BUS201
• Auto insurance coverage types o Bodily Injury Coverages
Bodily Injury Liability: covers risk of financial loss due to legal expenses, medical expenses, lost wages, and other expenses associated with injuries caused by an accident for which you were responsible Medical Payments Coverage: covers cost of health care for persons injured in your automobile, including yourself, or a pedestrian Uninsured Motorist's Protection: covers costs of injuries to you and your family if your vehicle is hit by a person without insurance; does not cover property damages No-Fault Insurance: provides fast, smooth methods of paying for damages without taking the legal action frequently necessary to determine fault
o Property Damage Coverages
Property Damage Liability: covers damage to other person's car when you are at fault; includes damage to things like signs/buildings Collision: pays for damage to your car regardless of who is at fault; if you aren't at fault, your insurer will try and collect from the other driver's property damage liability first; coverage is limited to actual cash value of your vehicle Comprehensive Physical Damage: covers damage to your vehicle not caused by a collision (ex. Fire, theft, vandalism, glass breakage, storms, falling objects/hitting animal); doesn't cover radio/stereo
Future value - "compounding
Single amount - earning interest on previously earned interest Annuity - a series of deposits o FV = P(1+R)^n
o Chapter 7 Bankruptcy
Submit petition to court, lists assets and liabilities and pay filing fee "Straight Bankruptcy" Many, not all debts forgiven Most assets sold to pay creditors Fresh start Most filings used to be this type May no longer owe: retail store charges, bank credit card charges, unsecured loans, unpaid hospital/physician bills May still owe: certain taxes/fines, educational loans, debts from willful or malicious acts
o Chapter 13 Bankruptcy
Voluntary plan proposed to bankruptcy court for those who want to pay a portion of their debt over a period up to five years "Wage-Earner's Plan" Must have regular income Payments are made to a trustee Trustee distributes money to creditors Court may allow you to keep property & pay less than full amt. of debt Costs to debtor include court costs, attorney's fees, and trustees' fees/costs
o Other coverages
Wage Loss Insurance: reimburse you for any salary/income lost due to an injury in an auto accident Towing/Emergency Road Service: pays for the breakdowns and mechanical assistance
***• Taking advantage of the float***
o "Grace period" o Purchases within the "float period" wont incur any charges/interest o Make larger purchases in the grace period so you have a month + the length of the grace period to pay off these purchases
• Personal Statement of Cash Flows
o Actual inflow and outflow for a given period of time o Cash surplus/deficit = cash received - cash spent
• Advantages and disadvantages of investing in gold and metals
o Advantages Hedge against inflation Safe haven during political or economic upheaval If interest rates low, could result in higher prices Can get in various forms (bars, wafers, coins, stocks, certificates) o Disadvantages Risky due to price variations Not easily turned into cash Difficult to know if you're getting a good stone De Beers controls 85% of world's diamond supply Expect to buy at retail and sell at wholesale
• Advantages and disadvantages of credit
o Advantages Immediate access to goods and services; permits purchase even when funds are low; cushion for financial emergencies; advance notice of sales; easier to return merchandise; convenient when shopping One monthly payment; safer than cash; needed for reservations/rentals; can take advantage of float time/grace period; rebates/miles o Disadvantages Temptation to overspend; failure to repay loan may lead to loss of income; misuse can lead to long term financial problems, damage to family relationships, slowing of progress towards financial goals; doesn't increase total purchasing power; credit costs money
• Advantages and disadvantages of investing in real estate
o Advantages Possible hedge against inflation Easy entry as a limited partner Limited financial liability No management concerns Financial leverage o Disadvantages Illiquidity Declining property values Lack of diversification Lack of a tax shelter Long depreciation period Management problems (direct real estate)
• W4
