Your Money and Credit-Test One-Morris

Net Worth

-Assets-liabilities=net worth -Measurement of current financial position -Net worth is not equal to cad available

Create a personal balance sheet and cash flow statement

-Balance Sheet=Net Worth Statement -Cash Flow Statement=Personal Income and Expenditure Statement

Connect money management activities with saving for personal financial goals

-Basis for achieving financial security=relationship between the personal balance sheet, cash flow statement, and budget -Use Time Value of Money calculations to determine increased value of savings and amounts needed to reach future goals

How long to keep records

-Birth certificates, wills, and Social Security information=permanently -Personal property and investments=as long as you own them -Documents re: purchase and sale of real estate=indefinitely -Copies of tax returns and supporting data=at least 7 years; 10 years is better

Identify the main components of wise money management

-Coordination of person financial records, statements and budgeting activities -An organized system providing ease of access and security

Trade-Offs

-Every decision involves a trade-off -Person opportunity costs: a. time b. effort c. health -financial opportunity costs a. based on time value of money

Types of Time Value of Money Calculations

-Future Value=Amount that will be available at a later date. -Present Value=Current value of an amount desired in the future

Ways to Increase Net Worth

-Increase savings -Reduce spending -Increase the value of investments and other possessions -Reduce amounts owed

Types of Tax Preparation Services

-One-person, local offices to large firms such as H & R Block -"Enrolled Agents"=Government-approved tax experts -CPA Tax Accountants -Attorneys

Alternative Minimum Tax (AMT)

-Paid by taxpayers with high amounts of certain deductions and various types of income -Designed to ensure that those who receive tax breaks also pay their fair share of taxes

Calculating Interest Earned:

-Principle=amount of savings -Annual Interest Rate -Length of time money on deposit (in years)

Components of a Balance Sheet

-Step 1: List items of value a. liquid assets b. real estate c. personal possessions d. investment assets -Step 2: Determine amounts owed a. current liabilities (< 1 year) b. long term liabilities -Step 3: Compare your net worth

Records on your personal computer

-current and past budgets -summary of checks written and other banking transactions -past income tax returns -account summaries, performance results of investments -digital versions of wills, estate plans, and other documents

Items you refer to often

-personal and employment records -money management records -tax records -financial services records -credit records -consumer purchase and auto records -housing records -insurance records -investment records -estate planning and retirement records

Calculating Savings Amounts

1. Convert savings goals into specific amounts 2. Use savings and investments plans to grow your money 3. Use time value of money to calculate progress toward financial goals

The Financial Planning Process

1. Determine current financial situation 2. Develop financial goals 3. Identify alternative courses of action -continue same course of action -expand current situation -change current situation -take a new course of action 4. Evaluate alternatives -consequences of choices -evaluate risks -financial planning information sources 5. Create and implement financial action plan 6. Review and revise plan

Main Components of Gross Income

1. Earned Income -Usually includes wages, salary, commissions, fees, tips, and bonuses. 2. Investment Income -Money received in the form of dividends, interest, or rent from investments. 3. Passive Income -Results from business activities in which you do not directly participate 4. Other Income -Alimony, awards, lottery winnings, and prizes

Total Income is affected by:

1. Exclusions -Amounts excluded from gross income -Also referred to as tax-exempt income; income that is not subject to federal income tax. -Ex: municipal bonds 2. Tax-Deferred Income -Income that will be taxed at a later date, such as earnings from a traditional individual retirement account (IRA)

Completing the Federal Income Tax Return

1. Filing status and exemptions 2. Income 3. Adjustments to income 4. Tax computation 5. Tax credits 6. Other taxes 7. Payments 8. Refund or amount you owe 9. Your signature (most common filing error)

A financial plan must include what 4 activities or areas?

1. Formalized report 2. Summarizes current financial situation 3. Analyzes financial needs 4. Recommends future financial activities

Time Value of Money Calculation Methods

1. Formula calculation 2. Time value of money tables 3. Financial calculator 4. Spreadsheet software 5. Websites and apps

4 economic influences that affect our financial goals and decision making.

1. Global influences 2. Domestic economic influences 3. Inflation 4. Interest rates

Advantages of financial planning

1. Increased effectiveness in obtaining, using, and protecting financial resources 2. Increased control of your financial affairs 3. Improved personal relationships 4. Sense of freedom from financial worries

Selecting a Budgeting System

1. Mental Budget -Appropriate if financial resources and responsibilities are limited 2. Physical Budget -Envelopes, folders or containers 3. Written Budget -On paper 4. Computerized Budget -Spreadsheet or specialized software

Benefits of personal balance sheet

1. Recap your current financial position in relation to the value of items you own and amounts you owe 2. Measure progress toward financial goals 3. Maintain information on financial activities 4. Provide information for preparing tax forms or applying for credit

The 7 Step Budgeting Process:

1. Set financial goals 2. Estimate income 3. Budget an emergency fund and savings 4. Budget fixed expenses 5. Budget variable expenses 6. Record spending amounts 7. Review spending and saving process

Five Filing Status Categories

1. Single or legally separated 2. Married, filing jointly 3. Married, filing separately 4. Head of household -unmarried individual or surviving spouse who has a child or dependent relative 5. Qualifying widow or widower with a dependent (2 years)

Components of Money Management

1. Storing and maintaining personal financial records and documents 2. Creating personal financial statements (balance sheets and cash flow statements of income and outflows) 3. Creating and implementing a plan for spending and saving (budgeting)

Types of Taxes

1. Taxes on purchases -sales tax and excise tax 2. Taxes on property -real estate property tax -personal property tax 3. Taxes on wealth -federal estate tax -state inheritance tax 4. Taxes on earnings -income tax and social security

Career Choice and Financial Planning

1. The life work one selects=key to financial well being and personal satisfaction 2. Career choices have risks and opportunity costs 3. Career choices require periodic re-evaluation of trade-offs related to personal, social and economic factors 4. Changing personal and social factors require continuous assessment of your work situation

Characteristics of a Successful Budget

1. Well planned 2. Realistic 3. Flexible 4. Clearly communicated

Selecting a Saving Technique

1. Write a check each payday and deposit in a savings account 2. Use payroll deduction to deposit a certain amount in savings (direct deposit) 3. Save coins or spend less on certain items

Money Management Activities

1. Your Balance Sheet: -snapshot of where you are now 2. Your Cash Flow Statement: -what you received and spend over a specific period 3. Your Budget: -planing, spending, and saving to achieve financial goals

Major element of financial planning

1. obtaining 2. planning 3. saving 4. borrowing 5. spending 6. managing risk 7. investing 8. retirement and estate planning

What kind of tax form do most people use?

1040

Exemption

A deduction from adjusted gross income for yourself, your spouse, and qualified dependents.

Tax Audit

A detailed examination of your tax return by the Internal Revenue Service.

Balance Sheet

A financial statement that reports what an individual or family owns and owes as of a specific date. -also called:net worth statement; statement of financial position

Financial Plan

A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities.

Inflation

A rise in the general level of prices.

Standard Deduction

A set amount on which no taxes are paid.

Bankruptcy

A set of federal laws that allow you to either restructure your debts or remove certain debts.

Excise Tax

A tax imposed on specific goods and services, such as gasoline, cigarettes, alcoholic beverages, tires, and air travel.

Estate Tax

A tax imposed on the value of a person's property at the time of his/her death.

Inheritance Tax

A tax levied on the value of property bequeathed by a deceased person.

Calculate Taxable Income

A. Adjusted Gross Income (AGI) -Gross income reduced by certain adjustments -The basis for computing various deductions B. Adjustments to Income -Reduce AGI -Contributions to a traditional IRA or Keogh -Alimony payments -Payed off student loans

Savings Ratio

Amount saved each month divided by gross income

Tax Credits

Amount subtracted directly from the amount of taxes owed.

Exclusion

An amount not included in gross income.

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.

Future value of a series of deposits

An annuity is a series of equal deposits or payments.

Payroll Withholding

Based on the number of exemptions and the expected deductions claimed

Changes in Net Worth

Changes in Net Worth result from cash inflows and outflows. -Outflows > Inflows Draw from savings or borrow (buy on credit) Problem/Result: Lower assets or higher liabilities -Inflows > Outflows Put money into savings or pay off debts Result: Higher net worth

Selecting Tax Software

Considerations: -Personal situation -Special tax situation -Features in the software -Technical aspects

CPI

Consumer Price Index

Money Management

Day-to-day financial activities necessary to manage current personal economic resources, while working toward long-term financial security

Present value of a series of deposits

Determine how much you need to deposit now in order to withdraw a specific amount for a desired number of years.

Estimated Quarterly Payments

Estimated tax payments made throughout the year based on income made during the year.

Itemized Deductions

Expenses that can be deducted from adjusted gross income, such as medical expenses, real estate property taxes, home mortgage interest, charitable contributions, casualty losses, and certain work-related expenses.

Evaluating Tax Services

Factors to Consider: -Training and experience of the tax professional -Fee for preparing taxes and how determined -Questionable deductions suggested? -If return is audited, will the preparer represent the client? -Is tax preparation the main business activity, or is it a front for other financial products?

Adjusted Gross Income (AGI)

Gross income reduced by certain adjustments, such as contributions to an individual retirement account (IRA) and alimony payments.

Values

Ideas and principles that a person considers correct, desirable, and important.

Where is consumer price index measured?

In Metropolitan areas

Net Income

Income on which tax is computed

Passive Income

Income resulting from business activities in which you do not actively participate

Tax Exempt Income

Income that is not subject to tax.

Tax Deferred Income

Income that will be taxed at a later date.

Time Value of Money

Increases in an amount of money as a result of interest earned.

