UGBA 196 – Personal Finance

Notary Public An appointed officer with authority to take the acknowledgment of persons executing documents, sign the certificate, and affix official seal; always get a copy of contract signed
Warranties on products purchased using a CC Extended warranty benefit which extends the terms of the original warranty on “eligible purchases” (eligible purchases: within 100 miles of your mailing address, more than $50, directly used your CC, not have fully paid for the purchase)
Variable Rate of Interest An interest rate that moves up and down based upon the changes of a different interest rate which is not controlled by the lender. Now commonly used by credit card issuers. Example: Base variable rate on the “prime rate” of interest which is supposedly the lowest interest rate banks charge their best customers
Go-To Rate of Interest Rate you are charged on unpaid balances; rate earned based on your credit score; in addition to the variable interest rate to determine the total rate of interest on your account
Retail charge cards Retailer, highest interest rates, stores offer discounts at register; new laws state that retailers may not be able to open an account at the register unless they do a credit check on the applicant before granting credit
Longevity Biggest problem, no savings, live too long
“Good” divedend yield greater than the interest rate on a 10-year treasury bond
Early retirement age 62; full benefits at 66; by taking early retirement, reduced by 25%
Increase in credit card limit effects Help decrease debt-to-credit ratio which can increase FICO score
Cancelling credit cards effects Cancelling cards can increase overall debt-to-credit ratio which might lower your FICO score
Credit report and credit score difference Credit report: individual financial report card which tells whether you have been making your CC and loan payments on time; a lot of other personal information about youCredit score: change over time as info changes, 6 month history
Wash sale If you sell a stock for a loss and buy the same stock back within 30 days, you may not use that loss for a tax loss.
W2 form Wage and Tax Statement; a report furnished by the employer for each employee indicating gross earnings and deductions.
Dividends Taxed twice, a taxable payment declared by a company’s board of directors and given to its shareholders out of the company’s current or retained earnings, usually quarterly
Net asset value total value of the fund’s holdings divided by the number of fund’s shares outstanding at that time; NAV is posted once a day after the market closes
Mutual fund professionally managed portfolio which may consists of stocks, bonds, or other investment divided into shares; must have a strategy
Marriage tax penalty Their combined income could push them up the tax bracket if they file jointly. This does not apply to those earning less than $68,000
Trends over 6-18 months Look for trends — most important thing to do in investing; keep eyes open for new trends; emerging market growth, rising inflation and interest rates, world is getting older, out of cheap energy, raw materials are hard to reach, more people have higher incomes, environmental needs
Itemized vs. standard deductions Standard: single – 5950, married and filing jointly – 11900Itemized on Schedule A: medical expenses, state income taxes, sales taxes, interest on home loan, property taxes, charitable contributions
Growth investor Investor looking for strong companies to grow their sales and earnings. Usually this means that sales and earnings could grow 15% or more from one year to the next.
Value investor Investor who seeks out stocks that have stumbled and whose shares are at bargain prices; not always a good thing
Income investor Those who buy stocks primarily for their dividends
Stock option A compensation system that gives employees the right to purchase shares of stock at a set price, even if the value of the stock increases above that priceExercised: employee pays the required price per share to the company and is issued the shares
FICO score a credit score that takes into consideration things like whether you:-pay your bills on time-debt/credit ratio-how long you’ve had established credit-new accounts and recent applications-mix of CC and loansmeant to be a quick way for creditors to determine whether you are a good risk
Credit reports Contain information about an individual’s background and credit history, and these reports are used to determine if someone is credit worthy; 25% have serious errors or list old accounts
Debt to credit ratio Total balance on your credit cards and other loans compared to your total credit limit. 30% is ideal. (Pay down, charge less or have more cards/increase limits)
Interest rates vs. value of bonds When interest rates rise, existing bonds decline in market value. When interest rates fall, existing bonds rise in market value.