o IRS form you complete to let your employer know how much money to withhold from your paycheck for federal taxes o Can ensure you don't under/over pay for your taxes o The more allowances you claim, the less money your employer withholds for taxes
• Types of funds
o Aggressive growth funds: buy stocks in small, fast growing companies o Equity income funds: invest in stock of companies with a long history of paying dividends o Global stock funds: buy stock in companies in the US and other countries o Growth stock funds: buy stock in companies with higher than average revenue and earnings growth o Index funds: buy stocks that mirror an index o International funds: invest in foreign stocks sold in securities markets around the world o Large-cap funds: invest in stocks of companies with a market cap of $10 billion+ o Mid cap funds: invest in companies with market cap of $2-10 billion o Regional funds: buy stock in companies in a specific region of the world o Sector funds: buy stock in companies in a particular industry o Small cap funds: buy stock in smaller companies with a market cap < $2 billion o Socially responsible funds: avoid investing in companies that produce harmful products o High-yield (junk) bond funds: buy corporate bonds that are higher risk/higher yield o Intermediate corporate bond funds: buy investment grade corporate debt that matures between 5-10 years o Intermediate US bond funds: buy treasury securities w/ maturities of 5-10 years o Long term corporate bond funds: buy investment grade corporate bond issues with maturities > 10 years o Long term US bond funds: invest in US treasury securities w/ maturities > 10 yrs o Municipal bond funds: invest in municipal bonds that provide investors tax-free interest income o Short term corporate bond funds: invest in investment grade bond issues with maturities of 1-5 years o Short term US government bond funds: invest in US treasury securities with maturities of 1-5 years o World bond funds: buy bonds of foreign companies and governments o Asset allocation funds: invest in various asset classes such as stocks and bonds, with precise amounts in each type o Balanced funds: invest in both stocks and bonds, with primary objectives of conserving principal, providing income, and long term growth o Funds of funds: invest in shares of other mutual funds o Lifecycle funds (target-date funds): initially invest in more risk-oriented securities and become increasingly conservative and income-oriented as a specific retirement date approaches o Money market funds: invest in CD's, government securities, and other safe and highly liquid investments
• What is a deductible?
o Amount of money you need to pay upfront before the insurance company pays for the claim
• Allowable deductions
o An amount subtracted from the AGI to arrive at taxable income o Itemized deductions Medical/dental expenses > 10% of AGI Taxes (state/local income tax, real estate property tax) Interest (mortgage interest, home equity loan interest) Contributions to charities Casualty and theft losses Moving expenses Misc. expenses > 2% of AGI o Exemptions from AGI Deductions for yourself, your spouse, and qualified dependents
• Home equity loan
o Based on the difference between current market value of your home and amount owed on the mortgage o Borrow up to 85% of the appraised value of the home less amount still owed o Interest on loan is tax deductible o Set up like a revolving line of credit
• Classification of stocks
o Blue chip: largest companies; large market caps; safe investments o Growth: typically smaller tech, medical, bio companies that can be risky, but can offer a lot of growth potential o Income: safe companies to invest in; don't offer a lot of growth, but pay out large dividends to stockholders o Large cap: market cap > $10billion o Mid cap: market cap between $2 and $10 billion o Small cap: market cap between $300 million and $2 billion
• Auto insurance policy (100/300/50)
o Bodily Injury Liability: $100,000 limit that will be paid to one person in an accident; $300,000 limit that will be paid to all persons in an accident o Property Damage Liability: $50,000 limit for payment for damage to property of others
• Payday loans
o Cash advances, check advance loans, postdated check loans, delayed deposit loan o Charge can be 780% or more
• Federal Reserve
o Central bank in the US o Creates monetary policy, regulates banks, maintains stability of financial system, controls interest rates for the nation
• What happens if your credit is denied?
