Exam 1 – Personal Finance

The financial planning process is complete once you implement your financial plan. (T/F) False
Higher interest rates can be caused by a higher money supply. (T/F) False
A major activity in the planning component of financial planning is: allocating current resources for spending.
The amount of interest is determined by multiplying the amount in savings by the: annual interest rate and the time period.
John Gleason is interested in purchasing a 46″ rear projection TV for his living room. He knows that right now the TV will cost approximately $1500. However, John is a little concerned about his job. John is a pilot for Delta Airlines and he thinks it is possible that he could be laid off in the near future. What type of risk is John worried about? Income risk
A family spends $40,000 on living expenses. With an annual inflation rate of 3 percent, they can expect to may approximately _______ in three years. $43,700
Using simple interest, if you were to deposit $400 into a bank account with an annual interest rate of 5%, how much would be in the account at the end of three years? $460
Using the rule of 72, how long would it take your money to double in value if you earn 3% interest 24 years
If the pretax return on an investment is 8% and you fall into the 15% tax rate bracket, what would be your after-tax return? 6.8%
Interest rates help you understand all the following EXCEPT, If you should go to college.
Interest rates will help you understand the following: When to refinance a mortgage, how to make long term investments, how the economy might impact your job
Over the long term, which type of investmentgives the highest rate of return? stock
Financial experts advise that people keep anemergency reserve savings fund. What type of investments would be best suited for keeping an emergency reserve? Money Market Account
The price of a bond Decreases with increases in interest rates
In comparison to whole life insurance, term: is cheaper
The maximum amount of your individualexposure on a lost credit card that has been reported as lost is: $50
Changes in fiscal and monetary policy do notgenerally impact a person’s net worth: (T/F) False
With respect to risk: Stocks tend to be riskier than bonds Stock mutual funds have less risk than owning anindividual stockCorporate bonds tend to be riskier than moneymarket mutual fundsCommodities futures contracts are considered veryhigh risk
Interest rates tend to be highest on: Credit Cards
Your FICO credit score is based primarily on: Payment history and outstanding debts
A good way to cut insurance costs is to: Ask for multiple policy discounts Ask for discounts for safety measures (e.g. smokedetectors)Increase your deductibles
Credit card, student loans, and recent tax debtsare among the debts that can be discharged in a Chapter 7 bankruptcy. false
Functional résumés emphasize a person’s skills and abilities in categories such ascommunications, research, and human relations. (T/F) true
The first step of the career planning process is to: assess your interests, abilities, and goals.
Barb Hotchkins is in the 28 percent tax bracket. A tax-exempt employee benefit with a value of $500 would have a tax-equivalent value of: $694.
Which of the following would be a competency commonly associated with successful people? A. An ability to work well with others in a variety of settings B. A desire to do tasks better than they have to be done C. An ability to solve problems creatively in team settings D. Well developed written and oral communication skills E. All of the choices are competencies commonly associated with successful people
____________________ is a benefit on which you pay no taxes. A tax exempt benefit
Younger employees are participating in their Employer’s 401-K plan more so than in the past. (T/F) True
Assume your monthly salary is $4,000. Your employer will match 5% for every 8% you contribute towards your 401-K plan. If you were to contribute 8% for 30 years, howmuch would you have in the plan assuming a 10% return? $1,175,453
What is the pretax value of a $3,000 parking benefit if you fall into the 35% tax bracket? $4,615
After-tax benefits include all of the following EXCEPT: Company car
Assume you make $75,000 per year and contribute 10% to your monthly salary to your 401-K account. Your employer will match 3% of your monthly salary and contribute to your plan as well for 30 years. If you expect this account to earn a 10% return, what is thevalue of the 401-K plan at the end of 30 years? $1,836,646
After-tax benefits include all of the following A. Company paid parking, On-site health facilities, Company portion of health care costs
If expenses for a month are greater than income, an increase in net worth will result. False
Current liabilities are amounts that must be paid within a short period of time, usually less than a year. True
Current liabilities differ from long-term liabilities based on when the debt is due
Which of the following situations is a person who could be insolvent? Assets $40,000; liabilities $45,000
Monica has determined that the value of her liquid assets is $4,500, the value of her real estate is $128,000, the value of her personal possessions is $62,000 and the value of her investment assets is $73,000. She has also determined the value of her current liabilities is $7,500 and the value of her long term liabilities is $98,000. What is Jamie’s net worth? $162,000
Phoebe has determined the following information about her own financial situation. Her checking account is worth $850 and her savings account is worth $1,200. She owns her own home that has a market value of $98,000. She has furniture and appliances worth $12,000 and a home computer and laptop worth $3,300. She has a car worth $12,500. She has recently purchased a 2 year certificate of deposit worth $5,500 and she has a retirement account worth $38,550. What is the value of her liquid assets? $2,050
The Lopez family budgets $420 a month for food. Last month they spent $413, which creates a budget surplus of $7.
Assume the following as monthly amounts: Gross Salary: $4,000 Take Home Pay: $2,600 Savings: $450 Credit Card Payments: $500 What would be your savings ratio? 11.25%
A savings amount of $5,000 on deposit for 8 years at 4 percent interest (compounded annually) would earn about ______ in interest. $1,840
A budget deficit would result when a person’s or family’s: actual expenses are greater than planned expenses.
A tax credit is an amount subtracted directly from the amount of taxes owed. True
Money received in the form of dividends or interest is commonly called “earned income.” False
Interest earnings of $1,600 from a taxable investment for a person in a 28 percent tax bracket would result in after-tax earnings of $1,152
Jim had earnings from his salary of $34,000, interest on savings of $800, a contribution to a traditional individual retirement account of $1,500, and dividends from mutual funds of $600. George’s adjusted income (AGI) would be: $33,900.
_____________ are the next group of expenses that a taxpayer is allowed to deduct once adjusted gross income is calculated. Itemized deductions
A tax credit of $50 for a person in a 28 percent tax bracket would reduce a person’s taxes by: $50.
An IRA, Keogh plan, and 401(k) plan are examples of: tax-deferred retirement plans.
The use of legitimate methods to reduce one’s taxes is tax ____________. avoidance
Randal is 36 years old. He has adjusted gross income of $32,000. He has medical expenses for the year of $6,000. How much of these expenses can he deduct from adjusted gross income $2,800
An amount not included in gross income is: an exclusion.
amounts that are included in gross income a tax credit an exemption, earned income, portfolio income.
Credit unions typically offer lower loan rates than other financial institutions True
401-K accounts are tax free. False
To avoid high fees for loans, a person should not borrow from a: pawnshop
A saver will usually earn the highest rate with which of the following types of savings plans? a five year certificate of deposit
Savings compounded ____________ would have the highest effective yield daily
Comparison of earnings for different savings plans can best be accomplished using the: annual percentage yield.
Based on the following information, what amount would be SUBTRACTED from the BANK BALANCE side of a checking account reconciliation? Service charge $12; Outstanding checks $145; Interest $3.50; Deposit in transit $80 $145
A savings account earns 4 percent. If the saver is in a 28 percent tax bracket, the after-taxsavings rate of return would be ____ percent. 2.88
Your bank statement shows a balance of $670. Your checkbook register shows a balance of $462. You earned interest of $2, and had a service charge of $4 which had previously been posted to the check register. What is the amount of outstanding checks assuming there are no deposits in transit $208
What is the effect rate of 5% interest compounding quarterly 5.09%
To avoid high fees for loans, a person should borrow from a credit union, savings and loan association, commercial bank, mutual savings bank.
The credit cardholders who pay off their balances in full each month are known asconvenience users true
When you cosign a loan, you are being asked to guarantee this debt true
Home equity loans are known as a first mortgage. False
The debit card: debits your account at the moment you buy goods or services
If your monthly net (after-tax) income is $1,500, what should be your maximum amount spent on credit payments? $300
Debt payments-to-income ratio is: calculated by dividing monthly debt payments (not including house payments) by net monthly income
A bank that is looking at your past payment records on your loans is most likely examining which aspect of the 5Cs of lending character
A UCF alum has determined that his/her net worth is $30,000. The alum has also determined that the balance on their mortgage is $80,000. He/she has determined that the amount due today for the rest of her debt is $15,000. What is the alum’s debt-to-equity ratio? .5
All of the following are way to improve your FICO score EXCEPT Increase your credit card/account applications
A home owner paid $40,000 for their home. After refinancing, the owner owes $180,000. If the bank will provide home equity loans up to 80% of the value of the home and the maximum the homeowner can borrow is $50,000, what is the value of the home? $287,500
ways to improve your FICO score Stop paying bills late, Pay down credit cards evenly, Don’t use a new credit card to lower other balances
You have two choices in declaring personal bankruptcy: Chapter 7 and Chapter 13 bankruptcy TRUE
There are no costs involved in filing for a bankruptcy FALSE
If you borrow $100 at 10 percent simple annual interest and repay it in one lump sum at the end of one year, you will have to pay $110
Chandler borrows $1,000 for school this year. He is charged $50 in interest and pays a onetime fee of $15. What is the cost of financing and the APR 6.5%
Which of the following is a local organization affiliated with the National Foundation for Consumer Credit that provides debt counseling services for families and individuals Consumer Credit Counseling Service
Using your financial calculator, solve for APR assuming you borrow $300 and pay it back in equal payments each quarter for the next 4 quarters at a 12% APR? What is the payment and what is the effective interest rate PMT = $80.71; EFF = 12.55%
What is (are) the signal(s) of potential debt problems? All of the choices are the danger signal
All of the following will help you avoid bankruptcy EXCEPT Financing your car for more than 3 years
The total dollar amount you pay to use credit is called the finance charge.
Your bankcard has an APR of 18% and there is a 2% fee for cash advances. The bank starts charging your interest on cash advances immediately. You get a cash advance of $600 on the first day of the month. You get your credit card bill at the end of the month. What is the total finance charge you will pay on this cash advance for the month $21
Will help you avoid bankruptcy Mortgage payments based on one salary, Avoiding credit card interest, Shopping wisely
Assume a pretax return of 13%, a 10% tax rate and an inflation rate of 3%. What is the realreturn? (.13 x (1 – .1)) = .117 minus inflation .03 = .087
Using the rule of 72, how long will it take to double your money assuming a 10% return? 72/10 = 7.2 year
A taxpayer is in a 33% tax bracket. What is the monthly pre-tax equivalent of a $200/month tax free parking benefit 200/(1 – .33) = 300/month
A taxpayer 25 year old has adjusted gross income of $45,000 and out of pocket medical expenses of $5,000. How much can be deducted on Schedule A for medical expenses Medical expenses = 5,000 less limit of 4,500 (10% of AGI) = 500 deduction
Calculate net worth assuming an individual has a house worth $100,000, cash of $5,000, student loans of $15,000, a car worth $10,000, a 401-K account valued at $25,000, and credit card debt of $4,000 In thousands: 100 house + 5 cash + 10 car +25 401-K = 140 assets minus 15 student loans minus 4 credit card debt = 121 net worth
How long must one hold a capital asset for a gain to be treated as “long term” More than a year (which is a year and one day)
An employee makes $50,000 per year and contributes 6% to his/her 401-K and the company matches 5%. The employee also pays $100/month in premiums for health insurance. What is the employee’s W-2 incom 50,000 minus 3,000 (401-K) minus 1,200 (health insurance) = 45,800
Using the information in question 7, assume the employee is paid at month end and earns a 9% return on his/her 401-K investments. How much will be in the 401-K in 40 years End mode Pmt/year = 12 Pmt = (50,000/12*.11) Int = 9 N = 40 x 12 FV = 2,145,605
Major trends – shifting the risk to the consumer-Individuals Must Assume More Responsibility for Their Financial Future- U.S. Government Entitlement Programs Will Strain Resources-U.S. GovernmentEntitlement Programs-
Attitudes on money are influenced by: our emotions and background
Opportunity cost is: what you give up by making a choice
potential income Risks – not being able to get a job after graduation-Getting fired
How much should you have in an emergency fund? at least three months take home pay (3-9 months)
What is inflation risk? rising prices and lowers corporate profits
in accordance to inflation, what does rising prices do to your buying power? lowers it
Inflation is bad for? stock
Inflation is good for? commodities (gold)
What causes Inflation? Caused by over heated economy orsupply shortages, easy money policies
What is deflation risk? lowering prices, discourages borrowingand spending, sending a bad economy even lower
Understanding interest rates helps you know: When to refinance a mortgage How to invest your savings How to make long term investments How the economy may impact your job
Who do interest rates start with? The Federal Reserve
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain “maximum employment, stable prices and moderate long-term interest rates.”
If inflation is causing the cost of goods to go up then prices are not stable
What do the feds use to control Inflation monetary policy
Low inflation or a recession will lead to LOWER interest rates to stimulate the economy and lead to higher economic growth and jobs
Higher inflation will lead to… an increase in the interest rates, which cools the inflated economy and possibly causes a recession (and loss of jobs)
Interest-rate risk Effects cost of borrowing and rate of return
Personal risk Health, safety, or costs
liquidity Higher return may mean less liquidity
real return equals after tax return minus inflation rate
Simple interest is P R Tprinciple rate time
Rule of 72 divide 72 by the annual rate of return on your investments this gives you how many years it will take to pay off
Personal financial planning is the process of managing your money to achieve personal economic satisfaction.
Advantages of Personal Financial planning allows you to see where you are and where you are goingyou can take corrective actions when needed
Six steps of financial planning 1. determine current financial standing2. develop your financial goals3. identify alternative courses of action4. Evaluate alternatives5. create and implement your financial action plan6. review and revise your financial plan
When evaluating your alternatives, what should you consider and assess consider: Life situation, personal values, economic factorsassess: Risk, TVM, opportunity costs
Goal setting guidelines SpecificMeasurableAction-orientedrealisticTime Based
A dollar today….. Is worth more than a dollar in the future
Translate $1 in the future into its equivalent today is discounting
Translate $1 today into its equivalent in the future is compounding
What it takes to manage: Leadership skills Management skills Business acumen Motivational skills Delegation skills Hiring, evaluation, and firing skills Stress management
What it takes to succeed Work harder Work smarter Team player Make money for your company Improve your skills Have a set career plan Act like the person you want to beWork well with others Desire to do tasks better Staying current/expanding skillsCoping with conflict Solving problems PC skills Communication skills
Are Pretax benefits included on w-2 Yes, as income
are after tax benefits included on w-2 No
How to calculate the after tax benefit value Pretax benefits * (1-tax rate) = after tax benefit value
how to calculate pretax benefit value after tax benefit * (1-tax rate) = pretax benefit value
What are pre-tax Benefits Benefits provided by your employer that are subject topayroll and income taxes such asSalaries Bonus Company car
What are after-tax Benefits Benefits provided by your employer that are not subject topayroll and income taxes such asCompany paid parking (employee paid parkingreduces W2)On-site health facilities Free air travel for flight attendants Company portion of health care costs
What is a 401-k plan? -Allows employees to save for retirement and get a tax break-allows employers to match employees with no immediate tax due- all savings grow tax deferred-amount saved is taxed once withdrawn during retirement
savers know: Spending today reduces the amount you cansave today for the futureBuying on credit ties up future incomeUsing savings for purchases today results inlost interest/investment incomeComparison shopping takes time, but can savemoney, especially for large dollar purchases
Why Keep Financial Records? To help making spendingdecisionsTo plan future spending To pay bills on time To see changes in net worth To make good investmentdecisionsTo prepare your income taxforms
What to keep in home filing cabinet Personal and employment records Consumer purchase & credit records Financial services records Tax records Insurance records Investment records Housing and car records Estate planning and retirement records
Net worth equals assets – liabilities
What are assets? What you own that has monetary value: liquid/current or illiquid
what are current/ liquid assets? Can be quickly converted to cash without taking a material loss from current valueCash Savings/money market accts. Stocks and bond taxable accts
What are illiquid assets? Real estate/homes Automobiles Personal possessions (jewelry) Retirement investment account
What are liabilities? What you owecurrent and long term
Current liabilites: are due with in the year
Long term Liabilites student loans, car loans, mortgages
What is net worth? assets – liabilities
what does insolvent mean? liabilities outweigh assets
income statement shows shows income or increase of net worth, shows expenses, and net income or net losses
Income on income statement is: salaries, unrealized gains or losses on investments and house
expenses on the income statement: cash expenses, noncash expenses like car depreciation, fixed vs. variable costs
Net income or net loss is found by income – expenses
What is a cashflows statement? shows inflows and outflows of cash during a time period
Debt ratio: liabilities / Net worth
Liquidity Ratio liquid assets / monthly expenses
debt payment ratio monthly credit payments / take home pay
Savings Ratio monthly savings / gross monthly payment
Five types of taxes purchasespropertywealth transfersearningsuses
what are purchase taxes? Sales and excise taxes (regressive)
taxes on property are: real estate taxpersonal property tax
taxes on wealth transfers are: Federal estate and gift taxstate inheritence tax, 14,000 / person / year excempt for gifts
taxes on earnings income tax (progressive)- federal-state -employment
Use taxes are: toll roadsairport landing fees
Who sets fiscal policy and how is it determined Congress, by passing tax laws to raise revenues, and then appropriates spending, as approved by the President
What do they use fiscal policy for? to encourage economic and social behaviors, such as, home ownership, credit card debt, savings initiatives
What do you do first when figuring out taxable income? choose filing status: single, married, etc
How to find taxable income: Gross income- adjustments=AGI- greator of Schedule A or standard deduction-exemptions=taxable income
What is gross income? includes all income that is notspecifically excluded by statute or administrative and judicial decisions
Gross income includes: Earned income Investment or passive incomenet capital gain
w-2 income equals: = salary minus pre-tax savings (401-K), healthinsurance, etc.
Investment or passive income: moneyreceived in the form of dividends, interest or rent from investmentsInterest income from banks, bonds etc.Dividends are paid by corporations toshareholders from after tax profits(most pay 35% tax)Individuals also pay taxes on these”qualified” dividends, thus they are taxed twice but at a lower rate
is municipal bond interest income taxed? No it is an exclusion
How are short term capital gains taxed? they are ordinary
How are long term capital gains taxed? they are taxed at a lower rate
what are adjustments to gross income? Contributions to a traditional IRA or KeoghYour 401-K contributions are netted on W-2Alimony payments Student loan interest up to $2,500 Moving expenses
What is the standard deductions? 12,600 married, 6300 single
The U.S. income tax is based on a Progressive tax system, meaning the more you make, the more you pay
How much are exemptions for people claimed? 4050
Average Tax rates are… interesting but meaningless
marginal tax rates… reflect how the nextdollar of income will be taxed, or the worth a $1more of deduction
Which tax rate drives all personal financial decisions? Marginal
whats a tax credit? an amount subtracted directlyfrom the amount of taxes owed
what are the three types of audits? correspondantofficefield
Tax Evasion Illegally not paying all thetaxes you owe, such as not reporting all income
Tax Avoidance/Tax Planning Legitimate methods to reduceyour tax obligation to your fair share but no more
Items that are tax deferred Traditional IRAs and 401-Ks U.S. Savings Bonds Deferred annuities Unrealized gains on stocks & bond
tax free investments Interest on municipal bonds Interest on Roth IRAs Interest from Sec. 529 college savings plan
Treasury bills are short term
treasury notes intermediate term
treasury bonds long term
To reconcile bank statement Balance per bank statement+Deposits in transit not clearing-Outstanding checks not clearing=Correct balance in your checkbook
appropriate debt Home mortgages – equity loans forimprovementsLoans for capital or long term durablegoods (e.g. autos)Student loans if needed, within a limitedtime periodMedical emergencies
NOT GOOD DEBT Credit card High cost finance companies Paycheck advances Pawn shops Borrowing to pay current expenses Home equity loans to pay off creditcardsSaves interest, but are you risking yourhouse
For individuals, capital and operatingbudgets includ Auto replacement Home down payment Furnishings Vacation
What is consumer credit? Buying now, paying lateruse of credit for personalneeds, except a home mortgage
Closed-End Credit (Repaid at Maturity End Mode)Mortgage loan Automobile loans Installment and some home equity loans
Open-End Credit Use as needed until reaching line of credit You pay interest and finance charges if you don’tpay the bill in full when dueRevolving check credit – prearranged loan Open end home equity loan
advantages of using a debit card Convenient Don’t have to carry cash or checks Can prevent credit card debt and bad checks
Disadvantages of using a debit card Consumer protections weaker if lost No stop payment ability Fees Loss of float Rewards/points not as good as credit cards
Debt Payments-to-Income Ratio should be less than what? 20 %
Debt Payments-to-Income Ratio monthly payments (not including housing)_______________________________________monthly after tax income
Debt To Equity Ratio should less than 1
Debt To Equity Ratio total liabilities _____________________net worth
Home Equity Loans second mortgagesClosed ended (home edition) Open end (Home Equity Line Of Credit)
five C’s of Credit Character – Do you pay bills on time? Capacity – Can you repay the loan? Capital – What are your assets and networth?Collateral – What do you have of value thatthe lender can take if you don’t repay?Conditions – What economic conditionscould affect your repayment of the loan?
Sources of Consumer Credit – inexpensive loans-medium priced loans-expensive loans
inexpensive loans Parents and family members Loans based on assets, such as a CD
medium priced loans Commercial banks, savings and loans Credit unions
expensive loans Finance companies Retailers such as car or appliance dealers Bank credit cards and cash advances
What are the costs of credit finance charge and APR
what is finance charge? includes interest and fees,such as service charges or credit-related insurance
what is APR is thepercentage cost of credit on a yearly basis and is
How to calculate APR = periodic rate* x number of periodsWhere periodic rate is annual rate/number of periods
what will extending the terms of your auto loan do? Will Lower Your Payments and Increase Interest Costs
How to calculate simple interest Principal x Rate x Time
what is compound interest (interest on interest) can bedone annually, monthly, daily
what is a declining balance? Interest is paid only on the amount of originalprincipal not yet repaid (mortgages)
Annuity a sequence of equal cashflows, occurring at the end of each period.
How to find a Perpetuity pmt/I

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