Personal Financial Test 1
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Standard of living
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The necessities, comforts, and luxuries we have or desire.
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What is average propensity
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The percentage of each dollar of income, on average, that a person spends for current needs rather than savings.
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Do an example of average propensity
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Income 100 / Spending 900 = 90% average propensity
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When is a good/best time to do a financial plan in one's life? Is financial planning a onetime thing or ongoing?
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Everyone needs to develop a personal financial plan as soon as they can. As goals and life changes financial goals should be redefined so that they better meet your current needs.
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What impact does financial planning have on your standard of living?
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Closely tied. With personal financial planning we learn to acquire, use, and control our financial resources more efficiently. It allows us to gain more enjoyment from our income and thus to improve our standard of living.
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How many months of emergency funds should you have saved?
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3-6 months
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What impact does current consumption/spending have on saving for the future?
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You should set aside a portion of current income for deferred, or future, spending. Placing these funds in various savings and investment vehicles allows you to generate a return on your funds until you need them.
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What percent of Americans have retirement planning as their priority?
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35%
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What is the most effective way to achieve your financial objectives?
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Personal financial planning, which helps us define our financial goals and develop appropriate strategies to reach them.
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Be familiar with the steps of the financial planning process.
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1) Define financial goals 2) Develop financial plans and strategies to achieve goals. 3) Implement financial plans and strategies. 4) Periodically develop and implement budgets to monitor and control progress toward goals. 5) Use financial statements to evaluate results of plans and budgets, taking corrective action as required. 6) Redefine goals and revise plans and strategies as personal circumstances change.
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How do most families feel about talking about money (easy/ difficult/avoid)
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Most people are uncomfortable talking about money matters and avoid such discussions, even with their partners.
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What is wealth?
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The total value of all items owned by an individual, such as savings accounts, stocks, bonds, home, and automobiles.
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Examples of financial assets
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they are intangible: paper assets, such as savings accounts and securities (stocks, bonds, mutual funds, and so forth)
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What is utility?
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The amount of satisfaction received from purchasing certain types of quantities of goods and services.
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What relationship does the financial plan have in conjunction with a person's goals? Or is there a relationship?
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Financial goals and decisions should be consistent with your personal values. You can formulate financial plans that provide the greatest personal satisfaction and quality of life by identifying your values.
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What impact does your personal value system have on your attitude on money?
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They are closely linked. If you place high value on family life you may choose a job that does not require a lot of travel. You maybe have plenty of money but choose to live frugally. If status and image are important to you, you may spend a high portion of your income on luxuries.
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Is there 1 financial plan that works for everyone?
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No they are defined to one person's financial desires. Financial goals cover a wide range of financial aspirations: controlling living expense, meeting retirement needs, setting up savings and investment programs, etc.
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How exciting is financial planning?
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Exciting because the more you save and the more you plan the more successful you will be. You can formulate financial plans that provide the greatest personal satisfaction and quality of life by indentifying your values.
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Can money be an emotional factor and what is an example if so?
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Yes. Money can be one of the most emotional issues in any relationship, including with a partner, paretns, or children. Differing opinions on how to spend money may threaten the stability of a marriage or cause arguments between parents and children.
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How many years would be considered to be a long term goal? Have an example.
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A long term goal should indicate wants and desires for a period covering about 6 years out to the next 30 or 40 years. An example would be to pay off a mortgage within X amount of years.
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What would be an example of a short term goal?
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Short term goals are set each year and cover a 12 month periods. An example would be making substantial, regular contributions to savings or investments in order to accumulate your desired worth.
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What is the definition of debt?
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It is a liability
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What is the purpose of insurance?
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Insurance is a way to reduce financial risk and protect both income and assets.
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What are examples of employee benefits? Do employee benefits transfer to other jobs.
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- Vacation and time off - Health and life insurance - Disability insurance - Long-term care insurance - Pension and profit-sharing plans - Supplemental retirement programs, such as 401k plans - Dental and vision care - Child care, elder care, and educational assistance programs - Subsidized employee food services. * no they do not transfer to another job
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Tangible asset and intangible assets and know examples?
