Personal Finance Unit One Test

What are the five steps to creating a budget?

1. Set financial goals 2. Estimate expected income from all sources 3. Budget amount for an emergency fund 4.Budget set amounts that you are obligated to pay 5. Budget estimated amounts to be spent for various household and living expenses 6. Record spending

You must file for a 1040 form if your income if over

100,00

how to find 40 percent of 400

400 times .4

Tax _______ is legal Tax ________ is not

Avoidance, evasion

Why do most planners advice people to contribute as much as possible to a 401k plan?

Contributions reduce adjusted gross income and therefore reduce taxes, increased value accumulates on a tax free basis until funds are withdrawn

interest Rate

Cost of borrowing money

What is the purpose of a 1099 form?

Interest, dividends, capital gains and losses, self-employment income, lump-sum payments.

Itemized Deductions

Medical cost, taxes, and interest and other sources subtracted from adjusted gross income

What is the purpose of a W-2P form?

Pension Income

What is the purpose of a W-2 form?

Salary, wages, and taxes withheld

When determining goal-setting guidelines, what three things should you take into account

Saving, spending, and investing activities

What are the five filing status categories for taxes

Single, married/filing joint return, married/filing separate returns, head of household, qualifying widow or widower

An exemption...

a reduction in taxable income for you, your spouse, and dependents

Inflation

a rise in the general level of prices

personal balance sheet

also called a net worth statement or statement of financial position, reports what you own and what you owe

What is a tax credit

an amount subtracted directly from the amount of taxes owed

Tax Deduction

an amount subtracted from adjusted gross income to arrive at taxable income

Cash flow statements show a summary of________

cash receipts and cash payments for a given period such as a month or a year

When planning your financial goals, what role does the economy plaY?

daily economic transactions facilitate financial planning activities, which affect personal finance decisions

Deflation results in consumers __________ their spending

decreasing

Budget Variance

difference between the amount budgeted and the actual amount saved or spent

Components of income include

earned, investment, and passive

Flat Tax

everyone pays the same tax regardless of income

Itemized Deductions

expenses you can subtract from adjusted gross income to determine your taxable income. examples are medical cost, taxes and interest

Adjusted Gross income

gross income which has been reduced by IRA contributions, alimony, and other adjustments

Investment income

income received through dividends, interest, or rent from investments

True statements regarding income tax

income taxes are imposed by federal, some state, and some local government to fund government operations. Social security is a tax to fund old-age, survivor, and disability income benefits by the federal government

Time Value of Money

measures the increase in the amount of money as a result of interest earned

Financial Ratios are guidelines for

measuring changes in your financial situation

Taxpayers pay income taxes through

payroll withholding and estimated tax payments

a revolving check credit and a bank line of credit are

prearranged loans for a specific amount of money that is accessed with special checks

What are basic major money management activities

preparing personal financial statements, storing and maintaining personal financial records, creating and implementing a plan for savings

Another name for discounting is

present vaule

You calculate taxable income by....

reducing gross income by adjustments, exemptions, and standard or itemized deductions

Examples of earned income

salary, commissions and wages

what is a correspondance audit?

simplest and most frequent type of audit, requires you to clarify or document minor questions

You can be required to provide back documentation of your tax records for up to

six years

Risk Premium

the "extra" amount that you can expect to receive for investing in an instrument due to factors such as expected inflation and the uncertainty of getting your money back

Net worth

the amount you would have if you sold the assets and paid off the liabilities

Consumer Price Index

the measure of the average change in the price urban consumers pay for a fixed "basket" of goods and services

what is the balance sheet equations

total assets minus total liabilities equal net worth

Discretionary Income

what you have left after you have paid for housing, food, and other necessities

cash surplus

when cash inflows are greater than outflows

What qualifies someone as your dependent?

you must provide more than 50 per cent of his support and he must be a full time student if he is over 19

Your financial plan is determined by

your life situation, personal values, and economic factors

Take-Home Pay

earnings (salary, wages, and commissions) after deducting for taxes and other items

To calculate time value of money for savings, the following items are needed

length of time, annual interest rate, principle amount

What is the rule of 72?

a way to determine how long it will take an investment to double. You divide 72 by the annual interest rate

what are the three types of closed end credit?

installment cash credit, installment sales credit, single lump sum credit

Interest income from municipal bonds issued by state and local governments is not

subject to federal tax