates rise - Read fine print - Know how much your monthly payment could increase, when, and whether you could afford them - Penalties
Chapter 7: Straight Bankruptcy
- Can eliminate debts and begin again. - "Means test" - Most debts wiped out—not child support, alimony, student loans, and taxes. - Trustee collects, sells all nonexempt property. - Must complete credit counseling course.
Expenditures: Where Your Money Goes
- Cash transactions may not leave a paper trail - Variable or fixed expenditures Control over expenditures - Fixed expenses Contractual, predetermined expenses involving equal payments each period. - Variable expenses - Expenses involving payment amounts that change from one time period to the next.
Credit Evaluation: The Five C's of Credit
- Character - Capacity - Capital - Collateral - Conditions
Smart Buying in Action: Buying a Vehicle Step 3: Make Your Purchase- Financing alternatives
- Cheapest—cash - Investigate all financing options before buying. - Keep financing out of the negotiations. - The shorter the term, the higher the monthly payments.
Monitoring your Credit Score
- Check for errors in credit report. - Get free copy of your credit report each year from the three major credit bureaus at annualcreditreport.com - Check all information correct, all accounts on report are yours.
Cash Management Alternatives
- Checking Accounts - Demand Deposit account - NOW (negotiable order of withdrawal) account - Saving Account - Money Market Deposit Account (MMDA) - Certificates of Deposit (CD) - Money Market Mutual Funds (MMMF's) - Asset Management Account - U.S. Treasury bills, or T-bills - U.S. Savings Bonds
Borrowing Less and Borrowing Smarter
- Compare financial aid packages and college costs - Apply for federal financial aid first - Look for state and local grants and scholarships - Use tax credits and deductions to your advantage
Smart Buying in Action: Housing Step 3: Make Your Purchase
- Comparison shop - Traditional real estate agent - Independent or exclusive buyer-broker - Get it inspected - Make an offer and haggle
Controlling Your Use of Debt
- Determine how much debt you can comfortably handle. - Debt level comfort and need changes at different stages of the financial life cycle. - *With age, debt proportion of income tends to decline*. - Use several measures to control debt commitments.
Closing Costs Deed
- Document that transfers ownership - Warranty deed guarantees the title is good •Seller is true owner with right to sell the property •No outstanding claims against the title
Smart Buying in Action: Housing One-time Costs
- Down payment - Closing/settlement costs - Points or discount points ° prepaid interest as a % of loan amount ° Each point =1% of the loan amount ° Premium paid to obtain a lower mortgage rate - Loan origination fee - Loan application fee - Appraisal fee - Title search fee
Disadvantages of Certificates of Deposit (CD)
- Early withdrawal penalty - fixed interest rate - minimum deposit required.
Used-Car price negotiation
- Edmund's Used Car Prices - Kelly Blue Book - The more new cars sold, the more used cars there are for sale, keeping the prices down
Automating Savings: Pay Yourself First
- Have savings automatically deducted from your paycheck—pay yourself first. - The earlier you start to save, the easier it is to achieve your goals—time value of money.
Disadvantages of Money Market Deposit Account (MMDA)
- High minimum balances/penalties - interest rates below alternatives
Smart Buying in Action: Buying a Vehicle Step 2: Do Your Homework
- How much can you afford? - Down payment - Monthly payment - Which vehicle is right for you? - Comparison shop—price and attributes - Operating and insurance costs, and warranty.
You should have how many months of spending money tucked away?
3-6 months
FICO Score Not Good range
620-659
FICO Score Good Range
660-699
FICO Score Average
687
FICO Score Very Good range
700-759
FICO Score Median FICO Score
723
FICO Score Excellent Range
760-850
Present Value of a Perpetuity
= annual dollar amount provided by the perpetuity divided by the annual interest (or discount) rate.
SMART Financial Goal Example: Saving for a down payment on a new car A
A = I will reach my $5,000 goal by saving $200 every month.
