Ch 1-4 -Finance

time account

CD - certificate of deposit

insurance for financial institutions

FDIC - banks NCUA - credit union

future value equation

FV = original amount + interest

bonds

IOU / loan

SMART

S - specific M- measurable A - action oriented R - realistic T - time based

financial plan

a formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities

fixed expense

a predictable expense that is the exact same amount every month

the stages in the family situation and financial needs of an adult is called the

adult life cycle

other income

alimony, lottery winnings, prizes

estimated quarterly payments

estimated tax payments made throughout the year based on income made during the year and reported on Form 1099

what is an investor lacking in the SMART approach is their onl goal is making more money for the rest of their life

the investor is lacking a set time frame to meet

what measures the increase in the amount of money in a savings account as a result of interest earned

time value of money

retirement and education plans

traditional IRA - Roth IRA - Education IRA Keogh Plan - 401K plan gov sponsored - social security employer - 401K/403B

deadlines and penalties

underpayment of quarterly estimated taxes may require paying interest on amount owed underpayment due to negligence - big fine

the ideas and principles that a person considers correct, desirable and important

values

earned income

wages, salary, commissions, fees, tips, bonuses

opportunity cost

what you give up by making a choice trade off decision not always measurable in dollars

short term goal

within 1 year

your life situation, personal values, and economic factors influence what

your financial plan

tax forms

1040 EZ - easiest 1040 - standard 1040A - complicated w-4 = tax info for employer (personal info) w-2 = sent by employer (tax info)

intermediate goal

2-10 years

what is the typical time frame for an intermediate goal

2-5 years

exclusions

amount excluded from gross income, referred to as tax-exempt income not subject to federal income tax ex - interest on most state and city bonds

simple interest

amount in savings x annual interest rate x time period = interest

principal

amount of savings

tax credit

amount subtracted directly from the amount of taxes owed

future value

amount that will be available at a later date

APR

annual percent rate $1,000 6% = 1,060

APY

annual percent yield including compound interest = 6.1% instead of 6%1

personal opportunity costs related to health are

avoiding exercise that results in increased health care costs lack of sleep that results in illness poor eating habits that result in illness

what are some methods that cannot be used to compute time value of money

bankers books

durable product goal

car, appliances

demand account

checking savings demand your money any time

children investments

children under 18 or full time student under 24 with investment income of more than 2,000 is taxed at parent's top rate

the measure of the average change in the prices urban consumers pay for a fixed "basket" of goods and services is called

consumer price index

present value

current value of an amount desired in the future

investment income

dividends, interest, rent from investments

compounding

earning interest on your interest

intangible purchase goal

education, health

the risk premium includes the following factors

expected inflation interest rates uncertainty of getting money back length of time

variable expense

expenses that occur every month, but amount varies

wealth

federal estate tax, state inheritance tax

commercial banks

for profit nationwide, international, publicly owned/traded

community banks

for profit privately owned, regional

the amount to which current savings will increase based on a certain interest rate and a certain time period is called

future value

long term goals

greater than 20 years

wage

hourly pay overtime (1.5 x regular pay)

liquid

how easily an asset can be converted to cash

earnings

income tax and social security

tax-deferred income

income that will be taxed at a later date such as earnings from IRA

time value of money

increase in an amount of money as a result of interest earned savings today - more money tomorrow spending today - lost interest

a rise in the general level of price is called

inflation

to calculate time value of money for savings in the form of interest earned, the following items are needed

length of time principal amount annual interest rate

capital gains

long term greater than 1 year short term less than 1 year

interest rates represent the true cost of

money

salary

monthly/annual earnings often exempt from overtime

credit union banks

not for profit

alternative minimum tax AMT

paid by taxpayers with high amounts of certain deductions

making tax payments

payroll withholding - base on the number of exemptions and the expected deductions claimed

what are some factors that may cause people in their 50s to spend money differently than people in their 20s?

personal beliefs, household size, income levels

what are two main reasons Americans have financial problems?

poor planning, weak management of money habits advertising efforts and availability of goods encourages overspending

what is the current value of a future amount based on a certain interest rate and a certain time period

present value

consumable financial need goal

product goals food, clothing

income statement

profit + loss statement revenue - expenses = profit/loss

property

real estate property tax, personal property tax

passive income

results from business activities in which you do not directly participate financial partnership

purchases

sales tax and excise tax

savings rates

savings rates are always lower than borrowing rates

annuity

series of equal deposits at equal intervals earning a constant rate ex - retirement savings

when discussing personal financial growth, what is an important aspect?

setting goals

balance sheet

statement of net worth assets = liabilities + owners equity (ALOE)

tax credit vs tax deduction

tax credit reduces your taxes by x tax deduction amount of reduction is based on your tax bracket