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adjusted gross income and therefore reduce taxes, increased value accumulates on a tax free basis until funds are withdrawn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
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
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
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
Examples of earned income
salary, commissions and wages
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 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
Budget Variance
difference between the amount budgeted and the actual amount saved or spent
Components of income include
earned, investment, and passive
Take-Home Pay
earnings (salary, wages, and commissions) after deducting for taxes and other items
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
what are the three types of closed end credit?
installment cash credit, installment sales credit, single lump sum credit
To calculate time value of money for savings, the following items are needed
length of time, annual interest rate, principle amount
Time Value of Money
measures the increase in the amount of money as a result of interest earned
You calculate taxable income by....
reducing gross income by adjustments, exemptions, and standard or itemized deductions
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
personal balance sheet
also called a net worth statement or statement of financial position, reports what you own and what you owe
Deflation results in consumers __________ their spending
decreasing
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
Interest income from municipal bonds issued by state and local governments is not
subject to federal tax
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