personal finance exam 1

What amount of money should you hav in your savings account on the day you graduate

$1,500-$3,000

you have total assets (monetary, investment, and tangible) of $100,000. Your total liabilities (current and non-current) are $25,000. Please calculate your Net Worth (or Owners equity)

$75,000

Toby just accepted a job offer that pays a gross annual salary of $40,000. using the professor's rule of thumb, what is a good estimate of Toby's take-home pay?

(gross income x 75%) $30,000

What are the main uses of a monthly budget?

- Determining how much money you will be able to save and invest each month - figuring out how to reduce your spending without hurting your lifestyle too much - estimating the maximum monthly car loan payment you will be able to afford

You want to start investing for your retirement soon after you graduate. Approximately how much money will you have in your Roth IRA if you invest $500/month for the next 40 years? Assume that your IRA will earn an average annual return of 7% and your investments start at the beginning of the period.

1,320,000

What is the order of the five basic steps to personal financial planning and their related tasks?

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

You have the opportunity to invest $8,000 today in a fund that you hope will be worth $16,000 after 6 years. What approximate annual rate of return are you earning on this investment (BEG)

12% Rule of 72 (72/6)

You own a car that is worth $20,000 today. You still owe the bank $4,000 on the auto loan you used to purchase the car. How much "net worth" or "equity" do you have in your car?

20,000-4,000 = $16,000

You can afford to make monthly loan payments of $1,500/month on a house loan. The loan is for 20 years at 4% APR. What is the maximum loan that you can afford to borrow? Assume END of period payments

247,500

Sarah has $15,000 in monetary asstes, $4000 in monthly living expenses, a $20,000 balance on her car loan, and $60,000 of equity in her house. What is her month's living expenses covered ratio?

3.75

Most students graduate from college with an average of $35,000 in student loans. Assume the interest rate on student loans is 7% and the loan will be paid back over a 10-year period. Calculate the monthly payment on a $35,000 student loan at 7% for 10 years. END

350-450

What percent of your gross income should you try to save or invest each pay period

5-10%

You want your money to double within the next 8 years. Using rule of 72, what approximate annual rate of return do you need to earn each year for your money to double in eight years

72/8 = 9%

The financial principle of "waste not, want not " can be explained as:

Comparison shop, reduce spending, and use your money and assets wisely

Kai invested $3,000 in her investment account today. Her account earns an average rate of return of 7% compounded 4 times per year. She is in the 10% marginal tax bracket. How much will she have in her account after 10 years after she accounts for income taxes? (BEG)

Compounding interest w/ tax = interest/number of compounded periods (100%- Marginal Tax Bracket) I/yr= 1.75(100%-10%) = 1.575 N = 10 x 4 PV = $3,000 FV = ? $5,605

What financial statements is the most powerful pieces of paper you'll ever use

Daily expense tracker= It helps you see how you are spending your money and it forces you to slow down and think about how you are actually spending your money

How does the Babe Ruth Rule apply to step 3 of the financial planning process?

Develop 3 plans to achieve your financial goals

The concept of diversification is illustrated by the old saying:

Don't put all your eggs in one basket

Venus wants to have $30,000 in her taxable account at the end of 10 years. Her account will earn 6% annually. She is in the 15% marginal tax bracket. How much does Venus need to invest per year to reach her goal? (BEG)

FV = 30,000 I/yr= 6(100-15) = 5.1 N = 10 Pmt = 2,258 or between 2,200-2,300

D'wayne wants to have $40,000 available in 7 years for a down payment on a house. His account will earn 6% compounded annually. How much money does D'wayne need to deposit into his account today to reach his goal? (BEG)

FV = 40,000 N = 7 I/yr = 6 PV = 26,602

Juan wants to have 65,000 available to make a down payment on a house at the end of 5 years. His account earns 7% compounded semi-annually (2 times per year). How much does Juan need to invest every 6 months to reach his goal? (BEG)

FV = 65,000 I/yr= 3.5 N= 5 x 2 = 10 PMT = 5,250-5,400

True or False: Your goal for income tax management should be to minimize the amount of income taxes you pay each year

False

What is the professor's tips for improving your chance of success in college?

