Unit 17: Personal Finance Planning

short term financial goals having funds to buy things that require money above what is normally budgeted
short term financial goals might include: medical expenses, vacation, holiday spending (gifts), repairs to car tires, replace appliances, social events
long term financial goals major purchases that require extensive savings
long term financial goals might include: home purchase, home renovation, investments, automobile purchase, child’s education, retirement planning
anticipated income income that is expected; income that one uses to create budget to meet both short and long term financial goals
anticipated income might include: salaries, trust fund payments, wages, grants/scholarships
unanticipated income income that is unexpected; you should not count on this income for budgeting purposes
unanticipated income might include: gifts/ winnings, tax returns, bonuses, inheritance
anticipated expenses regular payments that one would include when budgeting
fixed costs the expenses that one would normally expect on a monthly basis. these expenses will normally not vary very much over the short term. paid with disposable income
fixed costs might include rent or mortgage payment, untitlities gas/ electricity, insurance (health-home-life-car), car payment, cable/ internet/ phone, transportation costs, college loans
unanticipated expenses payments that are unexpected which are very difficult to budget for; these would be paid for from discretionary income
variable costs payments that are difficult to budget for because they are not constant; they can change from month to month based on circumstances that are difficult to predict
variable costs might include: entertainment, maintenance, medical bills (co-pays), repair, regular savings, unpredictable losses (car wreck)
net worth the total of all one’s assets minus liabilities; a good indication of an individual’s wealth
assets a resource with economic value that an individual, owns or controls with the expectations that they will provide future benefits
liabilities a person’s legal debts or obligations that arise during the course of one’s lifetime; these are settled over time through the transfer of economic benefits including money, goods or services
assets would include: bank accounts, saving and checking, equity in home or other Real Estate, value of vehicles owned, retirement plans 401-403-IRA, whole life insurance policies, collectibles/ furniture/ electronics
liabilities would include: balance of mortgage owed, balance of car loan owed, credit card balances, student loans
net worth statement provides the total value of a person’s financial holdings (assets); this is written down and can be useful when applying for credit and also how much life insurance one might need
personal inventory a list of all of one’s assets / personal property; can be important for insurance claims especially when it includes pictures
budget an important tool for achiving one’s short term and long term financial golas; should be written
a budget should include 1) a written statement of long term and short term goals2) a plan for managing one’s money in the short-term period3) outlining a long-term plan for managing money
disposable income money left after taxes that will pay for needs such as food, shelter, and clothing
short term goals generally goals for a year or less; paying off credit card balance of car loan
discretionary income money left over after taxes have been paid and your needs have been accounted for; this part of your income would be used for savings for emergency expenses, and long term financial goals
long term goals savings for goals a year or further in the future; education, retirement, paying off your home
paying off loans as a form of savings if one uses discretionary income to pay off existing loans you can save money because rates on existing loans is usually higher than those rates paid on savings accounts
who is the most vulnerable with susceptibility of careers to changing economic conditions? individuals who work in industries that are strongly influenced by downturns in economic activity; building industry, automobile industry… major drivers of the economy; people in sale’s positions that are paid on commission; public service jobs have traditionally fared well but technology could change that
high inflation makes any interest bearing investments a big risk such as savings accounts and bonds; if income increases, inflation can make long term debt such as a mortgage or student loans more manageable thus making them easier to pay off
low inflation usually accompanies relatively low economic growth and might include low interest payments; generally stock prices may rise as people stay away from interest bearing investments; can make fixed debt more difficult to pay off
recession building trades, sales jobs, lenders, are all hurt; income tends to flatten so that people may find it more difficult to pay off loans on the short term; discretionary income likely to be reduced resulting in the reduction in savings and investing plans; people also tend to use some savings and retirement income, stock prices also deflate which causes a reduction in one’s personal assets
growing economy an economy where most people will benefit due to increasing income, more jobs, higher stock prices
“all bubble will eventually burst” when investments increase fairly rapidly and reach very high levels of value (“over-appreciated”) their values will eventually decline
financial planning and taxes always consider the value of planning and saving with tax policies in mind
529 Plan it is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs; it is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996; although you contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary’s college costs come out federally tax-free
IRA stands for Individual Retirement Account, and its basically a savings account with big tax breaks, making it an ideal way to sock away cash for your retirement; a lot of people mistakenly think an IRA itself is an investment – but its just the basket in which you keep stocks, bonds, mutual funds and other assets; a traditional IRA, allows you to deduct at least part of your contributions (tax differed) but requires you to pay income tax on money you withdraw in retirement
Roth IRA it is a retirement savings account that allows your money to grow tax-free; you fund this with after-tax dollars, meaning you’ve already paid taxes on the money you put into it; in return for no upfront tax break, your money grows and grows tax free, and when you withdraw at retirement, you may no taxes; every penny goes straight in your pocket
401K a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis; employers offering this my make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan; earnings accrue on a tax-deferred basis
403B a retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers; generally, retirement income accounts can invest in either annuities or mutual funds; also known as “tax-sheltered” annuity
annuity it is a contractual financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annunciation, pay out a stream of payment to the individual at a later point in time
basic economic principles: 1) everything is scarce and everyone faces scarcity 2) scarcity forces people into making choices3) every choice involves a cost4) what we give up to get what we want is opportunity cost; example would be the more we spend the less we can save5) economic choices are marginal choices and affect the future6) we make decisions that provide us the greatest benefits at the lowest cost7) everyone responds in a predictable way to incentives or disincentives8) when making investments, the greater the risk the greater the reward
when making your budget you must consider how to meet your _____ and your ______ needs, wants
need what you would give up all your resources to acquire; generally basics of survival; you must budget for your wants first; disposable income
want non-essential expenses; expenses that can be postponed; eat into your discretionary income
what is the opportunity costs of spending a large portion of your discretionary income? less money to save and invest in retirement and education
when considering risk and reward that is a decision you will have to make for yourself when making long term decisions; one of the most important factors in making your decision will be your age; how will your age figure into your long term financial planning? when thinking of retirement as an example, you will be bale to handle more risk because you will have more time to recover; as you get closer to retirement and get older you will have less tolerance for risk
How might inflation change your long term financial plans and your strategy for building wealth? Inflation can reduce your real income meaning that it will erode your purchasing power
How might a recession change your long term financial plans and your strategy for building wealth? Reduction in income growth and potential for unemployment; most likely will cause a loss in retirement income in the short run but as the economy recovers you should make up for your losses; makes budgeting more difficult; may cause your to dip into requirement savings

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