Family Financial Management Chapter 1

In a recent month, Ken Grossman has cash inflows of $3,100 and cash outflows of $2,950, resulting in a surplus of what

$150

A tax credit of $50 for a person in a 28 percent tax bracket would reduce a person's taxes by _____________.

$50

Financial experts recommended a monthly savings ration of at least ___ of gross income.

10%

Amanda and Jack are working on their taxes and need to determine which form to file. They had wages, interest, and dividends. In addition, they bought a house this past year and are thinking of itemizing their deductions. Which form should they use?

1040

A family with $49,000 in assets and $25,000 of liabilities would have a net worth of what

24,000 (assets - liabilities = net worth).

Liquid assets

Cash and items of value that can easily be converted to cash

Define assets.

Cash and other property with monetary value.

What are examples of tax credits

Child care and dependent care expenses

Which payment items should be budgeted first? Fixed or variable expenses?

Fixed Expenses

Higher consumer prices are likely to be accompanied by _______ interest rates.

Higher

What does it mean to be insolvent?

Inability to pay debts when due Liabilities far exceed assets

What is the time value of money?

Increase in an amount of money as a result of interest earned.

How can a person insurance net worth?

Increase savings Reduce spending Increase the value of investments and other possessions Reduce amounts owed Pay off debts Increase earnings, decrease spending

What is the main responsibility of The Fed?

Maintain an adequate supply of money

What actions could be taken to reduce fixed expenses?

Payments that do not vary from month to month. Ex: rent or mortgage payments, installment loan payments, fixed cash flows, etc.

What kind of records should be kept in a home file?

Personal and employment records Money management records Tax records Financial services records Credit records Consumer purchase and auto records Housing records Insurance records Investment records Estate planning and retirement records Medical receipts

What is a capital gain?

Profits from the sale of stocks, bonds or real estate Long-term capital gains (held more than one year) taxed at a lower rate

An exemption affects a person's tax situation by ___ the taxpayer's taxable income

Reducing

What are the characteristics of a well-written foal?

S- Specific M- Measurable A- Action-oriented R- Realistic T- Time-based

Steps of a cash flow statement

Step 1- Records Income Step 2- Record cash outflows Step 3- Determine Net Cash Flow

An IRA, Keogh plan, and 401(k) plan are examples of ______________ retirement plans.

Tax deferred

What is The Fed?

The Federal Reserve System

What is liquidity refer to

The ability to convert financial resources into usable cash with ease

How to reduce fixed expenses

The only way to reduce is to change Examples: how do you reduce rent expense? Find another place to live.

What is the definition of economics?

The study of how wealth is created and distributed.

The amount of interest is determined by multiplying the amount in savings by the _____ period.

Time Period

What actions can you take to reduce your taxes?

Using a tax credit, exemptions and itemize your deductions, own a house, put money in a flexible spending account, municipal bonds

At the end of the year, Xavier received a form from his employer that reported annual earnings and the amounts deducted for taxes. That form is called a ________________.

W-2

What is opportunity cost?

What a person gives up by making a choice

What determines the success or failure of a financial plan?

What resources are you using... What do you have access to and how are you using those. MUST HAVE resources.

The "Obtaining" component of financial planning is defined as

You obtain financial resources from employment, investments, or ownership of a business. Obtaining financial resources is the foundation of financial planning, since these resources are used for all financial activities.

Who is ultimately responsible for supplying accurate and complete information for completing a tax return?

Yourself!

Define liabilities

amounts owed to others

Future value calculations are also referred to as __________.

compounding time

Variable expenses

flexible payments that change from month to month

What are some actions that could be taken to improve your financial standing?

A budget, financial planning system and envelope system

What does a personal balance sheet present?

A financial statement that reports what an individual or a family owns and owes; also called a net worth statement or statement of financial position.

What is a cash flow statement?

A financial statement that summarizes each receipts and payments for a given period; also called a personal income and expenditure

Define "Financial Plan."

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

What is an excise tax?

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

What is a tax credit

An amount subtracted directly from the amount of taxes owed

What affects a person's taxes by reducing the amount of taxable income.

An exclusion

When should you evaluate and revise your actions in your financial plan?

Any time you have major life changing event. Retire Marriage? New job, etc.

How do you compute a person's net worth?

Assets - Liabilities = Net Worth

Name two personal financial statements that you construct yourself?

Balance sheet and cash flow statement

What type of financial documents would most likely be stored in a safe-deposit box?

Birth certificates Marriage certificate Adoption and custody papers Mortgage papers and titles List of insurance policy numbers Stock and bond certificates Copy of will

Joseph needs to complete his income taxes for the year. He has already calculated his adjusted gross income. What does he need to do next?

Compute his taxable income

Which type of audit is the least complicated for taxpayers?

Correspondence

Discretionary Income

EVERYTHING

What are the expenses that a taxpayer is allowed to deduct from adjusted gross income.

Exemptions

How long should you keep documents relating to investments? Real estate? Tax returns?

Keep investments until you sell. Keep real estate documents forever. Minimum of 7 years for tax returns (7-10 years)

What goals should be considered as a part of the saving component of financial planning?

Main goal: have an emergency fund

The tax due on the next dollar of income is referred to as the ____________.

Marginal Tax Rate

What expenses can be included in the itemized deductions of a taxpayer?

Medical expenses, real estate property tax, home mortgage interest, charitable contribution, casualty losses, certain work related expenses.

If I can invest a dollar today and earn interest on it, then it should be worth ____ in the future

More

What is an example of a long-term liability?

Mortgage Medical bills Tax payments

Give an example of a tax-exempt investment.

Municipal Bond Income

Disposable Income

Take home pay, deposited in the bank, net income

The use of legitimate methods to reduce one's taxes is tax ____________.

Tax avoidance

Long term liabilities

debts that are not required to be paid in full until more than a year from now.

Current liabilities

debts that must be paid within a short time, usually less than a year.

Take-home pay

earnings after deductions for taxes and other items; also called disposable income.

What are examples of variable expenses?

electricity bill, telephone bill, donations, etc.

Intermediate Goals

have a time frame of two to five years.

Money received in the form of dividends or interest is

investment income

Long Term Goals

involves financial plans that are more than 5 years off Retirement College Education Vacation Home

The "head of household" filing status is for people who are ___________________.

people who are unmarried or surviving spouse who has a child or dependent relative

The _________ property tax is based on the value of land and buildings.

real estate

An exclusion affects a person's taxes by ______the amount of taxable income.

reducing

Give an example of a long-term financial strategy?

retirement money for children's education or purchase of a vacation home

Give an example goal of a short-term financial objective?

saving for a vacation, or paying off small debts.

Deficit

the amount by which actual spending exceeds planned spending

Surplus

the amount by which actual spending is less than planned spending

What is inflation risk?

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

The Form 1040 is most helpful to whom?

the tax payers

Gross Pay

the total amount of an employee's earnings before deductions are taken out

Short Term Goals

will be achieved within the next year or so Vacation Pay off small debts

Most people pay federal income tax by having amounts what from income

withheld