FIN 381 Exam #1 (ch 1-5)
Savings plans
*Regular savings accounts Called share accounts at credit unions *Certificates of deposit (CD): savings plan requiring that a certain amount be left on deposit for a stated period to earn specified interest rate Types of CDs: *Rising rate/bump up: may have high rates at set intervals EX) every 6 months *Liquid: offer opportunity to withdraw $ without a penalty, usually must maintain min. balance *Zero-Coupon: purchased at a deep discount w/ no interest payments *Indexed: have earnings based on stock market *Callable: start w/ higher rates and usually have long maturity's, bank can "call" *Money market accounts and funds: savings account that requires a min. balance and has earnings based on market interest rates. +Drawback: Not covered bu FDIC insurance Savings bonds *EE bonds: bought and managed online, may be purchased for any amount. Increase in value as interest is earned monthly and compound semi annually. Tax advantages- interest earned is tax exempt for state and local, and federal income tax on earnings is not due until bond is redeemed. *I bonds: has I/Y based on 2 components. 1)fixed rate for the new life of the bond. 2) inflation rate that changes twice per year.
Tax planning strategies
*Tax avoidance: use of legit methods to reduce taxes *Tax evasion: use of illegal actions to reduce taxes Investment decisions Tax-exempt investments: EX) Interest income from bonds Tax-deferred investments: EX) tax-deferred annuities, section 529 savings plans, retirement plans *Capital gains: profits from the sale of a capital asset such as stocks, bonds, or real estate -tax deferred b/c you do not have to pay tax on these profits until asset is sold -short term capital gains (less than 1 yr) will be taxed as ordinary income *Capital losses: can be used to offset capital gains, and up to $3,000 worth of ordinary income. Retirement and education plans Traditional IRA (individual retirement arrangements) Roth IRA -allows $5,500 annual contribution which is not tax deductible, however earnings on account are tax free after 5 years. Funds may be withdrawn before age 59.5 if owner is disabled, or for purchase of first home. Coverdell education savings account 529 plan Keogh plan -self employed retirement plan 401(k) plan
Ch 1 questions, other notes.
++Lenders benefit more than borrowers in times of high inflation. (T/F) -False Rate of increase calculation: (End Value - Beg. value) / Beg. value
Financial planning process
1. Determine your current financial situation 2. Develop your financial goals 3. Identify alternative courses of action 4. Evaluate your alternatives 5. Create and implement your financial action plan 6. Review and revise your plan
Career opportunities: now and in the future
Career opportunities are based on: Social influences *Geographic buying power formula : used to compare living costs and salaries in different cities. City 1 Index # x salary / = buying power City 2 Index # EX) A person earning $30,000 in Nebraska would need to earn $39,550 in Chicago to have comparable buying power. 123 x 30,000 _________________ = $39,550 93.3 Economic conditions High interest rates, $ increases, decreased global demand can affect career opportunities. Industry trends
Career choice factors
Career training and skill development *Technical skills *General skills: "social intelligence" Career decision-making Stages of career planning and advancement: 1. Research personal goals, abilities, and career fields 2. Research employment market and identify opportunities 3. Develop a resume and cover letter, apply for available positions 4. Interview for positions, asses interview performance 5. Evaluate financial and other aspects of positions you are offered 6. Plan and implement a program for career development
Filing your federal income tax
Completing the federal income tax return The major sections of 1040: 1) Filing status 2) Income 3) Adjustments to income 4) Tax computation 5) Tax credits 6) Other taxes 7) Payments 8) Refund or amount you owe Correcting federal return *Form 1040X: needs to be filed to pay additional tax or obtain a refund if you discover income that was not reported or find additional deductions.
