finance exam 2
Liquidity
"rapid" cash needs Regular bills & expenses Enough to meet your usual needs Start the month with 1-2 months of living expenses in your checking account
A Simple CD Ladder - $4,000
$1,000 in a 3-month CD $1,000 in a 6-month CD $1,000 in a 9-month CD $1,000 in a 1-year CD Every 3 months you have CDs maturing Renew them all for 1-year maturity In theory, higher returns for longer maturities Laddering provides higher average returns
Deductions for exemptions
$4,050 per exemption
Standard deduction
$6,300 for single $12,600 for Married/Joint
5 things you look for in checking account
-is it insurred -it is convient -customer service -check on the fees -safety
reasons why you dont have enough cash
-you dont earn enough -spend too much
Determine which form to use
1040EZ 1040A 1040
how long would it take to calculate your tax at a college student?
20-30 min
Kavita and Raj use the married, filing jointly tax status. Their combined taxable income is $180,000. What is the appropriate marginal tax bracket (%) for them to use when they are trying to determine the after-tax returns on their investments? (You may use the 2016 Income Tax Rate Schedule to answer this question)
28%
how long should you keep your tax records?
3-7 years
Credit Score
A majority of your credit applications are measured by your credit score Especially "small" loans - under $200-500,000 Also look at employment, income, etc. High credit score --> loan acceptance Increases the odds of getting the loan High credit score --> lower interest rates High credit score --> lower insurance premiums Statistical measure of your credit worthiness Different scores, different names FICO - www.myfico.com Beacon Ranges from 300-850 (FICO) Median credit score is 732 In general, greater than 700 rocks! Less than 650-675 = low probability of getting the loan
The primary difference between a savings account and a money market account is:
A money market account has more limitations than a savings account, but usually earns a higher rate of return than a savings account.
Payments
All tax payments made during the year Income Tax Withheld (from W-2) Estimated tax payments Primarily for businesses Earned income credit (EIC) For low-income families Add to get Total Payments
Alternative Minimum Tax (AMT)
Always check to see if you have to pay
Exemptions
An "allowance" for you and your dependents $4,000 per exemption Claim yourself Unless Ma/Pa claim you as a dependent Claim your spouse and your dependents Dependents = "qualifying child or relative" Under 19; under 24 AND a full-time student, ... Any age if permanently disabled Didn't pay more than ½ of own support for the year Lived with you for at least ½ the year Time at college counts as living at home
Consumer Credit
Any non-mortgage credit purchases Auto loan, credit cards, vacation loans, student loans, etc.
Cash Advance
Bad way to get cash (IMO) Borrow cash against your credit limit Pay a cash advance fee (2-4%) High APR on cash advances -Usually starts accruing immediately
Open or Revolving Credit
Borrow up to your credit limit Variable payback - minimum payment to full amount Interest charges build on the outstanding balance Examples: Credit cards VISA, MasterCard, store credit cards, etc. Open accounts at stores Drug stores, hardware stores, feed/supply stores Operating lines of credit (ag & business) For purchasing operating inputs Home Equity Line of Credit More on these later
Al's Cash Management Tips
Budget, budget, budget Track your expenses Build your liquidity for emergencies 1-2 months in checking; 3-6 months in savings Use checks until you learn your spending habits Takes time, slows you down, creates paper trail Record your expenses, balance your account Cash, debit cards & smart cards are sneaky Tend to spend more than if using checks
Cash Management
Build your checking account Enough $ to meet your needs Need to know your monthly budget Direct deposit of paycheck into checking Then, build your emergency funds Automatic savings From your checking account Replenish as necessary Then, use cash to pay down debts, invest, spend on yourself, donate/charity, etc.
You want to sell your car on CraigsList. Which of the following forms of payments is the safest for you to accept from someone you do not know?
