Personal Finance Ch 1-4 – Flashcards
Unlock all answers in this set
Unlock answersquestion
The process of planning your spending, financing and investing in order to optimize your financial situation.
answer
Personal Finance
question
The process of describing your financial goals and planning your spending, investing and financing in order to help you reach those goals.
answer
Personal Finance Planning
question
What you give up as a result of decision
answer
Opportunity Cost
question
1. Make your own financial decisions (opportunity cost) 2. Judge the advice of financial advisors (informed decisions) 3. Become a financial advisor (career opportunities)
answer
How you benefit from knowing personal finance?
question
1. Budgeting and tax planning 2. Managing liquidity 3. Financing for large purchases 4. Protecting your assets and income (insurance) 5. Investing your money 6. Retirement and estate planning
answer
Components of a financial plan
question
Process of forecasting your future expenses and savings -evaluate current financial position -assets/liabilities -net worth
answer
Budget Planning
question
Access to funds to cover any short-term deficiencies. i.e. do you have enough money to pay off current obligations this month and still eat, looking at NOW
answer
Liquidity
question
Decisions regarding how much money to keep in liquid form and how to allocate funds to short term financial instruments. Ex: What you do with the $200 that you have left at end of month
answer
Money Management
question
Decisions regarding how much credit to obtain in order to support spending and which sources of credit to use
answer
Credit Management
question
1. How much money can I afford to borrow? 2. What will the maturity of the loan be? 3. Getting loan at competitive interest rate
answer
Questions to ask when managing loan (large expenditures=loans)
question
Insurance
answer
What protects your assets and income?
question
Determine the types and amount of insurance needed to protect your assets
answer
Insurance Planning
question
Assets
answer
Automobile and homeowners' insurance protects
question
Limits potential medical expenses
answer
Health Insurance
question
Income
answer
Disability and Life Insurance protects
question
Any funds beyond what you need to maintain liquidity should be invested
answer
Investing
question
Earning a high return
answer
What is the primary objective of investing?
question
Live on 70%, 30% fun (10% investments, 10% savings, 10% fun)
answer
Percentage breakdown of income
question
Uncertainty surrounding the potential return on an investment Ex: Dow Jones is down because more people wanting to sell than buy stock
answer
Risk
question
Manage your Investments
answer
To keep risk at a tolerable level you must...
question
1. Grows wealth 2. Enhances net worth 3. Every competent on financial plan affects inflows and outflows and determines how much cash you have
answer
What does building a financial plan do for you?
question
1. cash inflows (receive) 2. cash outflows (spend) 3. liquidity: deals with cash shortages/excesses 4. budgeting: balances income and spending
answer
How financial plan decisions affect your cash flows?
question
1. Budgeting 2. Managing Liquidity 3. Personal Finance 4. Protecting your wealth 5. Personal Investing 6. Retirement and estate planning
answer
Financial Plan Decisions
question
-work more hours -loan -sell investments -cash in insurance policy -take from retirement -withdraw cash from savings
answer
Summary of Financial Plan components (Sources of Cash)
question
-purchase of products and services -deposit in checkings/savings -pay interest payments -make insurance payments -make new investments -contribute to retirement account
answer
Summary of Financial Plan components (Uses of Cash)
question
Budgeting decisions---> liquidity management-->financing decisions-->insurance decisions--> investment decisions-->retirement and estate--> budgeting
answer
Integration of Financial Components
question
Spending decisions and the ability to implement an effective financial plan
answer
Psychology has an affect on what two aspects in human behavior?
question
1. Focus on Peer Pressure and Immediate Satisfaction 2. Focus on future
answer
Two different types of spending behavior
question
1. Do you live with a roommate or alone? 2. Do you have large monthly car payments? 3. Do you have credit card bills that you only make the minimum payment on each month? 4. Do you spend all your income that is not needed on home and car payments in the first two days? 5. Do you always find a reason each month to spend all of your income?
