BUS 112 Exam 2

Taxes:

• Can be sales, property, income (which can be state and federal), etc

• The date you need to file your taxes by are April 15th

• There’s federal income tax:

  • These taxes can be filed as single, married and filing jointly, married and filing separately, or as a head of household (meaning you’ll have dependents)

  • Depending on which category you file in, it can influence your deductions

Deductions

• Deductions can impact how you file taxes

• Mandatory deductions are the ones that are taken out automatically:

  • Can include: payroll, federal tax, and state income tax

• You can also have voluntary deductions:

  • Health insurance, retirement plans (like 401ks), Health savings accounts (HSAs)

  • Voluntary deductions can reduce your taxable income

    • To calculate taxable income you do gross income - mandatory deductions - certain voluntary deductions

  • Deductions as a whole can be standard or itemized (the majority of people do standard deductions)

• Taxes can be fixed or progessive

  • For ex: income tax is progressive since the more you make, the more you will be taxed

  • Sales tax is a fixed tax usually set by the state

Credit Cards & Loans

• The main benefit of having credit cards is that it can help you build your credit

• You can borrow later on and at a lower cost if you have an established credit score

Different ways to make purchases

Credit Cards, debit cards, BNPL (buy now pay later platforms like Klarna and Affirm), electronic transfer apps like zelle, cashapp, and venmo, online payment options like apple or google pay

Credit Worthiness

• Credit worthiness is basically their credit score and info from their credit report

• Credit scores have a wide range (credit scores are also known as FICO scores)

  • Can be Poor (250-480), Fair (580-760), Good (670-740), Very Good (740-800), Exceptional (800+)

  • You should aim to have a prime rate which is the lowest interest rate given to the best borrower

  • Lower credit scores usually make higher interest rates on loans

Credit Types

• Open end (revolving) credit: Credit cards that have limits for you to buy things, pay for it, and pay it off

• Unsecured credit lines: Credit not backed by collaterals (there’s no given value to allow you to borrow so its essentiallly unlimited) These can be store cards, credit cards, etc

• Secured credit lines: Backed by collaterals, you can use these for any sort of personal loan, credit limits are set meaning you have a personal line of credit. Credit history and score play a role in this

Cautions when getting a credit card:

• Paying back what you borrow on time to avoid late fees

• Credit scores can be impacted if a payment date is missed

• When you owe more money, you have more interest

How to minimize credit card risks:

• Read the fine print

• Be sure to know when the grace periods are, what the fees are, the credit limits, etc

• If a payment is missed or it is less than the minimum there will be a penalty added to your credit card and you’ll now have to pay interest

• Compound interest in this case is NOT your friend

Store Cards:

• These are when stores give you credit cards that can only be used at their specific store

• Ex: Macy’s, Marshall’s, Amazon, Etc

• The total interest charges are called finance charges

• Finance charges are the differences between the amount you borrowed and the interest that was gained

• Every time a new cc is opened or you get a new store card, your credit score is effected negatively

Managing Loans:

• Missing payments or paying them off late will have penalties and interest

How to pay off debt:

• Snowball method:

  • Paying your smaller loans as quickly as you can and once that debt is paid off, use the money that was being used for those payments and roll it onto the next small debt. The process continues until all debts are repaid

• Avalanche method:

  • Focuing on the loans with the highest interest rates and paying those off and then once those are paid off the money would be put into accounts with the next highest interest. This also continues until all debts are paid

Rules for a stable financial future:

• understand the opportunity costs and tradeoffs

• Undesrtsnad time value of money

• Save and invest early

• Dont ignore insurance

• Debt is not always bad but still be cautious

• Use resources and be cautious which council you seek

Investing:

• Investing can begin when the budget is planned out

• Should keep in mind your risk tolerance and if you want to be an active or passive investor

  • Active (always thinkng about your investing and being more hands on and making more decisions to monitor the portfolio)

  • Passive more hands off, investing in funds that mirror the market indexes or asset classes, focusing on long term market growth and aim to mirror that performance, doesn’t make frequent changes

Types of investments

• Cash equivalents:

  • Savings, high yield savings, money markets (low interest)

• Bonds

  • Can be cooporate or gov

  • They’re fixed income investments (the least risky alongside cash)

  • You buy from a company, pay them, receive a certificate, and get your money back at the end

  • Bonds don’t grow as much since the interest rates are low

  • For these you have to be an active investor

• Funds:

  • Can be index, mutual, and exchange trade (ETFs)

  • S&P 500 index is a fund

  • These can be stocks/shares of companies

  • Ranges of stocks/bonds

  • EFTs allow for more day trading

• Platform investing:

  • Robinhood, Charles Schawb, Fidelity, etc

Tips for investing:

• small amounts should be put in cash, a little bit more into bonds, and then a decent sized amount in stocks

Returns for investments:

Total return = current income + capital gains

• Current income is the money earned while having the investment (includes dividends, rents, and interest)

  • Includes bonds, stock dividends

• Capital gain is an increase in the value of your investment when its sold (you subtract costs associated with purchasing the investment, and any fees)

How are Returns impacted:

• Returns can be affected by fees and other taxes

• May be managment charges, 12b-1 charges, load fees, and expense ratios

• 12b-1 is the annual cost of marketing that covers advertisisng expenses related to the investment. They’re usually .25-1% and they add to the total cost of ownership

• Load fees are sales charges that you may encounter when buying or selling shares in mutual funds

Retirement

• should always consider how much income you should have before retirement

• Replacement ratio be like 80-90% of the pre retirement gross income which should include social security and it should be able to maintain their lifestyle

• Around 15% of your income including employer contributions should be saved towards retirement

Typical income sources during retirement:

• Social security

• Employer defined benefit plans (pension)

• Employer defined contribution plans ( 401 k (private companies0, 403b (non profits)

• Other retirement accounts (IRA/Roth IRA)

• Assets/investments

Employer Defined Contribution Plans:

• 401 k and 403 b are funded with pre tax dollars

• IRA is pre tax and Roth IRA is post tax

• Retirement should be funded with pre tax dollars so that less taxes are paid

Taking from social security & retirement accounts:

• Ss is a 40 yr credit

  • It can be collected at 62, 65, 67, or 70

  • Less is earned if you take out at 62

• 401 (k) and 403b

  • Can start withdrawing at 59.5

  • When taken out the income is now taxable

  • RMD are made at 72

Singletary’s 5 Reasons for Saving at 20:

• Power of time: putting money away now will let it grow later

• You can withstand inflation

• More likely to be able bodied while youre young

Healthcare

• Health insurance comes from the employer (both you and the employer pay a health insurance premium)

  • Insurance types include Helath Maintenance Organization (HMO), Preferred Provider Organization (PPO), and High Deductible Health Plans (HDP)

Costs of Healthcare

• Deductibles:

  • Base amounts that have to be paid for health care before insurance will handle the rest

• Copays:

  • Fixed amounts that might have to be paid after deductibles for specific services (insurance won’t cover it)

• Coinsurance:

  • The % patients pay after meeting the deductibles

• Out of pocket maximums:

  • The mac payment a patient makes before they have to pay out of pocket during a given year

Pre-tax dollars w healthcare:

• Pre taxed dollars can be used to set aside money to spend on healthcare

• For example you can have FSA and HSA

• FSA:

  • Putting money into an account, if its not used within a year its gone

• HSA:

  • Can have high deductibles since