Cashier's check
Other Types of Checks
Cashier's check From a bank or financial institution, very safe You write a check to the bank plus a fee They pay the check out of their funds Certified check Personal check guaranteed by the bank Money order Purchased at post office, convenience stores Traveler's check Specific denomination Safe, replaceable
basically a "loan to a bank" for a specified period of time
Certificate of deposit (CD)
Monitoring Your Credit
Check your report 1x per year Some say 4x per year to watch for identity theft Look for errors 79% have fairly serious errors 25% have errors that caused denial of credit Correct the errors Contact the credit bureau - have them investigate If the statement is accurate, but not quite... You can write a short explanation of the situation
Filing Status
Chose the appropriate one 1. Single 2. Married, filing jointly As of 2013: Same-sex marriages can use this 3. Married, filing separately Very few reasons to do this (IMO) 4. Head of household (with dependent(s)) 5. Qualifying widower with dependent children
Institutions
Commercial banks Full service, many locations On-line banking Convenience vs fees Savings & Loans (S&L) and Savings Banks Primarily home loans (70%) & savings accounts Credit unions Member-owned "Not-for-profit" = profits go to shareholders Usually higher rates of return, lower interest rates On-line deposit accounts Look for reliable companies Primarily savings accounts May be linked to credit card accounts Drawbacks Time to access your funds Fees Brokerage firms Asset management ("sweeps") accounts May have deposit accounts, credit/debit cards
Advantages of Credit Cards
Convenience Safer than carrying cash Great for emergencies Helps with record keeping -One monthly statement shows your purchases Internet shopping Helps build credit history - if used wisely Extra warranties & consumer protection -$50 max for lost/stolen card if reported Use someone else's money free for 30 day Consumer protection for debit cards: **** If you don't have the money, don't spend it.
Credit History
Creditors report to Credit Bureaus Credit limit Outstanding balance Payment history (current, delinquent, etc.) Date opened Judgments, collections, etc. It's all used to calculate your credit score Entitled to 1 free copy of your credit report per year
Which of the following is true about your federal income taxes? A) Your Roth IRA contributions are treated as "adjustments to your gross income" and will reduce the amount of income taxes you pay each year. B) You can only claim your grandparents as dependents (or exemptions) if they lived with you for at least 8 months out of the year. C) Most married couples should choose Married Filing Separately as their filing status D) There are 2 ways to list the expense of your tuition & educational fees. You are usually better off listing them on the back of the 1040 (as a tax credit) rather than on the front of the 1040 (as a tax deduction).
D
Troubleshooting your Credit Card Situation
Determine how long it will take to pay the balance in full Switch to lowest APR card possible Watch balance transfer fees! Use savings to reduce credit card balances Not a good sign Pay credit card balances with home equity line Then STOP using your credit cards! Work with your creditor Better than hiding from them
Tax Credits
Directly reduce your tax liability ($ for $)
Other Forms of Cash Management
Electronic fund transfers ATMs Debit cards Smart Cards & Stored Value Cards Money is transferred to an account "on the card" Use it like a debit card until the funds are gone May be able to add more funds to the account Single purpose vs multi-purpose Pre-paid phone cards, gift cards, Hokie Passport May be limited to where it can be used
Take-Home Pay/ Gross income minus:
Federal income taxes withheld State income taxes withheld FICA (Social Security & Medicare) -- 7.65%
Annual Fee
Fee charged just to have the card Many cards have no annual fee
Interest Rates may be fixed or variable... whats the difference?
Fixed rates on credit cards may change over time Need 45 days notice from company Variable rate Variable rates usually tied to an index (prime, LIBOR) Example: Variable rate = prime rate + 2.99% Variable rate may change each month
Why Do We Pay Income Taxes?
Help fund national, state, local efforts Cost of running the governments Roads, bridges, schools, libraries, etc. National defense - armed forces Police/fire protection Government programs Welfare, farm programs, special interest, etc. Your goal should be to MAXIMIZE your after-tax income
Refund/Amount Owed
If Total Payments > Total Tax Refund Otherwise, you owe more income taxes Can receive refund directly into bank account I recommend this - get it faster Be sure your account number and routing numbers are correct!
Old Doc White gave you a tip for balancing your checkbook when your adjusted balance doesn't match the bank's ending balance. He said to "take the difference between your adjusted balance and the bank's ending balance, then divide by 9." How can this tip help you find an error in your checkbook register?