o Check credit file at credit bureau o If reasons for denial are invalid: file suit/notify federal enforcement agency o Ask creditor to clarify why you've been denied credit
• Difference between close ended and open ended credit
o Close ended One-time loans for a specific purpose that you pay back in a certain period of time and in payments of equal amounts Also called Installment sales credit, installment cash credit, single lump-sum credit Mortgage loans, automobile loans, and installment loans for furniture, appliances, and electronics o Open ended Use as needed until reaching line of credit max You pay interest and finance charges if you don't pay bill in full when due Most common example is credit card "Revolving check credit"
• Difference between commercial bank and credit union
o Commercial bank Offers a full range of services including checking, savings, lending, and other services For profit Commercial banks can be found almost anywhere o Credit Union User-owned, non profit, cooperative financial institutions Lower fees for checking accounts, loan rates, higher levels of user satisfaction Not as common to find; difficult to get cash from ATM in case of an emergency
• Difference between common stock and preferred stock
o Common stock Used to raise money for start up costs and help pay for expansion/ongoing business activities Don't have to repay the money a stockholder pays for stock Stockholder may sell a share of stock to another investor Dividends not mandatory Stockholders are given voting rights Can earn money from dividends, appreciation of stock value, or from possible increased value from stock splits o Preferred stock Receive dividends before common stockholders "Middle" investment and represents an ownership position between common stock and corporate bonds Owner of stock, but have a known rate of return Safer than common stock because dividends are more secure Better if you want a more predictable source of income
• Contents of a bond indenture
o Contract of the bond giving price, interest rate, how frequently interest is paid, and maturity date
• Mortgage bonds
o Corporate bond that is secured by various assets of the issuing firm, usually real estate o Interest rate is lower because it is secured by the collateral and corporate assets
• Callable bond
o Corporation can call in/buy back outstanding bonds from current bondholders before the maturity date; most corporate bonds are callable o Most agree not to call bonds for the first 5-10 years after they are issued o Bonds typically called if their interest rate is much higher than going rate
• Bond sinking fund
o Corporations deposit money into this fund annually or semiannually and use the money to pay off the bondholders when the bond issue comes due
• Types of IRS Audits
o Correspondence (mail) - for minor questions o Office visit - takes place at an IRS office o Field visit - most complex, with an IRS agent visiting you at home/business
• Open enrollment period
o If you didn't enroll in company healthcare insurance plan, given option to enroll for the following year in last few months of current year
• Objective of Personal Financial Planning
o Increased effectiveness in obtaining, using, and protecting financial resources o Increased Control of one's financial affairs o Improved personal relationships o Sense of freedom from financial worries
• Homeowners insurance coverage
o Covers damage to/destruction of house and other structures, plus trees, shrubs plants; additional living expenses; personal property in or away from home o Types: Personal property floater - high value items Household inventory - with documentation Medical payments coverage - for minor injuries caused by you, family members, or pets, occurring on your property or away from home Personal liability ($100k+) - "Umbrella policy"/"Personal catastrophe policy"; supplements basic personal liability coverage Endorsements - add coverage for things like earthquake damage/damage from floods
• Co-pays and deductible
o Deductible: how much you pay for insurance each month; the amount of the deductible you pay determines how large of a co-pay you will have o Co-pay: the amount you pay when you visit the doctors (usually about $20)
• Steps to buying a home
o Determine home ownership needs: Buying vs. renting; assess types of housing available; possibility of building a home o Find and evaluate a property to purchase Selecting a location - be aware of zoning laws; assess school system if you have children Using a real estate agent; conduct home inspection; get an appraisal for mortgage company o Price the property Determine home price Negotiate the purchase price o Obtain financing Determine amount of down payment (Private Mortgage insurance needed if down payment is less than 20%) Investigate rates, types, and terms of mortgages Apply for mortgage and evaluate types of mortgages (33%-38% of GI) o Close the purchase transaction Documents signed; meeting of buyer, seller, and lender Closing costs (settlement costs: title insurance & title search fee; attorney's and appraisers fees; property survey; termite inspection; deed recording fees, etc.