Successful money management
Components of money management Three major money management activities: 1.) Storing and maintaining personal finance records How long to keep records: +Birth certificates, social security documents: permanently +Property, investments: as long as you own them +Purchase and sale of real estate: indefinitely Tax returns: 7 yrs 2.) Creating personal finance records 3.) Creating and implementing a plan for spending and saving Personal financial records system Financial records kept in one of 3 places: 1.) Home file 2.) Safe deposit box: private storage area at a financial institution w/ max. security. 3.) Online
Achieving financial goals
Components of personal financial planning Obtaining -> Planning -> Saving -> Borrowing -> Spending -> Managing risk -> Investing -> Retirement and estate planning
Financial institutions
Deposit institutions *Commercial banks *Savings and loans associations: specialize in savings accounts and home mortgages *Mutual savings banks: owned by depositors, also specialize in savings and mortgages *Credit unions: user owned, nonprofit, cooperative financial institution ***All insured by federal government Other financial institutions *Life insurance companies *Investment companies *Money market fund: common service of these companies, combo savings/investment fund *Brokerage firms *Finance companies- main function is making loans to consumers and small businesses, short and intermediate term loans have higher interest rates than most lenders *Credit card companies *Mortgage companies
Financial and legal aspects of employment
Evaluating employee benefits *Flexible employee benefit program "Cafeteria-style benefits": programs that allow workers to base their job benefits on a credit system and personal needs. *Flexible spending plans "Expense reimbursement accounts": Allows you to set aside part of your salary for paying medical or dependent care expenses. *Medical spending account (Archer MSA) or Health savings account (HSA): allows paying health care costs with pretax dollars 2 components; 1) health insurance coverage with a high deductible 2) tax-differed savings account for medical expenses *Vesting: point at which retirement payments made the organization on your behalf belong to you even if you no longer work for the organization. Tax-equivalent employee benefits Which of the following employee benefits has the greater value? (Assume a 25 percent tax rate.) a) A nontaxable pension contribution of $5,500 or the use of a company car with a taxable value of $7,430. USE: Tax-equivalent value = nontaxable amount / (1-tax rate) $5,500 / (1 - 0.25) =$7,333.33 ---> Company car b) A life insurance policy with a taxable value of $510 or a nontaxable increase in health insurance coverage valued at $370. USE: After-tax value = pretax value x (1- tax rate) =$510 × (1 - 0.25) =$383 ---> Life insurance
Chapter 2
Financial aspects of career planning
Chapter 5
Financial services: savings plans and payment accounts
Taxes and financial planning
Four major types of taxes: Taxes on purchases *Sales tax *Excise tax: tax imposed on specific goods and services. EX) gas, cigs, alcohol, air travel, phone service Taxes on property *Real estate property tax *Personal property tax: taxes on value of cars, boats, furniture, farm equipment. Taxes on wealth *Estate tax: imposed on the value of a persons property at time of death. *Inheritance tax: levied on the value of property bequeathed by a deceased person, paid for the right to acquire inherited property. Taxes on earnings *Social security and income tax
Ch 5 questions, other notes.
How many people in US are unbanked? Using a variety of alternative services rather than bank accounts. *10 million
Influences on personal financial planning
Life situation and personal values *Adult life cycle: stages in the family situation and financial needs of an adult. *Values The financial system and economic factors Providers (savers, investors) ---> Financial intermediaries (banks, insurance and investment companies) AND Financial markets (stocks, bonds, etc.) ---> Users (borrowers, spenders) of funds *Debt securities: represent $ borrowed by companies or governments. EX) bonds, notes *Equity securities: represent ownership in a corporation. EX) stocks Economic conditions 1) Consumer prices inflation *Rule of 72: the number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of inflation. EX) 4% I/Y, 72/4= 18 yrs to double 2) Consumer spending 3) Interest rates
Ch 2 questions, other notes.