Go to class. you will learn something just by attending class

Inflation represents a rise in prices over time- and that means your dollars won't buy as much in the future. As an example, assume that the average annual inflation rate is 2.5%. Your family currently has an annual living expense of $50,000. How much will you need in 30 years to have the equivalent lifestyle that costs $50,000 today? (END)

I/yr = 2.5 N = 30 PV = 50,000 FV = ?

Frances invested $3,000 in her retirement account today. Her account earns an average rate of return of 5% compounded 6 times/ year. How much will she have in her account after 5 years? (BEG)

I/yr = 5%/6 = .83% N = 5 x 6 = 30 PV = $3,000 FV = $3,848

How should a checking or savings account be listed on your balance sheet?

Monetary Asset

Jose and Katia have a Debt payment/gross income ratio of 35%. How would you rate their debt payment/gross income ratio?

Okay- its not bad, but could be better

Millie invested $3,500 in her retirement account today. Her account earns an average rate of return of 8% compounded annually. How much will she have in her account after 20 years? (BEG)

P = $3,500 N = 20 I/yr = 8 F = ? 16,313

You just won the lottery and you will receive $20,000/ year for the next 30 years. You feel that your opportunity cost of money is 8% (your desired rate of return). What lump sum would you rather have today rather than waiting 30 years to collect all of you winnings? (BEG)

PMT = 20,000 I/yr= 8 N= 30 PV = ? 243,168

You want to invest $3,000/year into an account that earns 5.5% compounded annually. How much will you have in your account at 5 years (BEG)

PMT =$3,000 I/Yr = 5.5 N = 5 FV = 17,664

Jose just borrowed $4,500 to buy a used car. His loan is for 5 years with monthly payments. The interest rate on the loan is 5% APR. Calculate his monthly loan payments (END)

PV = -4,500 N= 5 I/yr = 5 PMT = ?/12= 86.62 or 84.92

Randy just invested $10,000 in a 5 year CD that earns a return of 4% compounded quarterly. How much will he have in this CD at the end of 5 years? (BEG)

PV = 10,000 N= 5 x 4 = 20 I/yr= 4/4 FV = 12,201 or 12,200-12,300

Cousin Brucie has a classic car (1963 Corvette) that is currently worth $60,000. Brucie expects the car to increase in value by 10% annually. How much should this car be in 15 years? (BEG)

PV =60,000 N = 15 I/yr = 10 FV = ? 250,000-255,000

What is the main reason people get frustrated with their insurance agents?

People do not understand what is covered or what is not covered by the insurance policy

Jose and Katia have a Debt Payment Gross Income ratio of 55%. Using the professor's rating system, how would you rate their debt payment/gross income ratio?

Poor- its in the danger zone

What is the biggest enemy that most people have when it comes to improving their financial condition?

Procrastination in their financial planning

The most common reason that the average household is not in a solid financial position is due to...

Procrastination. Putting off financial planning until its too late

What is the fastest way to improve your current financial position?

Reduce your spending without hurting your lifestyle too much

How should a Roth IRA or a 401(k) account be listed on your balance sheet?

Retirement investment asset

What is the final step of the financial planning process that some refer to as the "post mortem" or "autopsy"

Reviewing your progress and revise your plans to reach your goals

A local investment company is offering an investment that is supposed to earn an annual return of 20%. They claim there is a "significant possibility" of losing your money with this investment. This is an example of which Key Financial Principle?

Risk Return Tradeoff

What does the principle "pay yourself first" recommend?

Save or invest 5-10% of your paycheck as soon as you receive it

What principle recommends making your financial plans flexible and liquid?

Stuff happens

True or False: While each person's financial plan is different, the following factors should be incorporated into all sound financial plans: flexibility, liquidity, protection, and maximizing what is left of your earnings after you pay your taxes.

True

What question is important to ask to help you measure your financial condition?

What do you own and what do you owe?

What does a balance sheet tell you about your financial condition?

What you own (assets) and how you have paid for it (liabilities and net worth)

One of the easiest methods of determining if an asset is a tangible asset is by answering BLANK with a yes

do I use it in every day life?

True or False: Always use at least 3 sources of trustworthy information so that you get the big picture

true