Chapter 3 Personal Finance
How much money should you have in an emergency fund and a fully funded emergency fund?
$1000 dollars if you make over $20,000, if you make under that you should put away 500$. A fully funded emergency fund is 3-6 months worth of expenses (education, utilities, housing costs take) then $45,000 saved to have a fully funded emergency fund.
What are the Baby Steps?
1.) $1000 in an emergency fund (or $500 if you make less than $20,000 a year) 2.) Pay off all debt except the house utilizing the debt snowball. 3.) Three to six months worth of expenses (Utilities, medical bills, and debts) 4.) Invest 15% of your household income into Roth IRA's and pre-tax retirement plans. 5.) College funding 6.) Pay off your home early 7.) Build wealth and give.
How much money should you have invested into your household income?
15%
What are the retirement plans?
401(k) and 403(b)
What is a 529 plan?
A college savings plan that lets people pay taxes on the money later. This should be used only after you have put the most that you can into an ESA
What race is comparable to building wealth?
A marathon because you have to pace yourself when you are running, and you need to pace yourself when it comes to building your wealth.
What is a custodian?
A person who is responsible for someone else's account
* What is an IRA?
A special tax treatment for your retirement savings
ESA
Are a good way to save for college
* What is a Roth IRA?
Best retirement account option after putting maximum in matched dollars into 401K. It uses after-tax dollars and grows tax free.
What is a 457 plan?
Deferring or putting off compensation. Usually this is available to government employees.
What is the rule of 72?
Dividing the interest rate into 72, it will tell you approximately how many years it will take to double your money.
What is an ESA?
Education savings account where you put after tax money and then the money grows tax free. The best way to save for college from a very young age (not always the best).
What is a UTMA and UGMA?
Laws that allow parents to save for their children with less taxes. This money can be used for many things, not just college. A custodian is in charge until child is older.
What is Pre-tax?
Money that is put into an account before taxes were paid on that money. Taxes would then be paid when the money comes out.
What is pre-paid tuition?
Paying the money of college ahead of time
What is a 403 (b)
Retirement plan found in places that are not trying to make a lot of money like hospitals and schools. (non-profits)
What are the different pensions?
Roth IRA, IRA, 457
What is a 401 (k)?
The typical retirement plant found in most corporations.
What is the difference between an IRA and a Roth IRA?
Traditional IRA contributions are tax-deductible on both state and federal tax-returns for the year you make the contribution; withdrawals in retirement are taxed at ordinary income tax rates. Roth IRA's provide no tax break contributions, but earning and withdrawals are generally tax-free. (In simpler terms) with a traditional IRA you pay the taxes on the back end - that is, when you withdraw the money in retirement (in some cases, you may escape taxes on the front end — when you put the money into the account). With a Roth IRA, it's the exact opposite. You pay the taxes on the front end, but there are no taxes on the back end.
What is SEPP?
a pension plan for a self employed person
What are tax-favored dollars?
money that is working for you, either tax-deferred or tax free, within a retirement plan
What is a direct transfer?
movement of tax-deferred retirement plan money from one qualified plan to another
What is rollover?
moving money from one plan to another