If the result comes out as a whole number (integer) you probably transposed numbers in your checkbbok register
Identity Theft - What to Do
If you suspect your identity has been stolen: Contact the Fraud Dept. of one of the credit bureaus Close any accounts that you suspect are at risk File a police report File a complaint with the FTC www.consumer.gov
Where to Keep your Cash
In cash - not recommended! Checking account (demand deposit) Non-interest bearing Interest bearing Savings account (time deposit) Money market deposit accounts Similar to a savings account Variable rate of return, usually slightly higher May have higher minimum balances & limits on withdrawals -------------------------------------------------------- Certificates of Deposit (CDs) "Loan" to a bank at stated interest rate and maturity Early withdrawal penalties Good place to "park" your money until you decide "Laddering" your CDs Nice way to manage your emergency funds Invest in a series of differing maturities Renew each CD for the longest maturity -------------------------------------------------------- Money market mutual fund (MMMF) Mutual fund investing in very safe debt instruments May have limited check-writing abilities Fees involved - usually less than 1% of the investment Not insured, but relatively safe -------------------------------------------------------- Asset management accounts AKA "sweeps account" Comprehensive financial account Checking, credit card, money market, mutual funds, loans More aggressive account, higher fees & min. balances Not insured -------------------------------------------------------- US Series EE Bonds (aka Savings Bonds) Very safe, low return, low liquidity Various denominations ($25 to $10,000) Electronic version - pay face value Get the face value + accrued interest at maturity Get reduced amount if sold before maturity Not taxed at state level Tax-exempt earnings if used for education expenses
Types of Open Credit: Bank credit cards
Issued by banks, "backed" by Visa or MasterCard May have nice perks!
Income
List your gross income for the year by source Support with W-2 forms Wages, salaries, tips Interest earned - taxable and tax-exempt Schedule B Dividends - ordinary, qualified Schedule B Business or farm income Schedule C or F Capital gain/loss from sale of assets Schedule D IRA distributions, pensions, unemployment Including Social Security benefits Other income (Line 21) Income from "odd jobs", gambling, etc.
The "Theory" of Income Taxes
Look at the IRS Form 1040 Address & personal info Filing status Exemptions Income Adjustments to income Taxes & tax credits Other taxes Payments Refunds/Amount Owed
Interest rate (APR)
Measured by Annual Percentage Rate (APR) APR = estimate of actual annual cost of the account Includes most fees as well as interest charges Allows comparison of different accounts Several different rates Purchases rate Balance transfer rate Cash advances rate - Ouch! Default rate - Doh!
Itemizable Expenses
Medical & Dental Expenses Only the amount OVER 10% of AGI State/Local income taxes OR sales tax (expiring?) Real estate and personal property taxes Interest paid Primarily mortgage interest, including HEL & HELOC Gifts to charity Casualty & theft losses Unreimbursed job expenses & misc
Other Fees
Minimum interest charge Balance transfer fee Cash advance fee Late fee Over-the-limit fee -Only if you "opt-in" for automatic limit increases
National average credit card APR =
National average credit card APR = 17% - 19% Student Credit Cards 19.8% APR Cash-back Cards 20.8% APR
College Students & Credit Cards
New laws for those under age 21: To get a card, must have: Income from a job, or Co-signer (joint account) May need to cancel card to get rid of co-signers Less active solicitation from credit card companies Cannot send unsolicited credit card applications Unless you authorize - credit bureau No more "free stuff" just for applying for a card Think about getting adding to Ma/Pa's account as an authorized user - easier for everybody
Types of Open Credit: Travel & Entertainment cards
Not revolving - must pay entire balance each month Therefore, basically interest-free Probably has annual fee
Uncle Al's How to Use Credit Cards
Only use a credit card when you have the cash in your checking account Use it as a convenience, not as a long term loan Pay your balance in full every month* Maybe carry a small balance 1-2x per year Make at least your minimum payment though!! Never make just the minimum payments! Michael Jordan and Richard Petty rules No cash advances!! Have less than 3 credit cards
Checking Account
Opening an account Look at: Fees Monthly, per-check, on-line banking, overdraft, minimum balance Minimum balances Operating hours & locations ATMs Customer service! Using Deposit paycheck & other funds Direct deposit is great Keep your receipts from ATM deposits!! Write checks as needed Date, payee, amount ($ & words), memo, signature Record in your check register On-line banking Faster, easier, schedule your payments/savings Fees? Don't bounce checks!! Fees will get ya! Balancing your check book In your checkbook register, mark off all deposits and checks that have cleared Take the ending balance from monthly statement Add any deposits that haven't cleared from the register Not shown on your statement Subtract any checks that haven't cleared Adjusted balance = checkbook balance
Credit Score - How it's Determined
Payment history (35%) Make your payments on time! Outstanding credit vs credit limit (30%) Being near your credit limit isn't good! Length of credit history (15%) The longer, the better! Types of credit used (10%) The wider the variety, the better New credit inquiries (10%) Basically, an increase in voluntary inquiries is b
Types of Open Credit: Variations of bank credit cards
Premium or "Platinum" cards Affinity cards VT, MADD get a percentage as a donation Secured credit cards For those with bad credit Pledge something as collateral (bank account, CD, etc.) Credit limit = value of collateral
Comparing Different Accounts
Rate of Return Annual Percentage Yield (APY) Allows comparison of accounts with different compounding methods Always compare AFTER-TAX APY After-Tax APY = Pre-tax APY *(1-MTB%) Account A pays 6% return, 25% MTB Account B pays 5% return, tax-exempt Account A: After-Tax APY = 6% x (1 - 0.25) = 4.5% Note: (1 - 0.25) = (100% - 25% MTB) Account B: After-Tax APY = 5% x (1 - 0) = 5% Account B's After-Tax APY > Account A's After-Tax APY You will have more money left after taxes with Account B Safety FDIC or FSLIC - up to $250,000 per depositor* May take a while to get your money MMMFs - not insured, but fairly safe Also look at convenience, fees, customer service, etc.