CARD act -No interest rate increase for first 12 months, unless introductory rate ended-45 days in advance of any rate change-More than 60 days late in making the min payment, issuer may charge default rate (if make 6 months on time, back to orig rate)-Overdraft fees must be allowed by cardholder-Unused credit hold cannot create overdraft charge-Statements must show how many months to pay balance if only min payment-Statements must show how much will have to be paid monthly to fully pay in 36 -“Cap” on fees for the first year, 25% of credit limit-NO legal limit or cap on interest rates on outstanding balances-Cannot solicit students on or “near” campuses and offer incentives-Excess payment of min: applied to highest interest rate-Notified 30 days in advance before account is closed
Rules by Federal Reserve (current laws) -CC company cannot charge you a fee of more than $25 for late payment-Cannot charge a late payment fee higher than your minimum payment-Cannot charge an inactivity fee-Cannot charge more than one fee for a single transaction-Increase in APR must be explained; must be re-evaluated every 6 months
Emergency fund Three to six months of expenses in readily available cash to be used only in the event of an emergency
What to do: credit card theft Contact the CC issuer or bank immediately; loss is limited to $50 if contacted within 2 days; beyond 2 days, liable for up to $500; beyond 60, liable for the full amount; close account immediately, ask for a new card, if you find it–destroy it; always check your CC statements every month
What to do: identity theft Done by phishing or hacking-Immediately contact the three major credit bureaus and put a “fraud alert” on account-Close all account ASAP-Contact all creditors-File a police report-Detailed record of who you contacted
“Millionaire” people who are financially able to take care of themselves throughout their adult lives without relying on government programs such as Social Security and Medicare; 5% of Americans after working 40 years
Proprietorship A business firm owned by an individual who possesses the ownership right to the firm’s profits and is personally liable for the firm’s debts; unlimited personal liability
Partnership A business owned and controlled by two or more people who have entered into a written agreement; partnership will survive the death of a partner; partnership does not pay fed income taxesGeneral partner: manage and runs, unlimited liabilityLimited partner: invest in business, limited liability
Limited and unlimited liabilities Limited liability: limited only to the amount of their investmentUnlimited: responsible for everything, can purchase liability insurance to protect assets
K-1 form Form received by partners or owners of LLC, S-Corp., or other entity, that passes through taxes to owners. Prepared by the entity to outline each person’s portion of income, loss and deductions; states the info needed to be filed with the partner’s individual ta return
Corporation A business owned by stockholders who share in its profits but are not personally responsible for its debts; chartered by the state
Social security %, $ 12.4% of all earned income, 6.2% is paid by employer, 6.2% is paid by employee; maximum annual cap of $113,700 ($14,099); do not pay SS taxes on unearned income
Medicare %, $ 2.9% payroll tax on all earned income, 1.45% is paid by employer, 1.45% is paid by employee; there is no annual cap
Credit hold Bank hold; usually car rentals and hotels; “hold” a larger amount than what is owed to cover any damages/ other purchases that you make– releases it AFTER you’ve paid what was agreed
Rule of 72 The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest.Inflation effects: inflation averages 3% yearly, rule of 72 says that in 24 years, the prices of goods/services will double
Rule of Fred “I get paid first”
Compound interest earning interest on interest, the interest earned is added to your investment
SS/medicare: tax deductible? Medicare: not for employees, yes for employer
Earned income: savings 15%, start 5-10% of earned income in your early years
Earned income includes wages, salary, bonuses, commissions, tips, etc.; evidenced by W-2 from employerSelf-employed: Form 1099 or Schedule C to report income
Top 1% Earn $400,000+, pay 40% of all income taxes
Maximum interest charge on CC balance No legal maximum charge
3 major credit reporting agencies Transunion, Equifax, Experian Federal-mandated website for free credit report, It is the website one should go to in order to receive free credit reports from all three credit reporting agencies; 1 free copy a year from each of the 3 major bureaus
Bankruptcy Will not wipe out alimony, child support, student loans; federal court only; negatively impact your credit score for up to 10 years; contact a credit counseling agency
Corporate bonds Long-term debt instruments issued by corporations
Muni bonds second to US government securities when it comes to safety, safety of issue is based on municipalities financial strength, no federal tax on interest but cap gains are federally taxable, lower interest rates, appropriate for investors in high tax bracketsInterests from muni bonds issued by state/local are free from federal taxMuni’s are not the best deal if you are in a low tax bracketHigh tax bracket = muni bonds
Federal bonds US treasury, guaranteed by the federal government, subject to federal income taxTreasury bills: 90 days – 1 year, no interest is paid, mature at face valueNotes: 2-5-7 maturities, paid twice a yearBonds: 10-30 years, paid twice a year
SS role and pay-as-you-go As costs rise, taxes must also rise; money comes in and out, without money coming in, there will be no money coming out
“Frugal” Being frugal is the cornerstone of their wealth; not CC junkies; working toward their goals, budgeting, and controlling expensesNot being cheapNot spending freely or unnecessarily