Minimum salary calculation = Current salary x (1 + cost of living) EX) Luke Anderson is earning $12,000 a year in a city located in the Midwest. He is interviewing for a position in a city with a cost of living 12 percent higher than where he currently lives. What is the minimum salary Luke would need at his new job to maintain the same standard of living? 12,000 x (1.12) = $13,440 Monetary value calculation = Salary + non-taxable benefits / (1 - tax rate) EX) Job 1 pays a salary of $39,800 with $5,396 of nontaxable employee benefits. Use a 28% tax rate. 39,800 + 5,396 / (1 - 0.28) = $47,294
Chapter 3
Money management strategies: financial statements and budgeting
Employment search strategies
Obtaining employment experience Part-time employment, volunteer work, internships, campus projects. Using career information sources Career development office and networking Identifying job opportunities Job advertisements, networking and career fairs, employment agencies, job creation (the development of an employment position that matches your skills with the needs of an organization) Applying for employment 1.) Resume *Chronological: presents education and experience in reverse time sequence. *Functional: appropriate for diverse skills and time gaps in experience . *Combinational: combines chronological and functional *Social: Involves LinkedIn, twitter, and other social media networks. 2.) Cover letter 3.) Interview
Income tax fundamentals
PAGE 124 Step 1) Determining adjusted gross income (AGI) *Exclusion "tax-exempt income": amount not included in gross income, not subject to tax. *Tax-deferred income: income that will be taxed at a later date. *Reductions "adjustments to income": include contributions to retirement plan, penalties for early withdrawal of savings, and alimony payments (if deductible). *Adjusted gross income (AGI): gross income after certain additions and reductions have been made. AGI = income - adjustments to income *Tax shelters: investments that provide immediate tax benefits and a reasonable expectation of future financial return. Step 2) Computing taxable income Deductions *Tax deduction: amount subtracted from AGI to arrive at taxable income. Every taxpayer receives at least the: *Standard deduction: set amount at which no taxes are paid. Some people qualify for more than the standard deduction: *Itemized deductions: expenses a taxpayer is allowed to deduct from AGI. EX) Medical and dental expenses, taxes, interest, donations to charities, casualties and theft losses, moving expenses, other miscellaneous expenses. The standard deduction or total itemized deceptions are subtracted from AGI to obtain taxable income. Qualified business income *permits owners of sole proprietorships, S corps., or partnerships to deduct up to 20% of income earned by the business from their individual return. Can also be subtracted to arrive at taxable income. Step 3) Calculating taxes owed Tax rates *Marginal tax rates: rate used to calculate tax on the last (and next) dollar of taxable income. *Average tax rate: total tax due divided by taxable income. Taxpayers with high amounts of certain deductions and various types of income may be subject to an additional tax: *Alternative minimum tax (AMT): designed to ensure that those who receive tax breaks also pay their fair share of taxes. Tax Credits *Amount subtracted directly from the amount of taxes owed. Making tax payments You will make your payment of income taxes to the federal government through: *Withholding: pay as you go system or *Estimated payments: based on person estimate of taxes due at the end of year
Chapter 1
Personal Finance Basics and TVM
Personal financial statements
Personal balance sheet "net worth statement" Step 1) List items of value -liquid assets -real estate -personal possessions -investment assets Step 2) Determine liabilities -current liabilities -long term liabilities Step 3) Compute your net worth Assets - liabilities = net worth *Insolvency: inability to pay debts when their owed because liabilities far exceed value of assets Cash flow statement "personal income and expenditure statement" Step 1) Record income *Take-home pay "net pay" "disposable income": earnings after deductions for taxes and other items *Discretionary income: money left after necessities have been bought and paid for. +ranges from less than 5% for ppl under 25 to more than 40% for older people Step 2) Record cash outflows *Fixed expenses: payments that don't vary month to month. EX) rent *Variable expenses: flexible payments that do vary month to mont. EX) food, clothing, etc. Step 3) Determine net cash flow (surplus or deficit) Cash flow statement reports actual spending of household, budget considers projected income and spending. Ratios for evaluating financial progress: Debt ratio: Liabilities/assest Current ratio: Liquid assets/ current liabilities Liquidity ratio: Liquid assets/ monthly expenses Debt-payments ratio: Monthly credit payments/ take-home pay Savings ratio: Amount saved each month/ gross income
Opportunity costs and TVM
Personal opportunity costs EX) Time used for studying, working, shopping can't be used for other activities. Also, can relate to health. Financial opportunity costs TVM Interest calculation = Principal x I/Y x N FV "Compounding" PV "Discounting"