• Six steps in the Financial Planning Process
o Determine your current financial situation Evaluate income, savings, living expenses, and debts Prepare list of current asset/debt balances and amounts spent for various items Match financial goals to current income and potential earning power o Develop your financial goals Identify feelings about money and the reasons for those feelings Determine the source of your feelings about money Determine the effects of the economy on your goals and priorities Make sure your goals are your own and specific to your situation o Identify alternative courses of action Continue on, expand, change, or take new course of action o Evaluate your alternatives Consequences of choices: opportunity cost and trade-off Evaluating risk: uncertainty Financial planning information sources o Create and implement your financial action plan Develop a plan that identifies ways to achieve financial goals Plans can be increasing savings, reduce spending, make provisions for tax May need assistance from others to implement plan o Review and revise your plan Planning decisions need to be assessed regularly
• Difference between direct investment and indirect investment
o Direct investment: as the investor, you hold the legal title to the property o Indirect investment: don't hold the legal title to the property; real estate syndicates; limited partnerships; real estate investment trusts
• Dividend payout ratio
o Dividend payout = annual dividend amount/EPS o Amount of dividends paid to stockholders relative to the amount of total net income of the company
• Dividend yield
o Dividend yield = annual dividend amount/ price per share o How much a company pays out in dividends each year relative to its share price
• Earnings per share
o EPS = after tax earnings/# shares outstanding o Increase in earnings is generally a healthy sign
• Items included in income
o Earned income (wages, salary, commissions, fees, tips, bonuses) o Investment income (dividends, interest, rent from investments) o Passive income (from business activities where you do not directly participate - limited partnership) o Other income (alimony, awards, lottery winning, prizes)
• How a 401(k) works
o Employer makes non-taxable contributions and reduced your salary by the same amount o Employee contributions are tax-deferred o Some employers match a portion of the funds you contribute o Funds made available to you at retirement
• Three credit bureaus
o Equifax, Experian, TransUnion
• Medicare
o Federal program for those age 65+ and certain disabled people o Part A: hospital insurance - compulsory; covers hospital costs including DR. o Part B: medical insurance: - voluntary if have proof of coverage; doctor's visits and prescriptions o Part C: Medicare advantage program o Part D: Medicare prescription drug benefit
• Types of mortgages
o Fixed-rate, fixed-payment mortgages: Conventional: fixed rate, fixed payment home loan; equal payments over 10/15/20/25/30 years; loan is amortized; Government financing programs: loans insured by VA; loans insured by Federal Housing Authority; lower down payment/lower interest o Adjustable rate, variable-payment mortgages: Adjustable rate mortgages: during life of loan, IR varies with prime rate, but has a rate cap; payment cap may limit payment, but extend the loan Interest-only mortgage: allows homebuyer to have lower payments for first few years of loan; none of the mortgage payment goes toward loan principal amount; higher payments later in loan; dangerous if value of property declines o Other financing Buy downs: IR subsidy from home builder that reduces the mortgage payment for first few years Second mortgage: home is collateral and interest may be tax deductible; "Home equity loan"
• Warranties and legal rights of consumers
o Full/limited express warranties (usually written) o Implied warranty of title = seller has right to sell product o Implied warranty of merchantability = guarantees produce is fit for normal use o Used-car warranties disclosures must describe warranty if any (otherwise car sold "as is") o New-car warranties include basic parts, power train, and corrosion coverage o Service contracts ("extended warranties") = not warranties; more of an insurance policy for a fee
• Types of Medical coverage
o Hospital expense insurance: hospital room, board, and other charges o Surgical expense insurance: surgeon's fee for an operation o Physician expense insurance: pays for physician's care such as office visits, lab tests, and X-rays; doesn't include surgery o Hospital indemnity: pays fixed amount for each day you are in hospital; best for people in high risk groups o Dental expense insurance: covers exams, cleaning, x-rays, fillings, root canals, and oral surgery o Vision care: exams, contact lenses, and glasses
• Five risks of investing
o Inflation risk: during periods of high inflation, your investment return may not keep pace with the inflation rate o Interest rate risk: you may invest in a bond at 6%, but when rates for comparable bonds later go up to 8% it means your bond price falls o Business failure risk: bad management or products affect stocks, corporate bonds, and mutual funds that invest in stock o Market risk: prices fluctuate because of behaviors of investors o Global investment risk: more difficult to evaluate and changes in currency affect the return on your investment