Putting It All Together: Budgeting
A budget that takes into account estimated monthly cash receipts and cash expenses for the coming year. 1) Live within your income 2) Spend money wisely 3) Reach financial goals 4) Prepare for financial emergencies 5) Develop wise financial management habits
Smart Buying in Action: Housing Prequalifying
have maximum amount you'll qualify for confirmed by a lender
_________ APR - loan has an interest rate that is guaranteed not to change during the life of the loan or credit facility.
Fixed
_________ _________________ _______________ gives APR and finance charges of a loan. It also states interest calculation
Loan disclosure statement
Amortized Loan
Loans paid off in equal installments.
___________ __________ the length of time given to make a payment before interest is charged against the outstanding balance on a credit card.
Grace period
Special Types of Consumer Loans
Home equity loans Student loans Automobile loans Pay day loans
Example of tax shelter
Home ownership can be considered a form of tax shelter. Interests paid on mortgage loans and property taxes are deductible, and some taxpayers can even write off their private mortgage insurance premiums entirely. Under many circumstances, the sale of one's primary residence can be free of capital gains taxes.
Personal Financial Planning Process 2. Define your Financial Goals
Identify what you are saving for and how much you need to save - write or formalize your goals - attach a financial cost to each one - when will you need the money to achieve the goals? - analyze and revise your goals
Example of rule of 72
If an investment grows at an annual rate of 9% per year, then it should take 72/9=8 years to double
Tax brackets
Income ranges in which the same marginal tax rates apply.
Type of Taxes: Taxes on Earnings
Income tax and Social Security tax
Common Predatory Mortgage Lending Practices: Balloon Loans
Loans with an unreasonably high payment due at the end of or during the loan's term. In many cases, the balloon payment is hidden and is almost the size of the original loan. The end result is that these loans force foreclosure or refinancing.
What kind of deduction is described: Deductions calculated using Schedule A. The allowable deductions are added up and then subtracted from adjusted gross income.
Itemized deduction
What Additional Fee is described below? A fee imposed as a result of not paying your credit card bill on time.
Late fee
Can I meet my debt obligations? Long-term debt coverage ratio- Range
Less than 2.5 is a red flag
Do I have enough liquidity to meet emergencies? Month's living expenses covered ratio- Formula
Month's living expense covered ratio = monetary assets / (annual living expenditures/ 12)
Drawbacks of Chapter 13
Must make monthly payments to the trustee for 3-5 years. May have to pay back a portion of general unsecure debts
Closed end credit
One-time loans for a specific purpose paid back in a specified period of time Closed-end credits include all kinds of mortgage lending and car loans
___________ tax is a real estate ad-valorem tax, calculated by a local government, which is paid by the owner of the property.
Property
SMART Financial Goal Example: Saving for a down payment on a new car R
R = I can cancel my gym membership and food delivery subscription to help me save this amount each month.
Consumer Loans First Decision: *Single payment* vs installment
Single-payment or balloon loan - pay back in a single lump-sum payment with interest at maturity. - Bridge or interim loan- short-term loan
3 stages of wealth management
Stage 1: Early Years Stage 2: Approaching Retirement Stage 3: Retirement Years
What kind of deduction is described: A set deduction allowed by the IRS, regardless of what a taxpayer's expenses actually were.
Standard deduction
Smart Buying
Step 1: Differentiate Want From Need Step 2: Do Your Homework Step 3: Make Your Purchase Step 4: Maintain Your Purchase
____________ __________- suggested retail price (MSRP) Includes base price + accessories
Sticker Price
Nondeposit-Type Financial Institutions Stock brokerage Firms
Stock brokerage firms that have traditionally dealt only with investments such as stocks (hence, their name) have recently introduced a wide variety of cash management tools, including financial counseling, credit cards, and their own money market mutual funds (which we'll talk about later). In effect, they've entered into direct competition with traditional banks.
Common Predatory Mortgage Lending Practices: Bait and Switch Costs
The cost or loan terms at closing are not what the borrower agreed to.