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Tangible assets are physical assets, such as real estate and automobiles. Intangible assets are financial assets such as stocks, bonds, mutual funds, etc.
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How important are employee benefits when you are looking at your financial planning?
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Managing your employee benefit plans and coordinating them with your other plans is an important part of the overall financial planning process. Your personal financial plans should include contingency plan to replace employer-provided benefits as required.
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What would be a good goal to have during every step of the financial planning process?
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The amount will change but the goal stays the same. ex. I want to buy a $10,000 car. Your income has increase and now you can save more to buy a $20,000 car.
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How does the government control consumers and businesses?
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Government is a customer of business and an employer of consumers, so it's a source of revenue for business and of wages for consumers.
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What determines the kinds of goods and services that business will provide?
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Consumer choices ultimately determine the kinds of goods and services that businesses will provide.
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Which is most important, the percent of interest you pay or the length of time you pay it?
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The length of time you keep your money invested is just as important as the rate of return you earn on your investments.
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When should you begin to plan for retirement?
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Retirement planning should begin long before you retire. The sooner you start, the better of you'll be.
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Will you have the same amount of money to retire on if you begin saving later (40s) rather than earlier (20s)?
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If you start investing for retirement at age 40, and put only $2000 per year in an IRA earning 5% for 25 years, then your account will grow to $95,454 at age 65. However, if you start your retirement program at 30, your IRA will grow to a whipping $180,641 at age 65.
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What is inflation?
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A state of the economy in which the general price level is increasing.
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What impact does the level of education have on your income over your lifetime? - page 21
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The higher the education the more money you will make.
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What is estate planning?
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As people grow older, they must consider how they can most effectively pass their wealth on to their heirs, this is known as estate planning.
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What is the main objective of estate planning? - page 336
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The main objective of estate planning is to eliminate or maximize taxes and thereby maximize the amount of your estate that ultimately passes to your heirs and beneficiaries. Page 336
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What types of things do you need to be knowledgeable of when doing estate planning?
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You need to be knowledgeable of people planning - anticipating the psychological and financial needs of those you love and providing adequate resources to ensure continuation of their way of life and asset planning - planning who will receive your assets upon your death. Also, planning involves directions about your medical care, whom to rely on for financial or legal advice, and other special instructions you want to give your family when you are unable to do so personally. Page 336
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What are some potential problems that you could have with estate planning? - page 337
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Some problems are excessive transfer costs, lack of liquidity, improper disposition of assets, inadequate income at retirement, inadequate income, if disabled, inadequate income for family at estate owner's death and insufficient capital. Page 337
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What impact can insufficient capital have on settling an estate?
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Insufficient capital can cause inadequate income at retirement. Page 337
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What is the one catastrophic thing that a person can do to destroy estate planning?
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...
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What are funeral expenses in the estate planning? What is covered?
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Funeral expenses are considered first-level death-related costs. Medical bills are also included in the first-level costs. Second-level costs are attorneys, appraisals, and accountants, along with probate expenses. Page 338
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How are minors treated when you do an estate planning? - page 337
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Minors cannot legally handle large sums of money or deal directly with real estate of securities. This would be a burden on them.
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What impact does property in different states have on estate planning?
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The impact could be on the ability to transfer the property. It depends on how you own your property (who is on the deed or title). Also, the nature of the asset (whether it's cash, real property, cars, collectibles) can have an impact. Page 337
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How important is it to know where important documents are in estate planning?
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It is important to know because you might need to have these on hand and might need to tell others where the are located. Page 338
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What are some benefits of a trust?
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Some benefits are to attain income and estate tax savings and to manage and conserve property over a long period. Page 348
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What are some common reasons for estates to break up? - page 338
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Estates break up because of death-related costs, inflation, lack of liquidity, omproper use of vehicles of transfer, and disibilites. Page 338
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How is life insurance treated in probating an estate? - page 339
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Life insurance is property in your gross estate, but not in the probate estate. All property in your gross estate may be subject to the estate tax. Page 339
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What is liquidity and how important is it in paying expenses of the estate? - page 338
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Liquidity is how easy an asset can be turned into cash. It is important in paying expenses because there is a need for cash to cover death costs and other estate obligations. Page 338
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What are the things you have to list when you probate an estate?
