Personal Finance

Réussis tes devoirs et examens dès maintenant avec Quizwiz!

Effective Goals should

"SMART" Approach

Changes in Net Worth result from

cash inflows and outflows.

Future Value Example

100 deposited for 1 year at 6% per year Future Value = $100 + ($100 X .06 X 1) Future Value = $100 + $6 = $106

The 7 Step Budgeting process are

1: Set Financial Goals 2: Estimate Income 3: Budget an Emergency Fund and Savings 4: Budget Fixed Expenses 5: Budget Variable Expenses 6: Record Spending Amounts 7: Review Spending and Saving Patterns

inflation

A continuous rise in the price of goods and services. Reduces buying power of the dollar Most harmful to those on fixed incomes Inflation rates vary "Hidden inflation"

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date.

AGI

Adjusted Gross Income

Life Situation and Personal Values

Adult life cycle Life Situation Factors Major events: Values:

Self Employment

Advantage: Owning your own business can have tax advantages Disadvantage: Business owners have to pay additional taxes

Other income

Alimony, awards, lottery winnings, and prizes

How Do I File My State Tax Return

All but 7 states have a state income tax Most states' tax rate ranges from 1 to 10 percent States usually require income tax returns to be filed when the federal income tax return is due

Flat tax

All taxpayers pay the same rate Would increase taxes for many

Tax credits

Amount subtracted directly from the amount of taxes owed Earned income credits Foreign tax credits Child and dependent care credits Retirement tax credits Adoption tax credits Education credits to offset college education expenses

Future Value

Amount that will be available at a later date

Gross income

Amount you earn before taxes are withheld

Exclusions

Amounts excluded from gross income Also referred to as tax-exempt income; income not subject to federal income tax Example = interest on most state and city bonds

Mental Budget

Appropriate if financial resources and responsibilities are limited

Copies of tax returns and supporting data

At least 7 years; 10 years is better

How Long to Keep Records

Birth certificates, wills, and Social Security information is Permanently Personal property and investments that is as long you own themDocuments re: purchase and sale of real estate

What to Keep in a Safe Deposit Box

Birth, marriage and death certificates List of checking, savings and financial institution account numbers Citizenship and military papers Adoption and custody papers Serial numbers and photos of valuables CDs and credit and banking account numbers Mortgage papers and titles List of insurance policy numbers Stock and bond certificates Coins and other collectibles Copy of will

Durable-product goals

Car, appliances

Meeting Daily Money Needs

Common mistakes

Personal Changes:

Consider changes in your personal situation and income Monitor your tax strategies to best serve your daily needs and long-term financial goals

Financial Needs Goals:

Consumable-product goals. . . Food, clothing Durable-product goals . . . . . . Car, appliances Intangible-purchase goals

Calculating Savings Amounts

Convert savings goals into specific amounts Use savings and investments plans to grow your money Use time value of money to calculate progress toward financial goals

Records on Your Personal Computer

Current and past budgets Summary of checks written and other banking transactions Past income tax returns Account summaries, performance results of investments Digital versions of wills, estate plans, and other documents

Present Value

Current value of an amount desired in the future

Personal financial planning involves

Determine financial situation Develop financial goals Identify alternative courses of action Evaluate alternatives Create and implement a financial action plan Review and revise the financial plan

Outflows > Inflows

Draw from savings or borrow (buy on credit)

Main Components of Gross Income

Earned income Investment income Passive income Other income

ntangible-purchase goals

Education, health

Physical Budget

Envelopes, folders or containers

Total income is affected by:

Exclusions, Tax-deferred income

Taxes on Wealth

Federal estate tax State inheritance tax

Consumable-product goals

Food, clothing, occur on a periodic basis and involve items that are used up relatively quickly (food, clothing, entertainment)

4 step of finance planning

Formalized report Summarizes current financial situation Analyzes financial needs Recommends future financial activities

Major events

Graduation, marriage, divorce Birth or adoption of child Career or health changes

Adjusted gross income

Gross income reduced by certain adjustments, described below The basis for computing various deductions

Money management

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

Deflation

decline in prices

Use Time Value of Money calculations to

determine increased value of savings and amounts needed to reach future goals

IRS Changes

IRS modifies tax filing procedures each year Congress passes legislation to change the tax code each year. Take advantage of these changes for personal financial planning

Net income

income on which tax is computed

Insolvency:

Inability to pay debts when due Liabilities far exceed assets

Taxes on Earnings

Income tax and Social Security

Tax-deferred income

Income that will be taxed at a later date, such as earnings from an traditional individual retirement account (IRA

Ways to Increase Net Worth

Increase savings Reduce spending Increase the value of investments and other possessions Reduce amounts owed

Advantages of Financial Planning are

Increased effectiveness in obtaining, using, and protecting financial resources Increased control of your financial affairs Improved personal relationships Sense of freedom from financial worries

Tax Exempt Investments

Interest income from municipal bonds are exempt from federal and some state taxes

Risk premium

Length of time funds in use Expected inflation Uncertainty

Budget = spending plan Helps you

Live within your income Spend money wisely Reach financial goals Prepare for financial emergencies Develop wise financial management habits

Problem/Result

Lower assets or higher liabilities

Life Situation

Marital status, household size, employment. life situation is an event such as graduation, dependent children leaving home , , parents separate or divorce, changes in health,birth,adoption of a child.

Investment income

Money received in the form of dividends, interest, or rent from investments

Balance Sheet

Net Worth Statement

Basic Financial Planning Activities

Obtaining Chapter 1 Planning Chapters 2,3 Saving Chapter 4 Borrowing Chapter 5 Spending Chapters 6,7 Managing Risk Chapters 8-10 Investing Chapters 11-13 Retirement/Estate Planning Chapter 14

Written Budget

On paper

Common mistakes

Overspending (impulse buying, using credit) Insufficient liquid assets Using savings or borrowing to pay for current expenses Failing to put unneeded funds in an interest bearing or investment account

Calculating interest earned

Payment x Rate x Time

Cash Flow Statement

Personal Income and Expenditure Statement

Cash flow statement =

Personal Income and Expenditure Statement

Records in Your 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

Financial Planning

Process of managing your money to achieve personal economic satisfaction

Capital Gains

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

Inflows > Outflows

Put money into savings or pay off debts Result: Higher net worth

Taxes on Property

Real estate property tax Personal property tax

Adjustments to income

Reduce AGI Contributions to a traditional IRA or Keogh Alimony payments

Passive income

Results from business activities in which you do not directly participate, such as a limited partnership

Taxes on Purchases

Sales tax & excise tax

Time Frames for Achieving Financial Goals

Short-term goals . . . . . . . . . . . within 1 year Intermediate goals . . . . . . . . . 1-5 years Long-term goals . . . . . . . . . . . > 5 years

S = M = A = R = T =

Specific Measurable Action-oriented Realistic Time-based

Computerized Budget

Spreadsheet or specialized software

Components of a Balance Sheet

Step 1 - List items of value Liquid assets Real estate Personal possessions Investment assets Step 2 - Determine amounts owed Current liabilities (< 1 year) Long term liabilities Step 3 - Compute your net worth

Future Value Series of Deposits

Table factors = Appendix Exhibit 1-B "Annuity" = series of equal deposits at equal intervals earning a constant rate Example: Deposit $50 per year at 7% for 6 years Appendix Exhibit 1-B factor = 7.153 Period = 6; % = 7% Future Value = $50 x 7.153 = $357.65

Tax Deferred Investments

Tax deferred annuities Section 529 education savings plans Retirement Plans -IRA, Keogh or 401(k) A type of tax shelter

VAT

Taxes a product at each stage in the manufacturing process Tends to start small and rise over time

Types of Taxes

Taxes on Purchases Taxes on Property Taxes on Wealth Taxes on Earnings

The Federal Reserve

The US central bank consisting of 12 regional banks are run by a board of governors appointed by the president for overlapping 14-year terms; formally independent of the executive and congressional branches of government; private bank members of the system own their assets.

Present Value

The current value of a future amount based on a certain interest rate and time period The current value of an amount desired in the future How much to deposit now to obtain a desired total in the future "Discounting

Tax table rates

marginal rates

Your total tax liability is based on the

published tax tables or tax schedules, less any tax credits

Basis for achieving financial security

relationship between the personal balance sheet, cash flow statement and budget

Values:

The ideas and principles you consider correct, desirable, and important

Future Value

The increased value of money from interest earned Amount to which current savings will increase Total amount available in the future "Compoundin

marginal rates

The percentage of the last dollar that you earn that must be paid out in taxes (the key tax rate).The tax rate paid on the last (or next) dollar of taxable income Example: After deductions and exemptions, a person in the 35% tax bracket pays 35 cents in taxes for every dollar of taxable income in that bracket.

Adult life cycle

The stage in the family situation and financial need of an adult is an important influence on your financial activities and decision

Every decision involves a trade-off Personal opportunity costs

Time Effort Health

inancial Planning in Our Economy Global Influences

U.S economy affected by foreign investors and competition from foreign companies Level of imports/exports affects available supply of dollars Level of foreign investment affects domestic money supply Money supply affects consumer interest rates

Earned income

Usually includes wages, salary, commissions, fees, tips, and bonuses

VAT

Value-Added Tax

Characteristics of a Successful Budget

Well planned Realistic Flexible Clearly communicated

Selecting a Saving Technique

Write a check each payday and deposit in a savings account Use payroll deduction to deposit a certain amount in savings (direct deposit) Save coins or spend less on certain items

Annuity

series of equal deposits at equal intervals earning a constant rate Example:Deposit $50 per year at 7% for 6 years Appendix Exhibit 1-B factor = 7.153 Period = 6; % = 7% Future Value = $50 x 7.153 = $357.65 A level stream of cash flows for a fixed period of time

Exemptions

subtracted from AGI

Taxable income is determined by

subtracting adjustments to income, deductions, and allowances for exemptions from gross income

Interest Rate

the cost of money Affected by supply and demand , The percentage of a sum of money charged for its use. Rent or charge paid for use of money, expressed as a percentage per month or year of the sum borrowed.

The average tax rate

the total tax due divided by taxable income

Opportunity cost

what you give up making a choice, Refers to what you give up (your next best choice) in order to do or get something else (your chosen decision).The trade-off of a decision Not always measurable in dollars; may be time Consider lost opportunities resulting from your decisions

An exemption =

a deduction for yourself, your spouse, or qualified dependents The amount of the exemption

CPI

a measure of inflation, (consumer price index) a measure of the overall cost of the goods and services bought by a typical consumer

Tax deduction

amount subtracted from adjusted gross income (AGI) to arrive at taxable income


Ensembles d'études connexes

250 Psychiatric Nursing - Exam 1

View Set

what is life, chapter 1 lesson 1 - science

View Set

Childress study guide final fall semester

View Set

Unit 1: The Biology of Psychology

View Set

Chapter 11: Health Assessment Prep U

View Set