answer
Questions to ask yourself when assessing your own spending behavior:
question
1. Establish Financial Goals 2. Consider current financial position 3. Identify and evaluate alternative plans to help you reach goals 4. Select and implement best plan to help you achieve goals 5. Evaluate Financial Plan 6. Revise Financial Plan
answer
Developing a Financial Plan:
question
1. What type of goal (car, home, college, wealth, charity) 2. Realistic goals (more likely to achieve) 3. Timing of Goals
answer
Establishing your financial goals
question
1-5 years
answer
Intermediate Goal
question
Within 1 year
answer
Short Term Goal
question
Beyond 5 years
answer
Long Term Goal
question
1. How your future financial position is tied to your education 2. How your future financial position tied to career choice (enjoyable and suit skills) 3. How your future financial position is tied to the economy (economic conditions affect, salaries, jobs available, prices of services, value of assets. Ex. 2008)
answer
Considering Current Financial Position
question
False, you can choose a plan that is conservative or aggressive.
answer
When identifying and evaluating alternative plans to help reach your goals, you have to choose a plan that is more aggressive. T or F?
question
The Internet
answer
What is a good source to use when selecting and implementing the best plan for achieving your goals?
question
1. it has updated info on all parts of your financial plan. 2. online calculators
answer
Why use the internet when selecting and implementing a good source to use to help you reach your goal?
question
Has updated information on all parts of your financial plan 1. current tax rates and regulations 2. investment performances 3. new retirement plan rules
answer
What kind of update information does the internet provide for you when creating your financial plan?
question
1. calculate taxes 2. determine how your savings will grow over time 3. determining whether buying or leasing a car is more appropriate
answer
What can an online calculator from the internet help you do when financial planning?
question
Focus on Ethics: Personal Finance Advice -Get best advice appropriate to your needs -Be wary of unethical behavior -Be wary of incompetent advice (be alert, ask questions, carefully consider)
answer
What should you focus on when selecting and implementing the best financial plan to help you attain your goals?
question
keep in accessible place and monitor progress
answer
After creating a financial plan what should you do with it?
question
Every year
answer
How often should you monitor your financial plan?
question
1, 2, 4, 3
answer
Put in proper order of how much you should focus when investing. 1. Savings Account, 2. Treasury Bonds, 3. Independent Stock Bonds, 4. Mutual Funds
question
Walmart Door guy--> low interest rates
answer
Example of integration of the financial plan components
question
financial condition and financial goals change
answer
Revise financial plan when...
question
financial statement that measures a persons' inflows and outflows
answer
Personal Cash Flow Statement
question
salaries, dividends, tips, interest
answer
Cash inflows include
question
all expenses large and small
answer
Cash outflows include
question
B. insurance premium
answer
Which is not considered an inflow A. salaries b. insurance premium c. interest d. dividend
question
revenues and expenses
answer
Create a Cash Flow Statement by recording your _____ and ____ over a period of time.
question
Cash Inflows - Cash Outflows
answer
Net Cash Flows=
question
1. Stage in career 2. Type of job (based on skill level and demand for those skills) 3. # of income earners in your household
answer
Factors affecting cash inflows include:
question
1. Size of family 2. age 3. Personal consumption behavior (saver or spender?)
answer
Factors affecting cash outflows
question
a cash flow stmt that is based on forecasted cash flows for a future time period
answer
Budget
question
anticipating cash surpluses or cash deficiencies
answer
What are budgets useful for?
question
-Anticipating cash shortages -Assessing accuracy of budget -forecast net cash flows over several months -create an annual budget by extending your budget out for longer periods -improving the budget -focus on ethics
answer
Creating a budget
question
- small shortages can be made up from checking account - budget provides warning of shortages so you can prepare for them
answer
Anticipating cash shortages
question
-use the info for a typical month and adjust it for unusual expenses i.e. christmas shopping -allow for some unexpected expenses like medical care, car and home maintenance
answer
Forecast net cash flows over several months
question
-compare predicted cash flows to accurate cash flows -adjust if necessary
answer
Assessing the accurate of the budget
question
-Periodically review budget to see if you are progressively moving towards goals -Look for areas that can be changed to improve the budget over time
answer
Improving the budget
question
-don't become overly dependent on others -create a budget and stay within it
answer
Focusing on Ethics with budget
question
a summary of your assets, your liabilities, and your net worth
answer
Personal Balance Sheet
question
specific
answer
A balance sheet reflects your financial position at a ______ point in time
question
financial assets that can be easily sold without a loss in value Ex. money market account, cash, checking, savings, etc.