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Probate estates consist of the real and personal property you own in your own name that can be transferred at death according to the terms of a will, or if there is no will, intestate laws. All cash, personal property, real property, insurance policies, investments need to be listed. Page 339
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Is your estate federally and/or stated taxed? - page 339
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Both. Page 339
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What are the things you include in a gross estate? - page 339
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A gross estate includes all the property-both probate and non probate-that might be subject to taxes such as property you will continue to own until your death. Page 339
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Should you update an estate plan?
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Yes, at least every 3-5 years. Page 340
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What impact does an adoption have on a estate transfer?
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If a testator did not provide for a child that was adopted, the child recieves that share of the estate not passing to the testator's spouse that would have been given to him or her had the deceased not had a will. Page 344
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What is intestate? - page 339
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When you die without a will.
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What is the definition of a good estate plan?
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A good estate plan maximizes the usefulness of people's assets during their lives and to achieve their personal objectives after their deaths.
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What is a will? - page 340
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A written legally enforceable expression or declaration of a person's wishes concerning the disposition of his or her property upon death. Page 340
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Is a will required by law? NO
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No
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Who decides the disposition of your estate if you die without a will? - page 340
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The State intestacy laws Page 340
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Who needs a will? - page 340
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Everyone, regardless of the size of your estate. Page 340
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What are the requirements of doing a will?
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Provide a plan for distributing the testator's assets according to his or her wishes, consider the changes in family circumstances, and be concise and complete in describing the testator's desires. Page 341
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How important is it to gather data on all aspects of the family when doing estate planning?
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It is very important because you don't want to leave any family members out and it's important to have everyone's role included.
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What are some things that will make a will invalid?
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A will can become invalid if mental incapacity is shown, threats, misrepresentations, inordinate flattery, or mental or physical coersion is used to persuade someone, of if it's improperly executed. Page 343
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How many witnesses do you need to have on a will? - 2
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A will needs to have two wittness, this is required by all states. Page 342
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What is a codicil? - page 343
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A codicil is a simple, often single-page document that provides a convenient legal means of making minor changes to a will. Page 343
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What impact does a new will have on the old or previous will?
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If the new will is created, because substantial changes are necessary, the old oneshould be destroyed to aviod offending anyone. Also, if the new will fails for some reason, the prior will may qualify. Page 344
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What impact does divorce have on a will?
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If a divorce occurs, the state will make all provsions in the will relating to the spouse ineffective. If a testater marries after making the will, the spouse recieves that portion of the estate that would have been recieved had the testator died without a valid will.
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Can a valid will be contested?
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Yes
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Can you omit a spouse from a will?
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Yes, but it might get contested.
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What should you do with copies of wills? - page 344
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Keep them in a safe and accessible place at home and with the attorney who drafted it. Page 344
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What is a letter of last instruction? - page 344
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The best way to communicate to others your thoughts and instructions that aren't appropriate to include in a will. Page 344
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What is meant by mental capacity? - page 343
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You must be of sound mind, know what a will is and aware that you are making and signing one, understand your relationship wiht persons for whom you would normally provide, understand what you own, and are able to decide how to distribute your property. Page 343
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Who can be a witness to a will?
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Generally, a beneficiary should not serve as a witness. Page 343 A witness should be in the presence of another after they witness the signing by the testator. Their address should be on the will. Page 342 & 343
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What impact does death have on your debts?
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The debts are paid by your estate. Page 346
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What is meant by joint ownership of assets? - page 346
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The interest of a decedent passes directly to the surviving joing tenant. A joint tenancy may consist of any number of persons who don't have to be related. A tenancy by the entirety can exist only between husband and wife. Page 346
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What is a trustee? - page 347
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An organization or individual chosed by a grantor to manage and conserve property that is placed in trust for the benefit of the beneficiaries. Page 347
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Who should be chosen as a trustee for a trust? - page 348
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A trustee should posess sound business knowledge and judgement, have an intimate knowledge of the beneficiaries needs and finances, be skilled in investment and trust management, be avaliable to beneficiaries, and be able to make decisions impartially. Page 348
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What is a testamentary trust and who does/how do you create it? - page 348
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It is created by a decedent's will and funded thought the probate process. Page 350
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Is there a gift tax on all gifts distributed through the will?
