Ch 1-4 -Finance
time account
CD - certificate of deposit
insurance for financial institutions
FDIC - banks NCUA - credit union
future value equation
FV = original amount + interest
bonds
IOU / loan
SMART
S - specific M- measurable A - action oriented R - realistic T - time based
financial plan
a formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities
fixed expense
a predictable expense that is the exact same amount every month
the stages in the family situation and financial needs of an adult is called the
adult life cycle
other income
alimony, lottery winnings, prizes
estimated quarterly payments
estimated tax payments made throughout the year based on income made during the year and reported on Form 1099
what is an investor lacking in the SMART approach is their onl goal is making more money for the rest of their life
the investor is lacking a set time frame to meet
what measures the increase in the amount of money in a savings account as a result of interest earned
time value of money
retirement and education plans
traditional IRA - Roth IRA - Education IRA Keogh Plan - 401K plan gov sponsored - social security employer - 401K/403B
deadlines and penalties
underpayment of quarterly estimated taxes may require paying interest on amount owed underpayment due to negligence - big fine
the ideas and principles that a person considers correct, desirable and important
values
earned income
wages, salary, commissions, fees, tips, bonuses
opportunity cost
what you give up by making a choice trade off decision not always measurable in dollars
short term goal
within 1 year
your life situation, personal values, and economic factors influence what
your financial plan
tax forms
1040 EZ - easiest 1040 - standard 1040A - complicated w-4 = tax info for employer (personal info) w-2 = sent by employer (tax info)
intermediate goal
2-10 years
what is the typical time frame for an intermediate goal
2-5 years
exclusions
amount excluded from gross income, referred to as tax-exempt income not subject to federal income tax ex - interest on most state and city bonds
simple interest
amount in savings x annual interest rate x time period = interest
principal
amount of savings
tax credit
amount subtracted directly from the amount of taxes owed
future value
amount that will be available at a later date
APR
annual percent rate $1,000 6% = 1,060
APY
annual percent yield including compound interest = 6.1% instead of 6%1
personal opportunity costs related to health are
avoiding exercise that results in increased health care costs lack of sleep that results in illness poor eating habits that result in illness
what are some methods that cannot be used to compute time value of money
bankers books
durable product goal
car, appliances
demand account
checking savings demand your money any time
children investments
children under 18 or full time student under 24 with investment income of more than 2,000 is taxed at parent's top rate
the measure of the average change in the prices urban consumers pay for a fixed "basket" of goods and services is called
consumer price index
present value
current value of an amount desired in the future
investment income
dividends, interest, rent from investments
compounding
earning interest on your interest
intangible purchase goal
education, health
the risk premium includes the following factors
expected inflation interest rates uncertainty of getting money back length of time
variable expense
expenses that occur every month, but amount varies
wealth
federal estate tax, state inheritance tax
commercial banks
for profit nationwide, international, publicly owned/traded
community banks
for profit privately owned, regional
the amount to which current savings will increase based on a certain interest rate and a certain time period is called
future value
long term goals
greater than 20 years
wage
hourly pay overtime (1.5 x regular pay)
liquid
how easily an asset can be converted to cash
earnings
income tax and social security
tax-deferred income
income that will be taxed at a later date such as earnings from IRA
time value of money
increase in an amount of money as a result of interest earned savings today - more money tomorrow spending today - lost interest
a rise in the general level of price is called
inflation
to calculate time value of money for savings in the form of interest earned, the following items are needed
length of time principal amount annual interest rate
capital gains
long term greater than 1 year short term less than 1 year
interest rates represent the true cost of
money
salary
monthly/annual earnings often exempt from overtime
credit union banks
not for profit
alternative minimum tax AMT
paid by taxpayers with high amounts of certain deductions
making tax payments
payroll withholding - base on the number of exemptions and the expected deductions claimed
what are some factors that may cause people in their 50s to spend money differently than people in their 20s?
personal beliefs, household size, income levels
what are two main reasons Americans have financial problems?
poor planning, weak management of money habits advertising efforts and availability of goods encourages overspending
what is the current value of a future amount based on a certain interest rate and a certain time period
present value
consumable financial need goal
product goals food, clothing
income statement
profit + loss statement revenue - expenses = profit/loss
property
real estate property tax, personal property tax
passive income
results from business activities in which you do not directly participate financial partnership
purchases
sales tax and excise tax
savings rates
savings rates are always lower than borrowing rates
annuity
series of equal deposits at equal intervals earning a constant rate ex - retirement savings
when discussing personal financial growth, what is an important aspect?
setting goals
balance sheet
statement of net worth assets = liabilities + owners equity (ALOE)
tax credit vs tax deduction
tax credit reduces your taxes by x tax deduction amount of reduction is based on your tax bracket