answer
Liquid Assets
question
items normally owned by a household (home, car, boat, furniture, etc.) -establish market value, the value would be at what you receive if sold today (call appraiser) *have a value
answer
Household Assets
question
Could lose money when liquidate if mkt goes down
answer
Investment Assets
question
Stocks, bonds, mutual funds, real estate
answer
Investments on Balance Sheet
question
certificates representing partial ownership of firm
answer
Stocks:
question
certificates issued by borrower, usually government agencies and firms, to raise money
answer
Bonds:
question
investment companies that sell shares and invest the proceeds in investment instruments; bunch of different kinds of stocks
answer
Mutual Funds:
question
holdings in real estate property and land, need value not amount paying rent on
answer
Real Estate:
question
housing or commercial property that is rented out to others
answer
Rental property:
question
Liquid and Household, investment assets
answer
Assets on Personal B.S.
question
debts that will be paid within year, credit cards
answer
Current Liabilities
question
debts that will be paid in greater than one year; payoffs, car and mortgage payments
answer
Long-term liabilities
question
1. helps determine your net worth 2. update periodically to monitor changes in your net worth over time
answer
Creating a personal balance sheet...
question
False, some will change both and some will only change your personal balance sheet
answer
Changes in personal balance sheet will affect both your personal balance sheet and your net worth. T or F?
question
1. ^ job opp and income 2. v job opp and income 3. net worth can decline to the point of becoming negative
answer
Impact of economy on personal balance sheet
question
1. wealth is built by using net cash flows to invest in assets without increasing liabilities 2. net cash flows can be used to decrease liabilities which in turn increases net worth 3. Net worth can change even if net cash flows is 0, i.e. if value of investment or assets goes up or down
answer
How cash flows affect the balance sheet
question
-allows monitoring of liquidity, debt, and ability to save -liquidity measured by liquidity ratio
answer
Analysis of the personal balance sheet
question
Liquid Assets / Current Liabilities
answer
Liquidity Ratio=
question
greater liquidity
answer
Higher result of liquidity ratio=
question
debt level
answer
Debt-to-asset ratio is used to measure
question
total liabilities / total assets
answer
Debt-to-asset ratio =
question
Higher debt relative to assets
answer
Higher Debt-to-asset ratio means
question
Savings over the period in relation to disposable income over the period
answer
What does the savings rate measure?
question
Savings during period / disposable income during the period
answer
Savings Rate =
question
1. How can I improve my net cash flows in the future? 2. How can I improve my net cash flows in the distant future?
answer
The key budgeting decisions for building your financial plan are:
question
a cash shortage
answer
If you don't budget for unexpected expenses, you will likely experience
question
Once a year (current, where you are today)
answer
How often should you do a personal balance sheet?
question
The time it is received
answer
What influences the value of money?
question
Greater
answer
The value of a given amount of money is generally ______ the earlier it is received.
question
earn interest and grow
answer
The earlier you start saving, the more quickly your money can _________________
question
Lump Sum
answer
A single dollar amount of money is also called a
question
A series of equal cash flow payments that are received or paid at equal intervals in time. i.e. a monthly deposit of $50 into your savings account
answer
Annuity
question
The process of earning interest on interest
answer
Compounding (FV of single dollar amount)
question
1. amount deposited today 2. interest rate to be earned on deposit 3. # of years money will be invested
answer
To determine the FV of a single amount of money you deposit today, you must know:
question
a factor multiplied by today's savings to determine how the savings will accumulate over time
answer
Future Value Interest Factor (FV of 1)
question
increases (aka greater savings)
answer
As numbers of years increase, FVIF ______
question
Grow.
answer
The higher the interest rate, the more your money will ________.
question
True
answer
Compounding effects debt as well as savings. T or F?
question
interest
answer
Don't hold payment past due date because company can raise______
question
False. Compounding can expand your debt. Not only do you pay interest on your debt, but you will pay interest on interest of your debt.
answer
Compounding can only expand your savings, not your debt. T or F?
question
No, debt will accumulate
answer
Is it a good idea to postpone debt payment as long as possible?
question
the process of obtaining present values
answer
Discounting:
question
you need to invest today to accumulate a certain amount as some future time and is based off of an interest rate you could earn over that period.