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The tax applies to the fair market value of the property transferred to a donee, less the amount of compensation given to a donor. Not all gifts. Transfers to a minor trust and the curmmey provision. Page 351
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At what point does an asset become a gift when settling the estate?
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When it is a gift of present interest, not of future interest. Page 351
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What can an individual do with power of attorney? What are some things you can not do? - page 346
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You can take over someone's financial affairs and act on his or her behalf.Page 346
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What is an executor? - page 346
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The personal rep. of an estate designated in the decedent's will. Page 346
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What is a durable power of attorney for health care? - page 346
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Allows your agent to make health care decisions for you if you aren't able to do so. Page 346
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What is federal unified transfer tax?
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A tax on the right to transfer property from one individual to another. Page 350
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What is the amount of money that can be given away each year without paying tax? And to who can it be given to? - page 340
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$13,000. It can be given to any donee.
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What impact does gift giving have on estate tax liability?
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Gift giving can reduce the taxable estate in two ways: 1) future appreciation of the gifted property is excluded from the estate because the decedent does not own the property on the date of death and 2) if the gift is so largethat taxes are due, the money used to pay the tax is also removed from the estate.
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Is inheritance tax the same as estate tax?
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No. Property that is inherited has a basis equal to the fair market value at the date of death. Page 352
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How man can your estate be worth and you not be subject to federal estate taxes?
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$9,999 Page 351
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What is meant by gift splitting? - page 353
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A method f reducing gift taxes; When gifts may be split between husband and wife.
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How often should you review your estate? - page 340
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Periodically, every 3-5 years. Page 340
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Who is the testator of a will?
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The person who makes a will that provides for the disposition of property at his or her death. Page 340
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What makes a will valid?
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Must be product of a person with sound mind, no undue influence, must be properly executed, and must be free from fraud. Page 342
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How do you revoke a will? - page 344
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You must either make a letter that expressly revokes prior wills, make a codicil that expressly revokes all wills earlier than the one thing being modified, make a later will that is inconsistent with a former will, or physically mutilating, burning, tearing, or defacing the will with the intention of revoking it. Page 344
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Who should you talk to to get guidance /advice when doing a will?
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A will no matter how modes the estate is, should not be attempted by a layperson. Some people seek out legal representation. Page 341-342
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What is a balance sheet? - page 25
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A financial statement that describes a person's financial position at a given point in time
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What kind of documents would you use to create a balance sheet?
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Checking, savings, investment statements; assets: kbb for home and cars; liabilities: all bills(expenses); equity: minus your liabilities from you assets
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What information does the income and expenditure statements tell you?
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It tells you where your money goes. It showsa your income, expenses and cash surplus. (cash in flows and out flows)
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What is a budget and what time frame does a budget cover?
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A short-term financial planning report that helps you achieve your short-term financial goes (short-term' anything 1yr or less)
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What are some examples of personal property? - page 27
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Moveable tangible assets used in everyday life: autos, recreational equipment and household furnishings
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What are some examples of real property? - page 27
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Immovable tangible assets: land, the house fixed to the land
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Does personal property generally increase or decrease over time? - decrease - page 27
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Generally decreases over time. (depreciates)
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What are some examples of investment assets? - page 26
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Investment assets earn a return; stocks, bonds, mutual funds, securities, IRA's, 401(k), life insurance and pensions
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What impact does a date have on your goals in life?
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?- I really cant find a certain answer. I feel if you put a date on your goals as when you want to accomplish them by then you tend to work harder and consitant at reaching them
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How do you determine the equity in your home?
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Take what you owe and minus that from the fair market value. (Fair Market Value-Outstanding Balance=Equity)
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What is the best way to balance your budget?
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Estimate you income and expenses. Keep tract of all information that relates to cash in flow and out flow. Compare estimated with projected, this shows surplus/deficits. Reduce your deficits if need be to balance.
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Is there a difference in budgeting and record keeping?
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Yes, record keeping deals with financial transactions and budgeting shows your cash in and cash out. Good record keeping helps you budget better.
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Where should you keep your budget?