Future value interest factor
The value of (1 + i)n used as a multiplier to calculate an amount's future value.
Common Predatory Mortgage Lending Practices: Upward Only Adjustable Rate Mortgages (ARMs)
These are ARMs that adjust only upward, with the borrower's interest rate and monthly payment climbing as often as every 6 months.
Common Predatory Mortgage Lending Practices: Excessive Points and Broker Fees
These are costs not directly reflected in interest rates. With predatory loans, these fees can be over 5 percent.
"Banks" or Deposit-Type Financial Institutions Commercial banks
These offer the widest variety of financial services, including checking and savings accounts, credit cards, safety-deposit boxes, financial consulting, and all types of lending services. They also dominate in terms of the dollar value of the assets they hold, and they have more branch offices or locations than any other type of financial institution. They also tend to have neighborhood locations, which allow for personal relationships.
Paying your income taxes: Pay as you go basis
This means that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year.
Can I meet my debt obligations? Debt to income ratio
This number is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.
What Other Types of Checks is being described below? Checks issued by large financial institutions such as Citibank, Visa, and American Express, that are sold through local banking institutions and are similar to cashier's checks except that they don't specify a specific payee and they come in specific denominations ($20, $50, and $100).
Traveler's check
What happens to the property in Bankruptcy of Chapter 7
Trustee can sell all nonexempt property to pay creditors
What Act requires all consumer loan agreements disclose APR in bold print?
Truth in Lending Act
Prepaid Debit or Gift Cards
Two main types •Single purpose or "closed-loop" cards which can be used at only one store. •Multi-purpose or "open-loop" cards which can be used just like a credit card and can be reloaded. •Many have activation fees, maintenance fees, and ATM transaction fees
"Don't put all your eggs in one basket" is an old saying that is also important in financial planning. How so? a) this relates to emergency funds; if an emergency arises you have different accounts to pull from b) this relates to diversification; if you have money in multiple investments, your overall risk is lower because it is less likely they will all decline at the same time c) this relates to having sufficient liquidity; if you break an egg you will be able to replace it d) this relates to diversification; if you have money in multiple investments, your overall risk is higher because it is more likely they will all decline at the same time
b) this relates to diversification; if you have money in multiple investments, your overall risk is lower because it is less likely they will all decline at the same time
What is the time frame for a debt to be considered long-term? a) you need longer than 10 years to pay it off b) you need longer than 1 year to pay it off c) you need longer than 3 years to pay it off d) you need longer than 5 years to pay it off
b) you need longer than 1 year to pay it off
What does it mean to be "upside down" on your vehicle? a) when it is worth more than you owe b) you owe more on it than it is worth c) to have a variable-rate financing charge d) to make the full purchase in cash
b) you owe more on it than it is worth
Using an Income Statement to Trace Your Money: Cash Basis
based on *actual* cash flows
Income: Gross value is used why?
because the taxes and payroll deductions will be itemized and deducted as expenses later in the income and expense statement.
The proper figure to use is gross wages, salaries, and commissions, which constitute the amount of income you receive from your employer *(before / after)* taxes and other payroll deductions.
before
Chapter 7: Straight Bankruptcy: Can eliminate debts and what else?
begin again
Long-term liabilities come due when?
beyond a year
Consumer loans are used for *(smaller/bigger)* purchases
bigger
Specialty Mortgage Loan Options Shared Appreciation Mortgage
borrower receives below-market interest rate, lender receives a portion of future appreciation.