answer
Present Values tell you the amount ________ and is based off of ______
question
1. How much will be received in the future 2. the interest rate to be earned on the deposit 3. # of years the money will be invested
answer
To determine present values you need to know:
question
Factor multiplied the future value to determine the present value of that amount
answer
Present Value Interest Factor (PVIF)
question
lower, interest rate
answer
Present Value Interest Factor gets ______ as # of years increases and as the ____ _____ increases.
question
Currency
answer
To solve for PV you need all except: 1) How much you will need in future 2) how long 3) expected rate on return 4) currency
question
A series of equal payments that occur at beginning of each period
answer
Annuity Due
question
Diagrams that show payments received or paid over time
answer
Timelines
question
a factor multiplied the periodic savings levels (annuity) to determine how the savings will accumulate over time
answer
Future Value Interest Factor for an Annuity (FVIFA)
question
discounting the individual cash flows of the annuity and adding them up
answer
Present Value of an Annuity is determined by
question
a factor multiplied by a periodic savings level (annuity) to determine the present value of the annuity
answer
Present Value Interest Factor for an Annuity (PVIFA)
question
Estimating the FV From savings
answer
What provides motivation for regular saving?
question
specific goals when saving for a large purchase
answer
Estimating annual savings that will achieve a future amount will help...
question
1. money can grow substantially over time when you invest periodically and earn interest 2. May be more motivated to save because you can see the reward of your effort
answer
How can time value motivate saving?
question
1) How much should I attempt to accumulate in savings for a future point in time? 2) How much should I attempt to save every month for a year?
answer
Key saving decisions for building your financial plan:
question
earned income, consumer purchases, wealth transfers and capital assets
answer
Taxes are paid on
question
alcohol, cigarettes, gasoline
answer
Special taxes are levied on things like
question
income
answer
Corporations pay ______ tax on profits
question
property
answer
Homeowners pay ________ tax
question
government services and programs
answer
Taxes are used to pay for
question
federal, state, and local
answer
Most individuals pay taxes at ______, ______, and _____ levels
question
The Internal Revenue Service (IRS)
answer
Who is the Federal Tax System administered by?
question
1) at the time of a transaction 2) through payroll withholding 3) by making estimated quarterly payments
answer
Taxes are paid in several ways:
question
December 31; April 15
answer
Tax year for federal income tax ends on ________ with taxes filed on _____
question
tax cut package designed to provide short-term economic stimulus through tax relief for taxpayers (2001-2011); post 9-11 to help people become normal again
answer
Economic Growth and Tax Relief Reconciliation Act of 2011:
question
Legislation that extend many of the previous tax law provisions through year 2012 -unless made permanent, will expire at beg. of 2013 -Revert to old, higher tax rates with the highest being 39.6%
answer
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010:
question
an act that accelerated much of the tax relief resulting from the 2001 Tax Relief Act -Individual rates lowered 2-3% -Child tax credit increased to $1,000 -Standard deduction increased for married taxpayers -Will also need an extension to go beyond 2013
answer
Jobs and Growth Tax Relief Act of 2003:
question
salary, wages, tips, bonuses and commissions
answer
Earned Income represents
question
SS and Medicare taxes
answer
FICA (Federal Insurance Contribution Act):
question
A government health insurance program that covers people over age 65 and provides payments to health care providers in the case of illness
answer
Medicare
question
Bush Tax Cuts
answer
Tax Relief Acts of 2001 and 2003
question
Twice
answer
A corporation's profit is taxed how many times?
question
Social Security (6.2%) and Medicare (1.45%)
answer
_______ tax is matched by your employer
question
6.2%; 110,100
answer
Social Security taxes equal _____% of your salary with a maximum level of $________ as of 2012.
question
1.45%
answer
Medicare taxes are _____% of your earned income, with no limit.
question
both parts of these taxes- 15.3%
answer
Self employed people must pay______________.
question
before
answer
Employees SS and Medicare taxes are paid before or after income tax is withheld?
question
4.2%
answer
What percentage was ss tax reduced to in 2011 and 2012?
question
taxes imposed on income earned
answer
Personal income taxes:
question
1040, 1040A, 1040EZ
answer
If you earn income you must file a _______, _______ or ________ to determine your tax liability.
