Personal Finance Chapters 1-4

What aspect of financial planning might you discuss with a friend who buys fancy coffee drinks twice a day, visits the mall at least once a week for recreational shopping, and prefers impulse buying to carefully researched purchasing?

Waste not, want not - smart spending matters

Planning for your eventual death and the passage of your wealth to your heirs

Estate planning

Which one of the following is the "enemy" of compound interest and makes it very difficult to reach your financial goals? a. inflation b. annuity factor c. simple interest d. compound frequency e. none of these

Inflation

Owing more money than one's assets are worth

Insolvent

your taxable income from all sources minus specific adjustments (IRA contributions, student loan interest payments, and alimony paid by you) but before deducting your standard or itemized deductions

adjusted gross income

Danielle is a divorced single parent who is currently paying back a college loan, attending graduate school part-time, and working full-time earning $42,000. She has custody and provides all support for her child. Which of the following adjustments, deductions, or credits might apply to her? a. adjustment for student loan interest b. child tax credit c. child and dependent care credit d. lifetime learning tax credit e. all of the above

all of the above

Which factors affect your choice between claiming itemized deductions and the standard deduction? a. home ownership, as mortgage interest may exceed the standard deduction b. more deductible expenses this year than last year, as a result of unforeseen circumstances or planned "bunching" of deductions c. ease and simplicity of filing d. year long record keeping to thoroughly and accurately document itemized deductions e. all of the above

all of the above

Which of the following is a relevant questions to ask a financial planner? a. what are your credentials and professional designations? b. would you provide us with references? c. would you show us a similar financial plan you have done for someone else? d. will you provide us with a written estimate of your services and their cost? e. all of the above

all of the above

Which of the following statements about portfolio income from investments that are not held in a tax-deferred account is accurate? a. it is also called investment income b. it is normally in the form of dividends and interest c. it must be reported on your tax return d. it may be taxed at a lower rate than wages and salaries are e. all of the above

all of the above

Which of the following typically occur(s) during stage 1 of the financial life cycle? a. initial goal setting b. insurance planning c. saving for goals d. home purchase e. all of the above

all of the above

You need to review your progress and reevaluate and revise your plan (Step 5) because: a. your financials need change over the course of your life b. your employment situation changes over time c. your net worth changes over time d. your family situation might change over time e. all of the above

all of the above

a loan paid off in equal installments

amortized loan

the rate charged or paid for the use of money on an annual basis

annual interest rate

a series of equal dollar payments coming at the end of each time period for a specified number of time period

annuity

The first section of a balance sheet represents your

assets

What you own

assets

Which of the following is not a type of long-term debt? a. student loans b. credit card debt c. home loans d. car loans

b. credit card debt

A listing of used car prices (by model year manufactured), giving the average price a particular car sells for and its expected trade-in value

blue book

A personal income statement is prepared:

both on a cash basis and based on actual cash flows

the movement into a higher tax bracket when wages are increased as a result of inflation

bracket creep

A plan for controlling cash inflows and cash outflows. Based on your goals and financial obligations, it limits spending in different categories

budget

Suppose that you have been operating an online marketing business out of your home, and the business has recently expanded beyond belief. Since you have neglected your personal finances for some time, what would you do as a first step?

Separate your personal finances from the business finances

A statement of your financial position on a given date. It includes the assets you own, the debt or liabilities you have incurred, and your level of wealth, which is referred to as net worth

personal balance sheet

Generally, wages are reported on a ___ form while interest and dividends are reported on a ___ form.

W-2; 1099

An IRS - allowed reduction in your income before you compute your taxes. You are given one exemption for yourself, one for your spouse, and one for each dependent

personal exemption

the current value - that is, the value in today's dollars - of a future sum of money

present value

a multiplier used to determine the present value of an annuity

present value interest factor of an annuity

the value used as a multiplier to calculate an amount's present value

present-value interest factor

the face value of a deposit or debt instrument

principal

A tax system in which tax rates increase for higher incomes

progressive or graduated tax

taking money that you have earned on an investment and plowing it back into that investment

reinvesting

a helpful investment rule that states you can determine how many years it will take for a sum to double by dividing the annual growth rate into 72

rule of 72

a ratio aimed at determining how much you are saving; defined as income available for savings and investment divided by income available for living expenditures

savings ratio

a federal program that provides disability and retirement benefits based on years worked, amount paid into the plan, and retirement age

social security

FICA deductions from your paycheck are for which mandatory federal insurance programs?

social security and medicare

a set deduction allowed by the IRS, regardless of what a taxpayer's expenses actually were

standard deduction

Your net worth, or your general level of financial worth, is found by

subtracting your liabilities from your assets

A physical asset, such as a house or a car, as opposed to an investment

tangible asset

income ranges in which the same marginal tax rates apply

tax brackets

income on which the payment of taxes is postponed until some future date

tax-deferred

income subject to taxes

taxable income

Your great-uncle placed $500 a year in a bank account for your "college fund" for each of the last 18 years. How much is now in your college account (at the end of the 18th year) if your account earned an annual rate of return of 6%?