Current maximum rate on personal income tax 39.6% (10, 15, 25, 28, 33, 35, 39.6)
Qualified vs. ordinary dividend Qualified: taxed at a max rate of 15% (20% for high income) if the stock has been held for at least 61 daysNon-qualified: Less than 61 days, in Real Estate Investment Trusts, reported on Form 1040 Schedule B
Short term and long term capital gains Capital Gains Tax on Schedule DShort term: asset owned for 0-12 months, profit is added to your income and is taxed at your indi tax rateLong term: over 12 months, profit is subject to a current max rate of 15% (20% for high income earners)
Alternative Minimum Tax Designed to make sure that those with high incomes pay their fair share of taxes, even if they have a high number of deductions that brings their adjusted gross income into a lower tax bracket.Increased to 51900 for singles and 80800 for married couples
Initial public offering The first time a company issues stock that may be bought by the general public
Bid/ask/offer bid: highest price a buyer is willing to pay at that very moment in timeask/offer: lower price a seller is willing to sell at that very moment in time
Market order to sell expect to sell at the bid price
Market order to buy expect to buy at the ask/offer price
Limit order to sell set the price; specific price set, someone must bid your price to be able to sell
Limit order to buy set the price; specific price set, someone must ask/offer at your price to be able to buy
Closed and open end mutual funds Open: pooled investment fund open to any investor with the money to make a min initial purchase; various kinds of fees–highest fees, buy shares from fund itself and sell within (prospectus attached)Closed: raises money by issuing and selling a set number of shares and then no more; NAV based on supply and demandBuying in December: after the year-end distribution, if it require you to pay tax on it
ETFs vs. sector funds ETF: funds that track an index, but trade like stock; bundle of stocks, electronically, expenses are low, instant diversification, ETFs may collect and distribute dividends to shareholdersSector: track stocks in a specific industry or other category, consider commissions and fees
Medicare and Social Security Medicare will run out quicker than SS; medical costs are soaring out of sign, people are alive longer; high tech treatments are expensive; major culprit: consumption per person; fraud; malpractice insurance costsSS: entitlement program (age, number of quarters, min amount of income, citizen/lawful alien)Medicare: 3 part health care entitlement program, most people age 65; part A is free to seniors, part B/C is optional and means tested
DJIA Tracks the stocks of 30 of the largest American companies to measure the well-being of the stock market as a whole
S&P 500 A stock index based on prices of 500 major US corporations in a variety of industries and market sectors
Biggest reason for bankruptcy Medical bills, loss of jobs, unaffordable housing costs and losses, and CC debt
First step in saving money Budgeting; list income/expenses
Credit card vs. debit card CC: unsecured line of creditDebit: secured, takes money immediately
Alimony vs. child support Alimony: legal obligation to provide financial support to one’s spouse or ex-spouse after separation or divorceChild support: payment made by a parent following divorce or separation to a custodial parent/guardian for the care and support fo the child
CC payment due dates mail in 5 days, online in 2 days before the cut-off; payments must actually be received, not postmarked by the due date to avoid penalty
Overdraft and late payment fees As high as $39, added to your balance and will increase your interest charges if not paid
Prepaid cards and fees Fastest growing segment of plastic money industry, not linked with bank account; fees include: activation fees, inactivity fees, fee to load money, ATM, check balance, using a check to close account, monthly maintenance; money is gone if lost
Disciplines on stocks Buying: Dollar cost averaging, diversifying (<20% in each area/sector), not need the money for 5 years, identify trends, allocation of assets, do your homeworkSelling: sell if the reason you bought stock no longer exists, do not buy your entire position at once, tax strategies, control risk by rebalancing, establish sell point
Diversification lowers risk; at least five stocks in five different industries; or five mutual funds, etfs, or index funds in 5 different categories
W-4 form Employee’s Withholding Allowance Certificate that shows the employer how much tax to withhold from an employee’s check; one of the first things an employer will have you do when you start a jobFiling status: single, married, etc.Personal exemptions: income not subject to taxationsPayroll amount
Low price and high price stocks Not about the price difference, but the percentage gain or loss
Claiming as dependent on tax return Only one person can claim someone as dependent; over half of the individual’s support
P/E ratio A valuation of a company’s current share price compared to its share price earnings; ratio tells you what the market is currently paying for each dollar of earning
PEG rate P/E ratio divided by the growth rate. Rate of 1.0 is attractiveUnder 1.0 = attractive buying range, growth rate is increasing faster than the market is currently valuing the stock
Market cap market cap is the total value investors are placing on the company, multiply price of single share by total number of shareslarge – 5Bmid – 1-5Bsmall 250m-1Bmicro under 250m
Quarterly estimated taxes Apr 15, June 15, Sept 15, Jan 15; pay taxes on income not being withheld for tax purposed (sale of house, capital gains, sole proprietorship, etc.)