question
April 15
answer
Filing deadline is _________ of each year.
question
rates
answer
Different ______ are associated with each filing status
question
single, married filing jointly, married filing separately, HOH, qualifying widow(er), with dependent child
answer
Different types of filing statuses
question
All reportable income from any source, including salary, interest income, dividend income, and capital gains received during the tax year
answer
Gross Income
question
included bonuses, but excludes contributions to an employee sponsored retirement account
answer
Gross income- Salaries and Wages
question
Interest earned from investments or loans to other individuals
answer
Gross Income- Interest Income
question
Income received in the form of dividends paid on stocks or mutual funds
answer
Gross Income- Dividend Income
question
income earned when an asset is sold at higher price than it as paid for
answer
Gross Income-Capital gains
question
a gain on assets that were held less than 12 months
answer
Short-Term Capital Gain
question
a gain on assets that were held for 12 months or longer
answer
Long-Term Capital gain
question
longer
answer
It is a better idea to hold a capital gain for a longer or shorter period of time?
question
the tax that is paid on a gain earned as a result of selling an asset for more than purchase price
answer
Capital Gains Tax
question
Interest and Ordinary Dividends
answer
Schedule B
question
Capital Gains and Losses
answer
Schedule D
question
Salary + Net Business Income Interest Income + Dividend Income + Capital Gains
answer
Determining Gross Income
question
adjusts GI for contributions to IRA, alimony payments, interest paid on student loans, and other special circumstances, money into retirement program
answer
AGI
question
a fixed amount that can be deducted from AGI to determine taxable income -not affected by income -affected by filing status and age -adjusted by the IRS each year to keep pace with inflation
answer
Standar Deduction
question
$12,400
answer
The standard deduction for married filing jointly
question
specific expenses that can be deducted to reduce taxable income -interest expense -State income tax -local income tax -real estate tax -charitable gifts -medical expenses in excess of 7.5% of AGI -other expenses (theft losses, job expenses if substantial)
answer
Itemized deductions
question
interest paid on borrowed money- primarily interest on mortgages
answer
Interest expense:
question
an income tax imposed by some states on people who receive income from employers in that state
answer
State income tax:
question
a tax imposed on a home or other real estate in the county where the property is located
answer
Real Estate Tax
question
-gifts to qualified organizations (cash or property) -keep receipts and records of gifts
answer
Charitable Gifts
question
if insurance policy doesn't cover all then can deduct excess leftover
answer
Theft Losses-->
question
total deductible expenses to decide whether to itemize or use the standard deduction
answer
Summary of deductible expenses
question
Itemized Deduction
answer
Schedule A
question
an amount that can be deducted for each person who is supported by the income reported on a tax return -deducted from gross income to determine taxable income
answer
Personal Exemption
question
AGI - deductions and exemptions
answer
Taxable Income
question
taxable income and filing status
answer
Taxes are dependent upon
question
a tax system where a positive relationship exists between an individual's income level and tax rate
answer
Progressive tax
question
-determine filing status Tax on Base + [% on excess over the base * (Taxable income - base)]
answer
Tax Liability =
question
1, 5, 2, , 3, 4, 6
answer
1. Gross income, 2. Deductions/Exemptions 3. Taxable Income 4. Calculate Tax 5. AGI 6. Tax Credits
question
specific amounts used to directly reduce tax liability
answer
Tax Credits
question
a tax credit allowed for each child in household -was increased to $1,000 in 2003, may revert to 500 in 2013 -available as refund to low income workers who owe no income tax
answer
Child tax credit
question
tax credit allowed to those who contribute towards their dependents' college expenses -coverdell savings accounts -section 529 college savings plans
answer
College expense credit
question
tax- free accounts that can be used for a variety of school expenses
answer
Coverdell Savings Accounts
question
-allows tax benefits for parents who set aside money for their children's future college expenses -available to all parents, regardless of income
answer
Section 529 College Savings Plan
question
a credit used to reduce tax liability for low-income taxpayers -other credits also available ( i.e. child care and adoptions)
answer
Earned Income Credit
question
1. what tax savings are currently available to you? 2. how can you increase your tax savings in the future? 3. should you increase/decrease the amount of your withholding? 4. What records should you keep?
answer
The key tax planning decisions for your financial plan are:
