BUS 201
Balance Sheet
(AKA net worth statement or statement of financial position) reports what you own or owe.
•Tax Credits versus Tax Deductions
-$100 Tax Credit reduces your taxes by $100. -$100 Tax Deduction reduces your taxes by $25 if you are in the 25% bracket.
Investment Income
-(also known as portfolio income) is money from dividends, interest, or rent from investments.
Liquidity
-Allows you to withdraw your money on short notice without a loss of principal or fees -With certain types of savings accounts, early withdrawal penalty may be loss of interest or lower earnings rate
Other payment methods
-Certified check •Personal check with guaranteed payment •Amount is deducted from your balance when financial institution certifies the check -Cashier's check •Check of a financial institution you get by paying the amount of the check plus a fee -Money order •Purchase at financial institution, post office, store -Money transfer services •Fast, convenient, and safe method to send money around the world •Examples: MoneyGram, TransferWise, Western Union, and Xoom -Traveler's check •Sign each check twice •Electronic traveler's checks — prepaid travel card used when visiting other nations
Types of Audits
-Correspondence Audit for minor questions -Office Audit takes place at an IRS office -Field Audit is the most complex, with an IRS agent visiting you at home, your business, or your accountant's office •You have audit rights, including time to prepare for the audit and clarification.
rule of 72 formula
-Divide 72 by the annual inflation (or interest) rate -Example: An annual inflation rate of 4% means prices (or your savings) will double in 18 years (72/4 = 18)
Tax Evasion
-Illegally not paying all the taxes you owe, such as not reporting all income
Time Value of Money
-Increases in an amount of money as a result of interest earned -Saving (or investing) today means more money tomorrow. Spending means lost interest -Saving and spending decisions involve considering the trade-offs. Current needs can make spending worthwhile
Tax Avoidance
-Legitimate methods to reduce your tax obligation to your fair share but no more -Financial decisions related to purchasing, investing, and retirement planning are the most heavily affected by tax laws
Deadlines and Penalties
-Most people are required to file their federal tax return each April 15. -Form 4868 allows an automatic six-month extension to file the federal return. -Failure to file a tax return can result in a 25% penalty in addition to the taxes owed.
Types of checking accounts
-Regular checking accounts •Monthly fee unless minimum balance maintained -Activity accounts •Fee on each check and deposit -Interest-earning checking accounts •Sometimes called NOW accounts •Usually require a minimum balance •Known as share draft account at credit unions
FICO
-The information in your credit report is used to calculate your FICO credit score •Between 300 and 850 •Higher the score, less risky you are
Good Financial habits
-Use a well-conceived spending plan that helps you stay within your income while allowing you to save and invest for the future - -Have appropriate insurance protection to prevent financial disasters - -Become informed about taxes and investments to expand your financial resources
Open Ended Credit
-Use as needed until reaching line of credit maximum -You pay interest and finance charges if you do not pay the bill in full when due -Credit cards issued by department stores, bank credit cards, overdraft protection, incidental credit, and revolving check credit (bank line of credit)
Reconciling your checking account
-Used to compare the bank's balance and your checkbook balance -Reasons for differences a.Interest earned b.Checks that have not cleared c.Deposits not yet received by bank
Making tax payments
-Withholding -Estimated Payments
Exclusions
-are amounts not included in gross income; for example, a portion of foreign earned income.
FDIC
-coverage prevents a loss of money due to the failure of the insured institution up to $250,000 per depositor per insured financial institution
Earned Income
-includes wages, salary, commissions, fees, tips or bonuses.
tax deduction
-is an amount subtracted from adjusted gross income (AGI) to arrive at taxable income.
Passive Income
-is from business activities in which you do not actively participate, such as a limited partnership. includes alimony, awards, lottery winnings, and prizes.
Compounding
-refers to interest that is earned on "previously earned interest" •More frequent compounding means the higher your rate of return
States with no state taxes
1)Alaska 2)Florida 3)Nevada 4)South Dakota 5)Texas 6)Washington 7)Wyoming
Four Major Tax Categories
1)Purchases 2)Property 3)Wealth 4)Earnings
Four Phases of Budgeting
1. Assess your current situation Determine your personal needs, values, and life situation 2. Plan your financial direction 3. Implement your budget 4. Evaluate your budget program Review Spending and Saving Patterns
Financial planning proscess
1. Determine current financial situation 2. Develop financial goals 3. Identify alternative course of action 4. Evaluate alternatives 5. Create and implement financial plan 6. Review and revise plan
How To improve credit score
1.Get copies of your credit report — review for accuracy 2.Pay your bills on time 3.Understand how your credit score is determined 4.Learn the legal steps to take to improve your credit report 5.Beware of credit-repair scams
Proper Check Writing steps
1.Record the date 2.Write the recipient's name 3.Record the amount in numbers 4.Write the amount in words 5.Sign the check 6.Note the reason for payment
grace
15 days you have to pay before you start accumulating interest
Formula to Calculate APY
= (100) × (Interest/Principal) NOTE: Formula is applicable when the number of days in the term is 365 or when the account does not have a stated maturity • qExample: Interest of $66 on principal of $1,200 =(100) × ($66/$1,200) = 5.5% (APY)
COMPUTING SIMPLE INTEREST
=Amount in savings × annual interest rate × time period =interest amount For Example: =$500 × 6% × 6 months/12 months=$500 × .06 × ½ year =$15.00In six months, a $500 deposit (principal) will earn $15.00 interest. Therefore, you will have a total of $515 at the end of six months.
Cash Flow Statement
A financial statement that shows the flow of money in and out of the business.
Tax Exemption
A part of a person's income on which no tax is imposed.
Annuity
A series of payments or deposits
taxable income
After deducting for exemptions, amount used to determine taxes owed
I9
Eligibility
1099
Form 1099 series is used to report various types of income other than wages, salaries, and tips (for which Form W-2 is used instead). Examples of reportable transactions are amounts paid to a non-corporate independent contractor for services (in IRS terminology, such payments are nonemployee compensation).
Consumer Price Index
It is the measure of the average changes in the prices urban consumers pay for a fixed 'basket' of goods and services.
Tax calculation example
Married couple 95,000 10% bracket Range of Income (0 - $18,550) $18,550 x 10% = $1,855 15% bracket Range of Income ($18,550-$75,300) $56,750 x 15% = $8,512.50 25% bracket Range of Income ($75,300-$95,000) $19,700 x 25% = $4,925 Total Tax Due Total Tax due all brackets $18,550 + $8,512.50 + $4,925 = $15,292.50
Truth in savings law
Purpose is to provide consistency when comparing different savings options at different institutions
EE Bonds
Series EE bonds may be purchased for any amount greater than $25 and are purchased online at face value. EE bonds increase in value as interest accrues monthly and compound semiannually. If you redeem the bonds before five years, you forfeit the latest three months of interest. After five years, you are not penalized. A bond must be held for one year before it can be cashed.
Smart Goals
Specific: know exactly what your goals are to create a plan Measurable: with a specific amount Action-oriented: identify the personal financial activities you will undertake Realistic: utilizing your income and life situation Time-based: identify the time frame to achieve the goal
Tax Shelter
Tax-deferred retirement plans
W2
The Form W-2, Wage and Tax Statement, is used to report wages paid to employees and the taxes withheld from them.[42] Employers must complete a Form W-2 for each employee to whom they pay a salary, wage, or other compensation as part of the employment relationship. An employer must mail out the Form W-2 to employees on or before January 31. This deadline gives these taxpayers about 3 months to prepare their returns before the April 15 income tax due date
W4
The Form W-4 is used by employers to determine the amount of tax withholding to deduct from employees' wages
Personal Financial Planning
The process of managing your money to achieve personal economic satisfaction
earned-income credit (EIC)
This federal tax regulation, for working parents with taxable income under a certain amount ($53,505 in 2016 for three or more children), can result in a tax credit of up to $6,044.
Net Worth
This is the amount you would have if all assets were sold for the listed values and all debts were paid in full.
Inflation
a rise in the general level of prices The main cause of inflation is an increase in demand without a comparable increase in supply.
Phishing
a scam that uses e-mail spam or pop-up message to deceive you into revealing your credit card number, bank account information, Social Security number, passwords, or other private information. Vishing - same as above by phone. Smiching - same as above by phone text or message.
Standard Deduction
a set amount on which no taxes are paid,
Overdraft Protection
an automatic loan made to checking account customers for checks written in excess of the available balance.
Wealth (AKA death Tax)
an estate tax is imposed on the value of a person's property at time of his or her death.
Cash Outflows
are divided into two main categories: 1)Fixed expenses 2)Variable expenses
Capital Gains
are profits from sale of stocks, bonds, or real estate; taxes paid when sold
FICA (The Federal Insurance Contributions Act)
created the Social Security Tax to fund the old-age, survivors, and disability insurance portion of the Social Security system and the hospital insurance portion (Medicare).
Take Home Pay
earnings after deductions for taxes and other items (also called net-pay).
itemized deductions
expenses you can subtract from adjusted gross income to determine your taxable income (Can subtract either standard or itemized)
W2
forms sent to employer at end of year reports taxes withheld from paycheck
W4
how much an employer can withhold
Other Income
includes alimony, awards, lottery winnings, and prizes.
1099
independent contractor or self employed
Certificates of Deposit
is a savings plan that requires you to leave your money on deposit for a set time period, otherwise you incur early withdrawal penalties
Exclusion
is an amount not included in gross income
Tax Credit
is an amount subtracted directly from the amount of taxes owed. An example is the earned-income tax credit (EIC).
Solvency
is an individual or a firm's ability to pay for long-term debt in the long run
alternative minimum tax (AMT)
is designed to ensure that those who receive tax breaks also pay their fair share of taxes.
Discretionary Income
is money left over after paying for housing, food, and other necessities.
Savings
is the 'only' path for financial success. Reducing your spending will result in lower credit card debt, more money for emergencies, and funds for long-term investing.
Insolvency
is the inability to pay debts when they are due
I Bonds
it has an interest rate based on two components: (1) a fixed rate for the life of the bond, and (2) an inflation rate that changes twice a year. Every six months a new, fixed base rate is set for new bonds.
Float
month you accumulate debt in
NCUA
provides similar insurance to FDIC for credit unions
Money Management
refers to the day-to-day financial activities necessary to manage current personal economic resources while working toward long-term financial security.
1040
tax return for report income and deductions (April 15)
Disposable Income
the amount a person or household has available to spend
Annual Percentage Yield
the percentage rate a saver should expect to earn
marginal tax rates
the tax rate on an additional dollar of income
Consumer Spending
total demand for goods and services in the economy influences employment opportunities and the potential for income. If consumer purchasing increases, the financial resources of current and prospective employees expand.
Opportunity cost
whatever must be given up to obtain some item
A Striver
which has minimal financial resources and would have to carefully plan to use available funds
Tax Exempt Income
which is income not subject to federal income tax; for example, interest earned on most state and city bonds. (An exclusion)
Tax Deferred Income
which is income that will be taxed at a later date; for example, earnings on a individual retirement account (IRA).
Taxable Income
which is net income, after deductions, on which income tax is computed.
Explorer
which is someone seeking to get to the next level of financial success, which is different from those of an
An Achiever
with a strong financial resource base would usually encounter money issues different from those of an
Main Purposes of Budget
§Live within your income §Spend your money wisely §Reach your financial goals §Prepare for financial emergencies §Develop wise financial management habits
Adjusted Gross Income
•(AGI) is gross income after certain reductions have been made. These reductions are called adjustments to income and include the following:
Adjusted Gross Income
•(AGI) is gross income after certain reductions have been made. These reductions are called adjustments to income and include the following: -Contributions to an IRA or Keogh retirement plan -Penalties for early withdrawal of savings -Alimony payments
Credit Rating
•A good credit rating is a valuable asset that should be nurtured and protected •Limit your borrowing to your capacity to repay •Live up to the terms of contracts •Check to see what is in your credit report as most creditors rely on credit reports in considering loan applications
Investment Companies
•Are also referred to as Mutual Funds •Offer a money market fund, which is a combination savings-investment plan, on which you can write a limited number of checks •Accounts are not covered by federal deposit insurance
Credit Unions
•Are user-owned, nonprofit, cooperative financial institutions •Annual banking studies report lower fees and lower loan rates with higher satisfaction levels compared to other financial institutions
Check Cashing Outlets
•Charge from 1% to 20% of the face value of a check; the average cost is 2% to 3% •Sometimes called currency exchanges
20% rule
•Consumer credit payments should not exceed a max of 20% of your net (after-tax) income
Debt payments to income ratio
•Divide your monthly debt payments by your net monthly income •Do not include your house payment in your monthly debt payments total as it is a long-term liability
Debt to Equity Ratio
•Divide your total liabilities by your net worth •Do not include the value of your home and the amount of its mortgage in total net worth
Vantagescore
•Does not count debt collections that have been paid off •Model allows predictive score for those with short credit histories •Ignores negative credit history if affected by natural disasters
Brokerage Firms
•Employ investment advisors and financial planners which serve as agents between the buyer and seller for stocks and bonds
Credit Card Companies
•Fund short-term retail lending