Risk Premium

Length of time funds in use Expected inflation Uncertainty

Debt Ratio

Liabilities divided by net worth

Current Ratio

Liquid assets divided by current liabilities

Liquidity Ratio

Liquid assets divided by monthly expenses

Earned Income

Money received from personal effort, such as wages, salary, commission, fees, tips, or bonuses.

Investment Income

Money received in the form of dividends, interest, or rent from investments. Also called portfolio income.

Debt-Payments Ratio

Monthly credit payments divided by take-home pay

How to calculate future value of a single amount

Original amount in savings+interest earned

Ponze Scheme

People have to invest in order to get pay back (social security)

Financial Planning

Process of managing your money to achieve personal economic satisfaction.

Capital Gains

Profits from the sale of a capital asset such as stocks, bonds, or real estate.

A system for personal financial records

Provides a basis for: -handling daily business affairs, such as bill paying -planning and measuring financial progress -completing required tax reports -making effective investment decisions -determining available resources for current and future buying

What to keep in a safe deposit box

Records and items that would be hard to replace: -birth, marriage, and death certificates -list of checking, savings and financial institution account numbers -citizenship and military papers -adoption and custody papers -serial numbers and photos of valuables -CDs and credit and banking account numbers -mortgage papers and titles -list of insurance policy numbers -stock and bond certificates -coins and other collectibles -copy of will

Effective Goals should be:

S=Specific M=Measurable A=Action-oriented R=Realistic T=Time-based

Budget

Spending Plan Helps you: -live within your income -spend money wisely -reach financial goals -prepare for financial emergencies -develop wise financial management habits

The Basics of Federal Income Tax

Step 1: Determining Adjusted Gross Income Step 2: Computing Taxable Income Step 3: Calculating Taxes Owed Step 4: Making Tax Payments Step 5: Watching Deadlines and Avoiding Penalties

A Plan for Effective Budgeting

Step 1: Set Financial Goals Step 2: Estimate Income Step 3: Budget an Emergency Fund and Savings Step 4: Budget Fixed Expenses Step 5: Budget Variable Expenses Step 6: Record Spending Amounts Step 7: Review Spending and Saving Patterns -Review financial progress -Revise goals and budget allocations

Future Value

The amount to which current savings will increase based on a certain interest rate and a certain time period. "Compounding"

Interest Rate

The cost of money. It is affect by supply and demand.

Present Value

The current value for a future amount based on a certain interest rate and a certain time period.

Insolvency

The inability to pay debts when they are due because liabilities far exceed the value of assets.

Taxable Income

The net amount of income, after allowable deductions, on which income tax is computed.

Marginal Tax Rate

The rate used to calculate tax on the last (and next) dollar of taxable income.

Adult Life Cycle

The stages in the family and financial needs of an adult.

Economics

The study of how wealth is created and distributed.

Average Tax Rate

The total tax due divided by taxable income. -Average Tax Rate < Marginal Tax Rate

Tax Evasion

The use of illegal actions to reduce one's taxes.

Tax Avoidance

The use of legitimate methods to reduce one's taxes.

Average Tax Rate

Total tax due divided by taxable income.

Opportunity Cost

What a person gives up by making a choice.

Financial Needs Goals

a. Consumable-product goals=food, clothing b. Durable-product goals=car, appliances c. Intangible-purchase goals=education, health

Types of Audits

a. Correspondence audit-minor questions b. Office audit-takes place at an IRS office c. Field audit-most complex, with an IRS agent visiting you at your home, your business, or your accountant's office

Time Frames for Achieving Financial Goals

a. Short-term goals=within 1 year b. Intermediate goals=1-5 years c. Long-term goals=greater than 5 years

Global Influences on Economy

a. U.S. economy affected by foreign investors and competition from foreign companies b. Level of imports/exports affects available supply of dollars c. Level of foreign investment affects domestic money supply d. Money supply affects consumer interest rates

The Cash Flow Statement

-Step 1: record income -Step 2: record cash outflows -Step 3: determine net cash flow

Available Tax Assistance Sources

-Tax publications -The Internet -Tax Preparation Services

Present value of money

-The current value of a future amount based on a certain interest rate and time period. -The current value of an amount desired in the future. -How much to deposit now to obtain a desired total in the future -Discounting

Penalties and Interest

-Underpayment of quarterly estimated taxes may require paying interest on the amount owed. -Underpayment due to negligence or fraud can result in penalties of 50 to 75 percent.

Tax Service Warnings

-You are responsible for providing complete and accurate information -Hiring a tax preparer does not guarantee that you will pay the correct amount -Beware of tax preparers that offer refunds in advance -Refund anticipation loans can charge interest rates in excess of 300%

Planning your tax strategy

-know current tax laws as they affect you -maintain complete and appropriate tax records -make purchase and investment decisions that reduce your tax liability

Financial decisions are affected by:

-life situation -personal values -economic factors