$15,452.83

If Monica invests $15.750 at 8% annual interest, how much would she have after 8 years?

$29,152.15

Suppose that Cathy's assets include an automobile worth $10,000 and a checking account with a $5,000 balance, while her liabilities include a student loan balance of $2,000 and a car loan balance of $8,000. What is her net worth?

$5,000

Adrian, a single man who wants to buy a house in five years, read an article that recommended a down payment of 20%. With a large income and little debt, Adrian can afford to save a substantial amount of money every month. He is asking you for advice to help him reach his goal. Assume that Adrian will need $30,000 for his 20% down payment in 5 years. If he located an investment with a 9% rate of return that compounds annually, which of the following is closest to the amount that he will have to save each year?

$5,013

What is the present value of an IOU for $1,000 due to be paid in 2 years if the discount rate is 8%?

$857.34

Jorge has a debt ratio of 37% and Jose has a ratio of 102%. They both have the same take-home pay every month. How can we describe their current financial situation?

- Jorge is currently solvent - Jose is currently insolvent - Jorge probably has more money available to enjoy every month - Jose probably doesn't have much money available to enjoy every month

Excise taxes

- are imposed on specific purchases, such as alcohol and cigarettes - are often aimed at reducing the consumption of the items being taxed - are referred to as "sin taxes" in some cases

List the four key factors involved in step 3 of personal financial planning basics.

- flexibility - liquidity - protection - minimization of taxes

Hector's month's living expenses covered ratio is 0.25 months. He just broke his leg an will not be able to work for six weeks. Without a paycheck for 6 weeks, what will Hector most likely experience?

- he may have to liquidate some of his tangibles or investment assets to keep current on his monthly bills - he may have to borrow some money to keep current on his monthly bills

While reviewing your current financial plan, you discover that you most likely won't achieve your long-term financial goals. What should you do now?

- look at increasing your income - look at cutting back on your expenses - look at revising your goals

Personal financial planning will enable you to

- manage the unplanned - accumulate wealth for special expenses - save for retirement - "cover your assets" - invest intelligently - minimize your payments to Uncle Sam

Alisha has $500 in monetary assets and $5,000 in current liabilities. What is her current ratio?

.10 times

List the 5 basic steps to personal financial planning.

1. Evaluate your financial health 2. Define your financial goals 3. Develop a plan of action 4. Implement your plan 5. Review your progress, reevaluate, and revise your plan

List the ten principles of personal finance

1. The best protection is knowledge 2. Nothing happens without a plan 3. The time value of money 4. Taxes affect personal finance decisions 5. Stuff happens, or the importance of liquidity 6. Waste not, want not - smart spending matters 7. Protect yourself against major catastrophes 8. Risk and return go hand-in-hand 9. Mind games, your financial personality, and your money 10. Just do it!

List the 3 stages in the financial life cycle.

1. The early years - a time of wealth accumulation 2. Approaching retirement - the golden years 3. The retirement years

Kareem has $6,000 in monetary assets and $2,000 in current liabilities. What is his current ratio?

3 times or 6,000/2,000

Using the Rule of 72, if it will take approximately 12 years for your money to double, at what annually compounded interest rate is it invested?

6%

You currently have $11,167 in your savings account. What interest rate do you need to earn in order to have $20,000 in the account in 10 years?

6%

What would be the interest rate on a loan of 39,927.10 that you paid off with annual payments of $10,000 for each of the next five years?

8%

As a teenager, Enrique learned a valuable lesson from his dad, who told him to invest $1,000 at 8% interest at age 20 and leave the money alone until age 65. Enrique's dad knew that one strategy used by wealthy people is to exercise self-discipline and never touch a long-term savings plan. Enrique is happy to apply his dad's advice. Approximately how long will it take Enrique's investment to grow into $2,000?

9 years

Which step has you to prepare a personal balance sheet?

Step 1

Which basic step to personal financial planning should be considered when establishing your personal financial goals?