A ____________ __________ is a situation wherein inflation pushes income into higher tax brackets. The result is an increase in income taxes but no increase in real purchasing power.
bracket creep
__________ detailed short-term financial forecasts that *compare estimated income with estimated expenses*, allow you to monitor and control expenses and purchases in a manner that is consistent with your financial plans.
budgets
Which of the following would provide the highest end-of-year earned interest a) 8% compounded quarterly b) 8% compounded monthly c) 8% compounded daily d) 8% compounded annually
c) 8% compounded daily
Which of the following sources of open credit work with a specific charity or organization and donate a part of the fees to that charity/organization? a) charge account b) single-purpose cards c) affinity cards d) prestige cards
c) affinity cards
Which of the following is *not* a strategy to lower your taxes? a) maximize deductions b) shift income to family members in lower tax brackets c) avoid capital gains d) all are strategies that have been discussed
c) avoid capital gains
What is the first step in the personal financial planning process? a) developing a plan b) defining your financial goals c) evaluating your financial health d) implementing a plan
c) evaluating your financial health
If you net worth is negative, you are said to be a) bankrupt b) non-financial c) insolvent
c) insolvent
What is the best protection for yourself and your wealth? a) advice from professionals b) books and podcasts c) knowledge d) not investing in anything risky
c) knowledge
What is estate planning? a) planning how much wealth you need to retire and maintain your standard of living b) planning for emergency situations c) planning the passage of your wealth to your heirs d) planning the purchase of land or a new home
c) planning the passage of your wealth to your heirs
Which of the following would be considered an Intermediate-Term financial goal? (consider Figure 1.2 on page 8) a) accumulate emergency funds equal to at least 3 months' living expenses b) start your own business c) save for a major home improvement d) pay off outstanding credit cards
c) save for a major home improvement
If a mortgage contract specifies that the borrower receives a below-market interest rate, but the lender receives a portion of future increase in value, this contract is for which type of mortgage? a) balloon payment mortgage b) interest only mortgage c) shared appreciation mortgage d) growing equity mortgage
c) shared appreciation mortgage
What is a grace period? a) the amount of time it will take to pay off the balance owed if only the minimum payments are made b) the amount of time after a bill is due you have to make payment before owing a late fee c) the amount of time after a bill is posted that you have to make payment before interest begins accruing d) the amount of time after opening a new line of credit you have before interest starts accruing
c) the amount of time after a bill is posted that you have to make payment before interest begins accruing
What is 'expected return' of an investment? a) the prediction of an investment's return based on how it performed in the past b) the return investors earn on an investment c) the return investors want to cover the level of risk associated with that investment d) the return an investment will provide no matter what happens
c) the return investors want to cover the level of risk associated with that investment
What is a certified financial planner? a) someone who has completed coursework and ten exams administered by the American College b) someone who is certified in public accountant who has passed certification tests in personal financial planning administered by the American institute of certified public accountants and has at least 3 years of personal financial planning experience c) someone who has passed 3 difficult exams from the CFA Institute and has at least 4 years of experience d) someone who has satisfactorily completed a 10 hour, 2 day exam and has a minimum of 3 years experience in the field
d) someone who has satisfactorily completed a 10 hour, 2 day exam and has a minimum of 3 years experience in the field a- chartered financial consultant (CFC) b- personal financial specialist (PFS)
Which of the following is not a depository institution? a) savings bank b) commercial bank c) credit union d) stockbrokerage firm
d) stock brokerage firm
You just purchased a house using a mortgage and plan to make the minimum payment for the entirety of the loan. As time passes, a) the percent of your payment towards the principal decreases b) the percent of payment that goes towards interest stays consistent c) the amount of interest you pay per payment increases d) the percent of your payment towards the principal increases
d) the percent of your payment towards the principal increases and percentage of payment towards the interest decreases
What is the Rule of Three? a) you should have your income be three times larger than your total debt b) there are at least three sales going on at once c) you should pay off debt in three years d) there are always at least three major competitors in a market
d) there are always at least three major competitors in a market
When would you refinance? a) when interest rates drop by at least 3 percent b) when interest rates drop by at least 1 percent c) when new closing costs and fees excede after-tax monthly interest savings d) when after-tax monthly interest savings excede new closing costs and fees
d) when after-tax monthly interest savings excede new closing costs and fees
Controlling Your Use of Debt: Debt Limit Ratio- equation
debt limit ratio= total monthly non mortgage debt payments/ total monthly take-home pay
Can I meet my debt obligations? Debt Ratio- Formula
debt ratio = total debt or liabilities / total assets
Can I meet my debt obligations? Debt to income ratio- Formula
debt to income ratio = all your monthly debt payments / gross monthly income
A ______________ is any item or expenditure subtracted from gross income to reduce the amount of income subject to income tax. It is also referred to as an "allowable deduction."