• Five risks that could impact your personal financial planning
o Inflation risk: risk of losing purchasing power o Interest rate risk: bank and federal interest rates o Income/personal risk: possibility of getting laid off; health insurance in case you get ill o Liquidity risk: have too many illiquid assets (ex. Houses) and not enough cash
• Municipal bonds
o Issued by a state or local government such as cities, countries, or school districts o Use funds for ongoing costs and to build major projects such as schools, airports, and bridges o People like to invest in projects close to home o People like insured municipal bonds, or states that guarantee payment o May be callable, but not until after first 5-10 years o Interest earned may be exempt from federal income tax
• Standard deduction vs. itemized deduction
o Itemized - takes into account individual things... add up the deductions o Standard - one lump deduction depending on filing status
• Record Retention - which documents to keep, where, and how long
o Items in home file Personal and employment records; money management records; tax records; financial services records; credit records; consumer purchase & auto records; housing records; insurance records; investment records; estate planning and retirement records o Items in safe deposit box - difficult to replace Birth, marriage, death certificates, copy of will; citizenship and military papers; adoption and custody papers; serial numbers and photos of valuables; CDs and credit and banking account numbers; mortgage papers/titles; list of insurance policies; annual stock investment statements; rare coins and stamps o Records on your personal computer Current and past budgets; summary of checks written and other banking transactions; past income tax returns prepared with tax prep software; account summaries/performance results of investments; computerized versions of wills, estate plans, other docs o Kept indefinitely Birth certificates, wills, social security information, documents related to purchase and sale of real estate o Kept as long as you own them Records on personal property and investments o Kept seven years Copies of tax returns and supporting data
• Expenses associated with having a direct investment in real estate
o Large down payment o Payments to own the land o Costs to develop land
• Rent-to-own centers
o Lease products to consumers who can own the item if they complete a certain number of weekly or monthly payments o Charge can be over 300% o Beneficial for someone moving somewhere short term (few months) o More costly if you do this monthly over the long run
• Bankruptcy process
o Legal process in which some or all of assets of debtor are distributed among the creditors because the debtor is unable to pay his or her debts o Debtors must complete an approved instructional course in personal financial management o Can cause an immediate drop up to 260 points on credit report
• Personal Balance Sheet
o List assets - what you own (liquid assets, real estate, personal possessions...) o List liabilities - what you owe (current liabilities, long term liabilities) o Net worth = assets - liabilities o Insolvency: inability to pay debts when they are due o Ways to increase NW: increase savings, reduce spending, increase investments
• Factors that impact property insurance premiums
o Location of home; type of structure; coverage amount/policy type (how much you want to pay for deductibles)
• Medicaid
o Low income people of all ages; state administered with federal guidelines
• Pawn shops
o Make loans on possessions but charge higher fees than other financial institutions o Used for quick cash o Charge can be 3-100+% interest
• Factors that impact market value of a bond
o Market interest rate o Inflation o Credit ratings
• Medi-gap
o May pay what Medicare doesn't cover
• Retirement planning
o Misconceptions My expenses will decrease when I retire My retirement will only last 15 years Social security and my company pension will pay for my living expenses My pension benefits will increase to maintain with inflation My employer's health insurance plan and Medicare will cover my medical expenses There's plenty of time for me to start saving for retirement Saving just a little bit won't help o Importance of starting early Take advantage of the time value of money Private pension and social security are often insufficient to cover the cost of living Inflation may diminish the purchasing power of your retirement savings o Power of compounding Compounding investment earnings is what can make even small investments become larger given enough time Earning interest on previously earned interest o Basics Analyze current assets and liabilities, then estimate spending needs and adjust for inflation Evaluate the planned retirement income Increase income by working part time if necessary
• Debt to income ratio
o Monthly debts / net monthly income... (excluding house payment) o Consumer credit payments shouldn't exceed 20% of net income
• Debenture bonds
o Most corporate bonds are debenture bonds o Unsecured - only backed by the reputation of the issuing company
• Social security benefits
o Most widely used source of retirement income; covers 97% of US workers o Meant to be part of retirement income, not sole source o Full benefits at age 65-67; reduced benefits at age 62 o Stream of steady income each month, not much though