Step 2

For many years, Joseph paid someone else to file his income tax return. After taking a personal finance course at his local college, Joseph feels he is ready to tackle it on his own for tax year 2014. Joseph is single with an income of $43,000 and has no dependents. He has little interest income from savings, does not have a personal IRA, and plans to itemize deductions. Joseph owns a home and travels a lot with his job. He pays some of his own work-related expenses because his employer does not pay for all of them. His only personal investments include 1,500 shares of stock he inherited from his uncle, which he does not intend to sell for many years because the blue-chip company has a strong history of dividend income and share price appreciation. However, he does contribute monthly to his 401(k) plan at work. Joseph can qualify for all of the following except: a. mortgage interest payments deduction b. deduction for unreimbursed job-related expenses that are in excess of 2% of AGI c. lifetime learning credit d. real estate property taxes deduction f. all of the above

c. lifetime learning credit

an asset you own, except for certain business assets, including stocks, bonds, and real estate

capital asset

the amount by which the selling price of a capital asset differs from its purchase price

capital gain

the tax you pay on your realized capital gains

capital gains tax

___ is the process of identifying a job that you feel is important and that will lead to the kind of lifestyle you desire

career planning

an investment that involves depositing an equal sum of money at the end of each year for a certain number of years and allowing it to grow

compound annuity

Interest paid on interest; occurs when interest paid on an investment is reinvested and added to the principal, thus allowing you to earn interest on the interest as well as on the principal

compound interest

A ratio aimed at determining whether you have adequate liquidity to meet emergencies; defined as monetary assets divided by current liabilities

current ratio

a ratio aimed at determining whether you have the ability to meet your debt obligations; defined as total debt or liabilities divided by total assets

debt ratio

expenses that reduce taxable income

deductions

Is it possible to save $585,000 for retirement instead of $310,000 without requiring much more to be invested every month?

depends upon the interest rate or return you earn on the investment as well as the number of years until retirement

Which indicates the correct order for completing your tax returns?

determine gross income, subtract adjustments, subtract deductions, claim exemptions, calculate total tax

the interest rate used to bring future dollars back to the present

discount rate

Acquisition of a variety of different investments, instead of just one, to reduce risk

diversification

A reserve or rainy-day fund with money set aside to be used in an emergency, when an unexpected expense is incurred or when normal income is disrupted

emergency fund

What an asset could be sold for, rather than what it costs or what it will be worth sometime in the future

fair market value

An expenditure over which you have no control. You are obligated to make this expenditure, and it is generally at a constant level each month

fixed expenditure

the value of an investment at some future point in time

future value

the value used as a multiplier to calculate an amount's future value

future value interest factor

a multiplier used to determine the future value of an annuity

future value interest factor of an annuity

A statement that tells you where your money has come from and where it has gone over some period of time

income statement

An economic condition in which rising prices reduce the purchasing power of money is termed

inflation

Deductions calculated using the federal tax form "Schedule A" which are totaled and then subtracted from taxable income are called

itemized deductions

deductions calculated using Schedule A. The allowable deductions are added up and then subtracted from adjusted gross income

itemized deductions

What you owe; your debt or borrowing

liabilities

The relative ease and speed with which you can convert non-cash assets into cash; in effect, it involves having access to your money when you need it

liquidity

When including an asset such as a car on your balance sheet

list its current value as indicated in a blue book or site like www.edmunds.com

a ratio aimed at determining whether you have the ability to meet your debt obligations; defined as total income available for living expenses divided by total long-term debt payments

long-term debt coverage ratio

the percentage of the last dollar you earn that goes toward taxes

marginal tax rate or marginal tax bracket

the federal government's insurance program to provide medical benefits to those over 65

medicare

A ratio aimed at determining whether you have adequate liquidity to meet emergencies; defined as monetary assets divided by annual living expenditures divided by 12

month's living expenses covered ratio

A measure of the level of your wealth. It is determined by subtracting the level of your debt or borrowing from the value of your assets

net worth or equity

an annuity that continues forever

perpetuity

Which of the following adheres to the financial principle "just do it"? a. the amount you can spend is what's left after you put aside your savings b. pay yourself last c. it's much easier to save than to spend d. all of the above

the amount you can spend is what's left after you put aside your savings

The concept that a dollar received today is worth more than a dollar received at some point in the future; therefore, comparisons between amounts in different time periods cannot be made without adjustments to their values

time value of money

An expenditure over which you have control. That is, you are not obligated to make that expenditure, and it may vary from month to month

variable expenditure

Your financial situation is insolvent when

your assets are less than your liabilities