Legally Reducing Your Taxes
Reduce your taxable income Make 401(k), 403(b) retirement contributions Increase your adjustments Make traditional IRA contributions Don't recommend this for most students (go Roth!) Student loan interest, moving expenses, etc. Standard vs Itemized Deductions Take the larger of the two For most students - use Standard Increase your Itemized Deductions House-related deductions Mortgage interest, property taxes Incur your medical expenses in same year Plan to have all elective surgeries in same year Increase charitable donations (tithing, etc.) Use any tax credits that might help Education credits, child/elder care, etc. $1-for-$1decrease in the amount of taxes you owe Qualified Dividends Hold your stocks at least 60 days Tax-exempt income Municipal bonds Have Tax Babies! You can claim more dependents Probably not the best reason to have a child!!
What to look for in an institution
Services & products The ones you need/want Checking, savings, debit/credit card, ATMs, loans, safe deposit boxes, trust, etc. Safety Track record FDIC, FSLIC, NCUA Fees & charges Convenience & Customer Service
Calculating the balance owed
Several methods & variations Average Daily Balance Method Most common method Add up each day's balance, divide by number of days Previous Balance Method Uses the previous statement's ending balance Higher interest charges Adjusted Balance Method Subtracts any payments from previous balance Lower interest charges than Previous Balance method
Getting a Credit Card
Shop around www.CreditCards.com www.BankRate.com Look at APR, fees, as well as the issuer 5 "Cs" of Credit Character - measured by credit score/history Capacity (Cash Flow) - current income Capital - value of your investment assets Collateral - only for secured credit cards Conditions - overall economy, purpose of loan
Credit Report
Shows: Identifying info Last 3 addresses, names used, employment All of your credit accounts (that are reported) Type of account, institution, balance, date opened, payment history (20-30 months), current status Inquiries about your account Voluntary - when you give permission Involuntary - doesn't work against you Public records Collections, judgments, bankruptcy, liens, etc. Bad stuff stays on for 7 years Bankruptcy stays on for 10 years
Determine if you have to file
Single, not a dependent Gross income > ~$10,350 As a dependent Unearned income > $1,050 or earned income > $6,300
Tax & Credits Types
Standard Deduction vs Itemized Deduction Reduces your taxable income Use the LARGER of the two Itemizable Expenses Deductions for exemptions Taxable Income Tax (line 44) Alternative Minimum Tax (AMT) Tax Credits Child/elder care Education credits Primarily self-employment taxes
Adjustments
These REDUCE your total income Total Income - Adjustments = Adjusted Gross Income AGI = Adjusted Gross Income Main adjustments for students/graduates Moving expenses (job-related, >50 miles) Self-employment items ½ SE tax, retirement contributions, health ins. premiums Traditional IRA contributions Student loan interest payments (up to $2,500) Not if you are a dependent!! Tuition & fees deduction (up to $4,000) But wait - check out the education tax credit (line 50)
Grace Period
Time from initial purchase to first interest charges Typically 20-25 days, may be 0 days No grace period if there's an outstanding balance
After reading the new account insert in his monthly statement, Tony Mercadante determined that the FDIC considers a joint account as a separate depositor. He and his wife Cynthia have three accounts at ABC Bank & Trust, one joint account with a balance of $60,000 and two individual accounts minus−his has a $150,000 balance and hers has a $254,000 balance. What amount of FDIC coverage do Tony and Cynthia have on their accounts?
Tony's account balance of $150,000 is completely covered as is their joint account of $60,000; both accounts are under the $250,000 FDIC limit. Cynthia's account is over the insurance limit by $4,000, but their money would be covered if she moved some into their joint account or into another institution.