deduction
Federal Student Loans: Who is your lender
department of education
Specialty Mortgage Loan Options Growing Equity Mortgage
designed to let homebuyer pay off mortgage early.
Bank Card Variations
different classes (credit levels) of bank credit cards.
APR for all consumer loans must be _______________ (the Truth in Lending Act).
disclosed
Over 70% of biggest credit card issuers *(do/do not)* charge an annual fee.
do not
Private Loans: Generally *(do/do not)* offer deferment or forbearance options
do not
Choosing a Source of Open Credit: Travel and Entertainment cards Do or do not offer revolving credit? What does it require?
do not and require full payment of balance each month
Creditworthiness is also based on what?
employment history, job history, and amount of debt you currently have.
The _________ tax is mostly imposed on assets left to heirs, but it does not apply to the transfer of assets to a surviving spouse.
estate
Using an Income Statement to Trace Your Money: Income
expenses
_______ __________ _______ what an asset could be sold for, rather than what it cost or what it will be worth sometime in the future.
fair market value
Getting the Best Rate on your consumer loans: Inexpensive sources
family home equity loans cash value life insurance loans.
Federal Student Loans: Interest is *(variable/fixed)* over the life of the loan
fixed
What kind of Annuity is described: pays at a fixed rate for a period of time
fixed annuity
Use the present-value interest factor to find present value of what?
future value
___________ _______ —the value of an investment at some point in the future
future value
________ Insurance helps pay the "gap" between what you owe on a car and what it's currently worth. A new car becomes "used," and therefore begins to depreciate, the moment you drive it out of the dealership. Depreciation just means that a car is worth less than what you bought it for. So if you purchase a car for $30,000, its value might drop to $26,000 just two months later. And if you've been making payments of $500 a month, then that means you owe $3,000 more than it's actually worth.
gap
How Home Equity Loans Work: Line of Credit or HELOC
get approved for a max amount available, and only borrow what you need
Consumer Loans: Second Decision: *Secured* vs. Unsecured Loans
guaranteed by an asset which typically lowers the rate of the loan.
Checklist 8.3 Tips on Buying a New Vehicle
• Read and understand every document you are asked to sign. Do not sign anything until you have made a final decision to buy. • Think twice about adding expensive extras you probably don't need to your purchase (e.g., credit insurance, service contracts, or rust proofing). • Inspect and test-drive the vehicle you plan to buy, but do not take possession of the car until the whole deal, including financing, is finalized. • Don't make a hasty decision—leave your checkbook at home. • Don't buy because the salesperson is pressuring you to make a decision. • Don't be afraid to walk away. It's not uncommon to get the best deal when you're in your car ready to leave. • Shop at the end of the month: This is when dealers are trying to meet quotas so they may be willing to take less now than at other times of the month.
Steps in Calculating your Taxes: 1. Determining Gross or Total Income
• Sum of all reportable income from all sources • Active/earned income—wage/salary/tips/bonuses • Portfolio/investment income—dividends/capital gain/interest • Passive income—activities in which the taxpayer does not actively participate e.g., business limited partnerships
Income or cash inflows
• Wages, salary, bonuses, tips, commissions • Other sources: family income, government payments (veterans benefits, welfare), investment income • Subtract federal, state, social security taxes from earnings to calculate your take-home pay
What to Look For in a Financial Institution
• Which financial institution offers the kind of *services* you want and need? • Is your investment *safe*? Is your investment insured? Is the financial institution sound? • What are all the *costs and returns* associated with the services you want? Are there minimum deposit requirements or hidden fees?