Chapter 4
Planning your tax strategy
Evaluating savings plans
Rate of return "yield" Percentage of increase in the value as a result of interest earned = interest/ principal EX) A $100 savings account that earned $3 interest for the year would have a rate of return of 3%. *Truth in savings law (TIS): requires financial institutions to disclose the following info on savings account plans: Fees on deposit accounts, I/Y, APY, other terms and conditions Defines *APY- % rate expressing total amount of interest that would be received on a $100 deposit based on the annual rate and frequency of compounding for a 365 day period Simply: reflects reflects amount of I/Y a saver should expect to earn APY = 100 (Interest / principal) Annual percentage rate= Rate x # of periods
Budgeting for skilled money management
The budgeting process (7 steps) (Phase 1) Asses current situation. (Phase 2) Plan financial direction. 1) Set financial goals (SMART) 2) Estimate income 3) Budget an emergency savings find and savings 4) Budget fixed expenses 5) Budget variable expenses (Phase 3) Implement your budget. 6) Record spending amounts *Budget variance: difference between amount budgeted and actual amount received or spent. +Surplus or deficit (Phase 4) Evaluate your budget. 7)Review spending and saving patterns Characteristics of successful budgeting +Well planned +Realistic +Flexible +Clearly communicated Types of budgeting systems *Mental budget: only exists in a persons mind *Physical budget: involves envelopes, folders, or containers to hold money or slips of paper representing amounts allocated for spending categories. *Written budget: provides detailed plan for spending *Computerized budgeting system: may be developed using spreadsheet software. *Online budget *Budgeting app
Ch 4 questions, other notes.
The interest is deductible on your tax return for which of the following? *Home equity loan
Payment methods
Types of checking accounts *Regular *Activity accounts: charge a fee for each check written and sometimes a fee for deposit, in addition to monthly service charge. No min. balance. Most appropriate for people. who write only a few checks each month and are unable to maintain min. balance. *Interest-earning checking accounts: Usually require min. balance. *Share draft account: interest-bearing checking account at a credit union. Checks written are called share drafts. Managing your checking account Four common endorsement forms are: *Blank endorsement: just your signature *Restrictive endorsement: "for deposit only", your signature, and account # *Special endorsement: allows you to deposit a check to someone else w/ the words "pay to the order of", followed by the name of the recipient and your signature Writing checks: Procedure for properly writing checks: 1) record the date 2) write the name of person or organization receiving it 3) record the amount of check in figures 4) write the dollar amount of the check in words 5) sign the check 6) note the reason for payment Other payment methods *Certified check: personal check w/ guaranteed payment *Cashiers check: check of a financial institution *Money order: purchased from financial institutions, post offices, and stores.
Developing personal financial goals
Types of financial goals -short, intermediate (1-5 yrs), long-term (5+ yrs) *Consumable-product goals: usually occur on a periodic basis and involve items that are used up relatively quickly, such as food, clothing, and entertainment. *Durable-product goals: involve infrequently purchased, expensive items such as appliances, cars, etc (tangible items). *Intangible-purchase goals: relate to personal relationships, health, education, and leisure. Goal setting guidelines S: Specific M: Measurable A: Action-oriented R: Realistic T: Time-based
Financial services for financial planning
Types of financial services Banks and financial institutions offer services in 4 main categories: 1.) Savings 2.) Cash availability and payment services EX) checking accounts 3.) Borrowing EX) credit cards, loans 4.) Investments and other financial services *Trust: management and control of assets by one party for another for benefit *Asset (or cash) management account: all in one account that includes- savings, checking, borrowing, investing, and other services for a single fee Opportunity costs of financial services When I/Y's are rising: use long term loans, short term savings instruments When I/Y's are falling: use short term loans to take advantage of lower rates when you refinance loans , long term savings instruments
Tax assistance and the audit process
What if you tax return is audited? About 1% of all tax filers are audited each year. Types of audits: Correspondence audit: smiliest and most common type, requires you to clarify some aspects of your tax return, usually given 30 days. Office audit: requires you to visit IRS office to clarify some aspect of your tax return. Field audit: more complex, IRS agent visits you at home, business, or the office of your accountant, field agent may visit to see if you have an actual home office.
Ch 3 questions, other notes.
Which of the following financial documents would most likely be stored in a safe-deposit box? *Birth certificates