Adjustable Rate of Interest Not fixed, change at various specific times; most commonly found in home loans/mortgages
Fixed Rate of Interest Loan with an interest rate that will remain at a predetermined rate for the life or term of the loan
Interest Cost of money paid by the borrower to obtain use of the principal; Interest is usually calculated on a daily basis
Default Rate An increased rate of interest charged on your credit balance as a penalty (did not pay min payment on due date or payment not honored by bank); 35% highest
Universal Default The ability of lender to unilaterally change the terms of a loan upon learning that their customer has defaulted with another lender
Switching checking accounts Open new, list auto deposits, contact party authorized to make deposits/withdrawals, keep enough money in old account, keep old account open for two billing cycles, copies of old bank’s monthly statements
Every contract must -how much required to pay/be paid and when-how long the term of contract will be-what is the “end” of contract-how amendments can be made-know what happens if either party fails to perform
“Consideration” Anything of value that is promised to another when making a contract
Federal budget 40% of all the money the federal government currently budgets is for senior citizens
Pension Benefit Guarantee Corporation agency of the federal government which takes over certain pension plan payments when businesses go into bankruptcy and their retirement plans fail
Capital losses Used to offset capital gains for tax purposed; excess losses can be applied to either type of gain; losses in excess of gains: reduce taxable ordinary income up to $3000 per year, can be carried forward to offset future years’ capital gains/ordinary income
Adjusted gross income (AGI) total income subtract specific deductions
Dependent deduction 3800 per person
Common tax credits Subtracted from tax liability; worth more than tax deductions
Federal gift tax 14000 to as many people free of gift tax; highest gift tax rate is 40%
Audit 1% of tax returns are audited by IRS
Health Savings Accounts and Flexible Savings Accounts reduce insurance costs and tax deduct certain eligible medical expenses
Lost opportunity such as investing or paying off high interest cc balances or loans
Types of corporate structures C-Corp: state, shareholders, file own tax returns at corporate rate, dividends paidS-Corp: state, shareholders, limited, no dividendsLLC: state, limited, no dividentds
money market funds not isured by FDIC, mature in 60-90 days
money market accounts or MMDA insured by FDIC up to 250000 per account
EPS earnings per share, last 12 month earning/trailing 12 months
Growth rate Percentage rate of increase over a period of time, this year EPS – last year EPS / last year EPS
Return on investment Stock is 8% up in yearDividend is 3% in yearROI is 11%Earn an above average rate of return: 6-8% or more including dividends)
Bond premium The difference between the selling price and par when the bond is sold for more than par
Bond discount The difference between the selling price and par when the bond is sold for less than par
Coupon yield The rate the bond issuer promises to pay its investors, (Coupon/Face Value)
current yield Annual Interest Payment / Current Market Price
Yield to maturity the rate of return a bondholder will receive if the bond is held to maturity
Stock grants Restricted: certain restrictions, employment is terminated, shares are not yours/do not receive any valueVested: job terminated, fired/quite, leave with all/part of value of stock
Quarters to be eligible for SS 40 quarters
FDIC insures up to 250000
market timing There is never a right time or wrong time to invest in stocks, no timing
Jim Cramer’s rule 1 hr per stock, 5 stocks = 5 hrs per week
Best time to establish credit When you don’t need it
federal estate tax Discourages formation of an aristocracy-Tax exemption is $5 million with a 35% tax rate applied to amounts about $5 million -Exemption is portable and transfers to surviving spouse
dollar cost averaging investing a set amount of money in the shares of a business on a regular time schedule regardless of the price of shares at the time

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