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Where it is easily acessible so you can make changes if needed
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Is federal income tax progressive or flat? (is everyone paying the same amount?) - no
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Progressive and no everyone does not pay the same amount.
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Is there a difference between tax avoidance and tax evasion? - page 66
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Tax evasion is illegal where tax avoidance is a legal way to reuce the taxes you pay.
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What is the main objective to tax planning?
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To maximize the amount of money you keep by minimizing the amount if taxes you pay.
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What must you do to get a tax refund?
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File a tax return
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Can a married person file the marital status as single on a tax return?
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No, you can file seprate tax returns but you have to file marital status as married.
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Who writes the federal income tax code?
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?, I guess the IRS... not really sure.
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Is there a limit of social security tax that can be withheld from your earnings?
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Yes, you pay 11.3% of Fica, 8.4 ss and 2.9 medicare. The 11.3 only applies to the first $106,800 of your earnings. Medicare then applies to all earns but the ss tax stops after 106,800.
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What is the Medicare tax? Is it based on 100% of your earnings? - page 49/50
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Medicare tax is a tax that withholds 2.9% of all earnings. Medicare is a type of a federal health insurance for older people (not sure of the age)
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What is child support and is it taxable?
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We all should know what it is. It is not considered a gross income and not taxable.
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What is alimony and is it taxable?
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Gross income that is active and noninvestment income that is taxable
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Are dividends from stock taxable?
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Yes
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Is there a taxable gain on the sell of your house?
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Yes, after the first $250,000 gain for a single person double that for a married taxpayers. Also:
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How many years must you own your home to be able to sell it without paying a capital gains tax? - page 52
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You must own and occupy your home for at lest 2 out of 5 years prior to the sell.
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What is the difference between itemized deductions and standard deductions and what are some examples of itemized? - page 53
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Standard deductions is a fixed amount that depends on your filing status. Itemized deductions is personal expenses that can be deducted from your AGI. Ex: Medical and Dental expense; Property Taxes; Personal Property Taxes; Mortgage and investment interest
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What are the qualifications of tax preparers? - page 64
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Anyone can prepare a tax return. Your can prepare your own return. There are no certain qualifications but the person that prepares the retturn must sign as the preparer.
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What is the current fica withholding rate? - page 49
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11.3% (8.4% ss and 2.9% medicare)
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Do you normally earn a higher rate of interest on a CD, checking account, or money market account?
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CD usually pay a higher rate of interest.
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Is there a penalty when you do an early withdrawal from a CD?
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Yes, an interest penalty if withdrawl is done before maturity
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What is the highest amount the FDIC covers on money market?
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FDIC only covers deposit accounts. If the Money market is not a deposit account(Money Market Mutual Fund) then it is not covered. If it is a money market deposit account then it covers up to $250,000 per depositor for the total of all deposit accounts not per account.
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What is a credit union and what is required to be a member?
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A non-profit member-owned fianncial cooperative. Members have to be a part of a certain occupation, religious or fraternal order, or residential area
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What kind of customer needs to do internet banking?
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Internet users who are comfortable with the online banking process. It is in their best interest as well as the financial insitute.
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What are the two advantages of online bill payment?
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-Save Time -Save Postage
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Do all ATM transaction require the use of a PIN?
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Yes
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What is compound interest?
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Interest earned each period. Is figured by applying the stated rate of interest to the sum of (the initial deposit and the interest earned in each prior period) compound interest=future value
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What is a certified check? Is there a difference between a certified check and cashiers check? - page 84
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A certified check is related to kyour personal account which the bank stamps and certifies that the money is available. The difference is that with a cashiers check anyone can purchase with cash and a certified is not purchased with cash. The money is already in the bank. Cashier checks are used usually by people who do not have a checking account
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What are the major reasons of overdrafts?
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-People write checks/use dedit card for more money than what the account balance is. -People dont balance their check book regularly -People do not use good cash management techniques -People also know that there are so many ways to have overdraft protection
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What are the factors that influence the choice of where to hold your checking account?
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-Look at balance requirements -Fees/Service Charges -Convient ATM's/ATM Fees -Overdraft and FDIC Protection -Interest bearing checking and Online Banking