• Auto insurance requirements
o Nearly all states require auto insurance; requires drivers to prove their ability to cover the cost of damage or injury caused by them in an automobile accident
• Consumer credit counseling services
o Non-profit, supported by contributions from banks, merchants, etc. o Provides education about credit and budgeting o Provides help with spending plan o Provides debt counseling services for people with serious financial problems o Can develop debt repayment plan and negotiate reduced interest rates
• Affordable Care Act "Obamacare"
o Offering tax credits for small businesses to make coverage more affordable; prohibit denying coverage due to pre-existing medical conditions for children; provide access to affordable insurance for those with pre-existing medical conditions; prohibit insurance companies from dropping coverage when people are sick; eliminating co-payments for preventive services; requiring new health plans to allow persons up to 26 to remain on their parent's insurance policy; prohibit health insurance from placing lifetime caps on coverage; restricting use of annual limits; ensuring consumers have appeal options with the plan; providing funds to states to set up consumer assistance offices; increasing money for community health centers; increasing investment for increases in number of health care workers; requiring health insurance companies to justify all premium increases
• Warning signs of debt problems
o Paying only the minimum balance each month o Increasing total balance due each month o Missing payments, alternating payments, or paying late o Intentionally using overdraft protection or taking frequent cash advances o Using savings to pay routine bills such as food o Getting second or third payment notices o Not talking to your partner about money or only talking about money o Depending on overtime to meet routine expenses o Using up savings o Borrowing money to pay old debts o Not knowing how much you owe o Going over credit limit on credit cards o Having little/no savings for the unexpected o Being denied credit due to a credit report o Getting credit card revoked by issuer o Putting off medical/dental visits because you cant afford them
• Factors that impact your FICO score
o Payment history o Amounts owed o Length of credit history o New credit o Types of credit used
• Medicare Tax
o Payroll tax typically taken out of paycheck o Employer has to match amount you pay o Provides health insurance to Americans aged 65+ and have paid the tax
• Renters insurance
o Personal property loss/damage; additional living expenses; personal liability; building owner's insurance usually wont cover renter's personal property; many renters don't have insurance
• Steps to take if you cant pay your creditors
o Postpone further credit purchases; notify creditors; seek help from a non-profit credit counseling service o Fair Debt Collection Practices Act (regulates debt collection agencies) They must send written notice of amount owed, creditors name, and your rights to dispute the debt within 5 days of call Can dispute or pay it May request verification of the debt within 30 days • If not received, can insist communication about debt be ceased • If verification is sent, must pay debt or give notice you aren't paying
• Advantages of investing in funds
o Professional management o Diversification
• Bond ratings
o Provide info about quality and risk associated with bond issues o Moody's, Standard and Poor's, Fitch o Bond ratings generally range from AAA to D
• Reverse mortgage
o Provides elderly (>62) with tax-free income based on their home equity in the form of a loan that is paid back (with interest) when the home is sold or the homeowner dies o "Home Equity Conversion Mortgage"
• Disability income insurance
o Provides regular cash income lost as the result of an accident, illness, pregnancy o May only pay if you can't work at any job; look for policy that pays if you are unable to work at your regular job o Aim for benefit that = 60-70% of your gross pay o Sources of Disability Income Employer: group disability policy may be short or long term Social security: covers total disability that >12 months Worker's Comp: injured at work/injury is result of your type of work
• Two personal financial statements
o Report current financial position; measure your progress towards your goal o Personal cash flow statement Cash inflows and outflows o Personal balance sheet Assets & Liabilities Net worth = Assets - Liabilities
• Private mortgage insurance (PMI)
o Required if down payment is less than 20%; protects lender if you stop making payments on your home
• Difference between savings account and certificate of deposit
o Savings account Earns very low interest rates Can deposit/withdraw money as you need to, not recommended o CD Earn slightly higher interest rates than a savings account Money is locked in for a certain period of time (cant withdraw) If you withdraw before the specific date you forfeit all of your interest earned and have to pay a fee
• Convertible bond
o Special kind of corporate bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock
• Personal Budget
o Steps: set goals, estimate income, budget emergency fund, budget fixed expenses, budget variable expenses, record spending amounts, review spending and saving patterns, revise your goals and budget allocations
• Different investment alternatives
o Stock/equity Buying shares of a company Stockholders are owners and share in success of the company Corporation isn't required to repay the money obtained from the sale of stock Corporation is under no legal obligation to pay dividends to stockholders; could use profits to reinvest and grow the company Common stock and preferred stock o Corporate and government bonds Bond is a loan to a corporation, federal government, or a municipality Bondholders receive periodic interest payments and the principal is repaid at maturity (1-30 years) Bondholders can keep the bond until maturity or sell it to another investor before maturity o Mutual funds Investors' money is pooled together and invested by a fund manager You buy shares in the fund Provides diversification to reduce risk Funds range from conservative to extremely speculative Match your needs with a fund's objective Be aware of fees o Real estate Goal is to buy a property and sell it at a profit Decreases in value are also possible Location is very important
• Tax credit vs. a deduction
o Tax credit - amount subtracted directly from the amount of taxes owed Earned income tax credit; foreign tax; child and dependent care expenses; retirement savings; adoption expenses; energy savings o Ex) $100 Tax Credit reduces your taxes by $100... $100 Tax deduction reduces your taxes by $28 if you're in the 28% tax bracket
• W2
o Tax form given to you when you are hired o Reports wage and salary information for employees o Reports amount of federal, state, other taxes withheld from paycheck o Used to file your federal and state taxes
• Tax free income vs. taxable income
o Tax free income - not subject to federal income tax (interest on state/city bonds) o Taxable income - income that is subject to federal income tax (listed above)
• Social Security Tax
o Tax that pays for the retirement and disability benefits o Typically collected in form of payroll tax or self-employment tax o Employer has to match amount you pay
• Impact of having 401(k) on taxes
o Tax-deferred retirement plan; type of tax shelter o Contributions you make to your 401(k) can reduce your tax liability at end of year and your tax withholding each pay period o Don't actually take a tax deduction on your income tax return for 401k contributions
• Types of taxes
o Taxes on purchases (sales & excise tax) o Taxes on property (real estate property tax & personal property tax) o Taxes on wealth (federal estate tax & state inheritance tax) o Taxes on earnings (income tax & social security tax)
• Term life vs. whole life
o Term Life: temporary Protection for specified period of time If you stop paying premiums, coverage stops Can renew policy without having a physical at end of term Multiyear level term - most popular form of term insurance Conversion option - can exchange term for whole life w/ out physical Decreasing term: premium stays same, but amount of coverage decreases as you age - mortgage insurance Return of premium - policy refunds every penny of the premiums if one outlives the defined term o Whole Life: "Straight Life" Pay premium as long as you live Amount of premium depends on age when you started policy Provides death benefits and accumulates a cash value Can borrow against the cash value/draw it out at retirement Look carefully at rate of return your money earns
• Debt to equity ratio
o Total liabilities / net worth (excluding value of your home and amount of its mortgage) o Should be < 1
• Traditional IRA vs. Roth IRA
o Traditional Lets you contribute up to $5,500 ($6,500 if you're 50+) Contribution may be tax-deductible depending on tax filing status and income Earnings accumulate tax free until you start taking it out Pay taxes on the money as you withdraw it once you are retired but must begin to withdraw funds by age 70.5 o Roth Contributions are not tax deductible, but earnings accumulate with distributions tax free if the money is in the account for at least five years and withdrawals take place after age 59.5 If you're a single taxpayer, your Roth IRA contribution limit is reduced when your AGI > $112,000; can't contribute when your AGI > $127,000 May convert your traditional IRA to a Roth IRA
• Federal government bonds
o Treasury Bills (T-Bills) $100 minimum 4,13,26, or 52 weeks to mature Sold at discount o Treasury Notes (T-Notes) $100 units 2,3,5,7, and 10 year terms Interest paid every six months o Treasury Bonds Minimum units of $100 Maturities of 30 years Interest rates generally higher than those of T-bills and T-notes Interest paid every 6 months Held until maturity or sold before maturity o Treasury Inflation Protected Securities (TIPS) Minimum units of $100 5,10, and 30 year terms Valued based on the consumer price index Principal increases with inflation and decreases with deflation Interest is paid every 6 months and will vary Held until maturity or sold before maturity
• Simple yield of a bond
o Yield = dollar interest rate/price of bond
• Co-sign a loan
o You're being asked to guarantee the debt... consider if you can afford it if the borrower defaults o If borrower doesn't pay, you may have to pay up to the full amount and also any late or collection fees o If payment is missed, creditor can collect debt from you without first trying to get it from the borrower o Can affect your credit