Advantages of financial planning
•Increased effectiveness in obtaining, using, and protecting financial resources • •Increased control of one's financial affairs by avoiding excessive debt, bankruptcy, and dependence on others • •Improved personal relationships • •Sense of freedom from financial worries
Rent To Own Centers
•Lease products to consumers who can own the item if they complete a certain number of payments; interest rates can be over 300%
Pawn Shops
•Make loans on tangible items but charge higher fees than other financial institutions; used for quick cash; charge can range from 3% to over 100% interest (High Cost Alternative)
Finance Companies
•Make short- and intermediate-term loans to consumers and small businesses but at higher rates
Commercial Banks
•Offers a full range of services including checking, savings, lending, and other services •Organized as corporations
Fair Credit and Billing Act
•Passed in 1975 •Sets procedures for promptly correcting billing mistakes, refusing to make credit card or revolving credit payments on defective goods, and promptly crediting your payments
Mortgage Companies
•Provide loans to customers to purchase homes
Car Title Loans
•Provide loans with automobile title as security for a high-interest charge often over 200%
Life Insurance Companies
•Provides financial security for dependents •Offers insurance plus savings and investment features; recently expanded to offer investment and retirement planning
Payday Loans
•Referred to as cash advances, check advance loans, postdated check loans, and delayed deposit loans; interest rates charged can be 780% or more
Closed End Credit
•Single loan for a specific purpose and a specified amount that you pay back in a specified period of time and in payments of equal amounts •Installment sales credit, installment cash credit, and single lump-sum credit •Mortgage, automobile, and installment loans for furniture or appliances
Mutual Savings Banks
•Specialize in savings and mortgages •They are owned by their depositors •Mainly located in northeastern United States
Savings and loan associations
•Traditionally, specialized in savings accounts and home mortgages •Today, offer services comparable to banks
Cosigning a loan
•You are being asked to guarantee the debt, so consider if you can afford it if the borrower defaults •If the borrow does not pay, you may have to pay up to the full amount and also any late or collection fees •If a payment is missed, the creditor can collect the debt from you without first trying to get it from the borrower -Some studies show that three of four cosigners are asked to wholly or partially repay the loan
average tax rate
•based on the total tax due divided by taxable income. -For example, a person with taxable income of $40,000 and a total tax bill of $4,740 would have an average tax rate of 11.85 percent ($4,740 ÷ $40,000). -The average tax rate is less than a person's marginal tax rate except in the 10 percent bracket.
Tax Audit
•is a detailed examination of your tax return by the IRS. •About 1% of all tax filers are audited. If you claim large or unusual deductions you are more likely to be audited.
Financial plan
•is a formalized report that... -Summarizes your current financial situation -Analyzes your financial needs -Recommends future financial activities
Trust
•is a legal agreement that provides for the management and control of assets by one party for the benefit of another -Commonly created through a commercial bank or a lawyer -Parents who want to set aside certain funds for their children's education may use a trust
Future Value
•is the amount to which current savings will increase based on a certain interest rate and a certain time period •Future value is also called compounding — earning interest on previously earned interest
Present value
•is the current value of a future amount based on a certain interest rate and a certain time period •Present value calculations are also called discounting •The present value of the amount you want in the future will always be less than the future value
Money Market Accounts
⎼A money market account is a savings account that requires a minimum balance and has earnings based on market interest rates ⎼Money market accounts at banks and credit unions are covered by federal deposit insurance •This is not true of money market funds, which are a product of investment companies
Money Market Funds
⎼A money market account is a savings account that requires a minimum balance and has earnings based on market interest rates ⎼Money market accounts at banks and credit unions are covered by federal deposit insurance •This is not true of money market funds, which are a product of investment companies
Asset Management account
⎼Also called a cash management account or a wealth management account ⎼All-purpose account offered by investment brokers and financial institutions ⎼Provides a complete financial service program for a single fee and includes: §Tracking your money in one location §Fewer monthly and quarterly statements §Lower fees for maintaining a large balance §Simplified tax reporting §Ease of communicating your financial situation to family members
Savings Bonds
⎼U.S. savings bonds are a low-risk savings program guaranteed by the federal government and that may be used to achieve financial goals ⎼The Treasury Department offers several programs for buying savings bonds: •EE Bonds •I Bonds