Problematic financial business
• Would you pay $8 to cash a $100 check? • Would you pay $20 to borrow $100 for two weeks? Pawnshops; Check-cashing outlets; Payday loan companies; Rent-to-own centers; Car title loan companies.
Financial Institutions
•"Banks" or Deposit-type financial institutions—Financial institutions that provide traditional checking and savings accounts Commercial banks, credit unions, savings banks, etc. •Non-deposit-type financial institutions—mutual fund companies, brokerage firms, insurance companies offer similar services as those offered by banks.
Stages of Wealth Management: Stage 3- The Retirement Years (wealth distribution)
•. After age 65, live off savings Retirement age depends on savings •. Less risky investment strategy •. Consider extended nursing home protection •. Estate planning decisions and documents are critical
Prepayment penalty
•A prepayment penalty clause states that a penalty will be assessed if the borrower significantly pays down or pays off the mortgage, usually within the first five years of the loan. •Prepayment penalties serve as protection for lenders against losing interest income. •Mortgage lenders are required to disclose prepayment penalties at the time of closing on a new mortgage.
Examples of EFT
•ATM transactions Can be used to make withdrawals, deposits, transfers, and account inquiries. •Debit card transactions •Debit card: a card that allows you to access the money in your accounts electronically. •Smart cards This card actually magnetically stores its own accounts. Funds are transferred into the card, which is then used the same way you'd use a debit card. When the funds run out, the card is useless. •Stored Value Cards
Debit Cards
•Allow you access to money in your accounts electronically. •Looks like a credit card but acts like a checking account. •ATM card is type of debit card but with access to savings accounts. •Check card blocking policies.
Security at ATMS
•Always observe your surroundings before conducting an ATM transaction. •If an ATM is obstructed from view or poorly lit, go to another ATM. •If you are using a walk-up ATM, take a companion along if possible—especially at night. •Minimize time spent at the ATM by having your card out and ready to use. •If you see anyone or anything suspicious while conducting a transaction, cancel your transaction and leave. •If you are followed after making an ATM transaction, go immediately to a heavily populated, well-lighted area and call the police. •If you are at a drive-up ATM, keep your engine running, the doors locked, and the windows up at all times when waiting in line. Before rolling down the windows to use the ATM, check the entire area for anything or anyone suspicious
Long-Term Capital Gains on Homes
•Capital gains taxes for most homeowners on sale of their homes •Exemption up to $500,000 for couples filing jointly ($250,000 filing single) on sale of principal residence •Must have been occupied for 2 of the 5 years prior sale
10 Principles of Personal Finance Principle 6: Waste Not, Want Not—Smart Spending Matters
•Differentiate want from need •Do homework before the purchase •Make the purchase at the best price •Maintain your purchase
10 Principles of Personal Finance Principle 2: Nothing Happens Without a Plan
•Easier to think about spending than about saving. •Saving must be planned. •Putting off a financial plan means goals are harder to achieve.
Steps in Calculating your Taxes: 4. Claiming your Exemptions
•Exemption—deduction for each person supported by the income on a tax return •An exemption includes yourself, spouse, or dependents •Dependent must qualify as child or dependent
Benefits of e-filing include:
•Faster refunds •More accurate returns •Quick electronic confirmation •Delete the paperwork—nothing to mail •Federal/state e-filing
Federal Student Loans: Examples
•Federal Perkins Loan Program •Direct Subsidized Loans •Direct Unsubsidized Loans •Direct PLUS Loans •Direct Consolidation Loans
Type of Taxes: Taxes on Wealth
•Federal estate tax •State inheritance tax
Filing late
•File Late—Form 4868—request an extension if unable to file by April 15th and include estimated tax payment
10 Principles of Personal Finance Principle 7: Protect Yourself Against Major Catastrophes
•Have the right kind of insurance before a tragedy occurs. •Know your insurance policy coverage. •Focus insurance on major catastrophes which can be financially devastating.