Add to your income taxes to get
Total Tax
Disadvantages of Credit Cards
Typically spend more with credit card vs cash Easy to lose track of your purchases -During the month Fees and interest charges -High interest rates Live above your means now - pay for it later -Commit future earnings to debt payments Destroy your credit history if used unwisely
Itemized deductions
Use Schedule A
Types of Open Credit: Charge accounts
Use product/service today, pay at end of month Phone bill, electric, medical, hardware, feed/supply
Tax (line 44)
Use tax tables or tax brackets
Address & Personal Info
Use the IRS label if possible Name and address SSN Presidential Election Campaign ($3) Doesn't change the amount of your tax or refund State income tax forms County codes or school district codes
Types of Open Credit: Single-purpose cards
Used for only one store Good way to limit spending Confined to one store!
Al's Tax Tips
You can easily do your own taxes Get the instruction book READ the instructions Use www.IRS.gov for specific questions Some tax software is okay But I would compare to the "by-hand" results Round off to the nearest $1 Document your numbers Check your math When in doubt, read the instructions! Keep copies of your calculations
What is Doc White's advice about using the Standard Deduction vs the Itemized Deduction on your federal income taxes?
You should use whichever deduction is largest.
progressive tax system
Your tax rate (%) increases as your income increases High income households pay a higher percentage Everyone starts out paying the same rate Bill Gates pays the same rate as you on the first portion of his income
Schumer Box
a summary of the costs of a credit card in the United States.
Education credits
aka American Opportunity Credit Up to $2,500 per STUDENT Only for first 4 years of higher education Lifetime up to $2,000 per RETURN Can't use if you claim the Tuition/Fee adjustment Can't use if you're a dependent
Credit
buying something today with the obligation to pay later
Which of following is NOT a legal method of reducing your federal income taxes? A. Using the larger of your standardized deduction or your itemized deduction B. Making deductible contributiosn to a traditional IRA C. Listing only 75% of your cashtips and wages as income Your answer is correct. D. Contributing money to your 401(k) at your place of employment
c
casher's check vs certified check
casher's check- banks fault certified check- your fault both work
why are checks better than credit or debit cards?
checks are better because it makes you think what youre doing
Savings
emergency needs Unexpected expenses & situations 3-6 months of living expenses Your "financial safety net"
T or F: You should try to minimize the amount of income taxes you pay rather than trying to maximize how much money you have left after you pay your income taxes.
false
True or False. You are in the 15% marginal tax bracket. You make a Roth IRA contribution of $5,000 for tax year 2017. This contribution will reduce your income taxes by $750 for 2017
false
which is the better option? married filling jointly or separately on the 1040?
jointly --> it gives you more benefits would make sense to do separelty if one makes more money, lives in a separate state, divorce
what do the two computerized codes on a check?
left side: bank routing number middle side: your account number right side: check number
always be aware of
making decisions strictly on tax consequences! Look to Liquidity (3-6 months of savings) Repayment ability (40% rule) Risk (safety, volatility) Profitability (opportunity cost) And - does the decision move your towards your goals!
whats the benefit of putting 0 or less exceptions in your W-4?
on april you are going to get a tax refund check --> huge and you should save
Cash "flow chart"
take home pay checking or savings checking: normal expenses checking: gifts and donations savings: pay debts savings: invest savings: gifts and donations
Impact of FICO Score on APR
the higher the FICO score, lower the APR --> monthly payment goes down
the more excepmtions you pay
the more money they are going to withold in your paycheck but in the end you might have to write a check
Marginal tax rate
the taxes owed on the next dollar you earn
Average tax rate
total taxes / taxable income
True or False. The hardest part about filing your own income taxes is keeping all of the tax records you will need to complete the forms.
true
biggest impacts on the us economy?
us government buy services to pay their empoylees
Teaser rates
Short-term low rates - as low as 0% APR After stated term, rate increases
Take-Home Pay/ Filling out a W-4 form
The more exemptions you list, the less income tax they withhold Fill out when you start a job Can make changes later
when the us first institute income taxes?
abe l.
when is your filling deadline?
april 15th usually
A primary benefit of using a "CD Ladder" for your emergency funds is:
you will have money available on a regular basis when each CD matures you should earn a higher average rate of return than just using 1 short-term CD
Your savings account earns an annual rate of return of 1%. You are in the 10% marginal tax bracket. If you deposit $1,000 into your account, how much will you have in your account (after taxes) after 5 years? Beginning of Period.
$1,045.82