Personal Finance Chapters 1-4 Test

personal financial planning

the process of managing your money to achieve personal economic satisfaction

opportunity cost

what you give up by making a choice

adult life cycle

stages in the family and financial activities and decisions (graduation, marriage, move, divorce, retirement, death in family)

inflation

a rise in the general level of prices-9% in US

interest rates

represent the cost of money (consumer saving and investing up, interest rates down and visa versa)

time value of money

calculates increases in an amount of money as a result of interest earned

What are the three main decision areas of personal financial activities?

spend, save, share

What are the steps in the financial planning process?

determine current financial situation, develop financial goals, identify alternative courses of action, evaluate alternatives, create and implement you financial action plan, review and revise the financial plan

What are the five types of financial risk?

inflation risk, interest rate risk, income risk, personal risk, liquidity risk

What is the rule of 72?

divide 72 by the annual inflation or interest rate to find how fast prices will double (an annual inflation rate of 4% will double in 18 years -72/4=18) (at 6% interest, your money will double in 12 years -72/6=12)

examples of short term goals

saving for a vacation, paying off small debts, WILL BE ACHIEVED WITHIN THE NEXT YEAR

examples of intermediate goals

1-5 year time frame

examples of long term goals

more than 5 years off (retirement, money for kids' college, purchase of vacation home)

SMART guildelines

Specific, Measurable, Action-oriented, Realistic, Time-based

Future value of a single amount

present value(1+interest rate)^number of time periods

Future value of a series of deposits

annuity x (1+i)[^n]-1/i

annuity

series of equal deposits or payments

Present value of a single amount

FV/(1+i)^n

job

employment position obtained mainly to earn money

career

a commitment to a position that requires continued training and offers a clear path for occupational growth

technical skills

specialized career training, skills for certain profession

general skills

traits adaptable to most work situations (social intelligence)

networking

process of making and using contacts to obtain and update career information

resume

summary of a person's education, training, experience, and other job qualifications

types of resumes

chronological, functional, combination

cover letter

letter that accompanies a resume and is designed to

express interest in a job and obtain an interview

corporate culture

management styles, work intensity, dress codes, and social interactions within an organization

What are the stages of career planning and advancement?

assess and research personal goals/abilities/career fields, research the employment market and identify specific employment opportunities, develop a resume and cover letter and apply for available positions, interview for positions and asses your interview performance, evaluate financial and other factors of positions you are offered, plan and implement a program for career development

What are the stages of career development?

preentry and career exploration, establishment and professional growth, advancement and midcareer adjustment, late career and preretirement

money management

the day to day financial activities necessary to manage current personal economic resources while working toward long term financial security

assets

cash and other tangible property with a monetary value

liabilities

amounts owed to others but do not include items not yet due, such as next months rent

income

inflows of money received from a job

discretionary income

money left over after paying for housing, food, and other necessities

fixed expenses

payments that do not vary from month to month (rent, mortgage, loan payments, cable fees, monthly train tickets for commuting to work)

variable expenses

flexible payments that change from month to month (food, clothing, utilities, recreation, medical expenses, gifts, donations)

budget

a spending plan necessary for successful financial planning

What are the three money management activities in successful money management?

storing and maintaining personal financial records and documents, creating personal financial statements (balance sheets and cash flow statements of income and outflows), creating and implementing a plan of spending and budgeting

What are the two personal financial statements discussed in chapter 3?

balance sheets (what you own-amounts owed=net worth) and cash flow statements (total cash received during time period-cash outflows during time period=cash surplus or deficit)

How do you compute net worth?

what is owned-amounts owed=net worth

How do you prepare a cash flow statement?

total cash received during time period-cash outflow during time period=cash surplus or deficit

What are the steps in the budgeting process?

assess current situation, plan financial direction, implement budget, evaluate your budget program

What are the characteristics of a successful budget?

well planned, realistic, flexible, clearly communicated

sales tax

state and local tax added to the purchase price of products

excise tax

imposed by federal and state governments on specific goods and services such as gas, cigarettes, alcohol, tires, air travel, and phone service

real estate property tax

source of revenue for local governments-tax based on the value of land and buildings

estate tax

tax on value of person's property at the time of their death

inheritance tax

levied on value of property bequeathed by a deceased person

taxable income

net amount of income, after allowable deductions, on which income tax is computed

earned income

money received for personal effort (wages, salary, commission, fees, tips, bonuses)

investment income

(also called portfolio income) money received in the form of dividends, interest, or rent form investments

exclusion

amount not included in gross income

tax exempt income

income that is not subject to tax

tax deferred income

income that will be taxed at a later date

adjusted gross income

gross income after certain reductions (adjustments to income such as contributions to IRAs or Keogh retirement plans, penalties for early savings withdrawal, and alimony payments) have been made. Used for computing various income tax deductions such as medical expenses

tax shelter

investments that provide immediate tax benefits and a reasonable expectation of a future financial return

tax audit

detailed examination of your tax return by the IRS

tax avoidance

the use of legitimate methods to reduce one's taxes

tax evasion

illegal actions to reduce one's taxes

What is the primary purpose of taxation?

government income

What are the steps in computing taxable income?

gross income-adjustments to income=AGI

AGI-itemized deductions and exemptions=taxable income

What are the steps in computing tax liability?

tax based on tax tables or schedules-tax credits+other taxes= total tax due

Identify possible itemized deductions?

expenses tax payers are allowed to deduct from AGI-such as medical and dental expenses, state and local income taxes, real estate property tax, interest, contributions, casualties and theft losses, moving expenses, job related and other miscellaneous expenses

Identify possible tax credits

amount subtracted directly from the amount of taxes owed-foreign tax credit, child and dependent care credit, retirement savings tax credit, mortgage interest tax credit, energy savings tax credit, elderly and disabled tax credit

What are the five federal tax filing status categories?

single, married filing jointly, married filing separately, head of household, qualifying widow or widower

Who gets audited and what are the different types of audits you are likely to encounter?

1% of tax filers are audited each year- correspondence audit (mail inquiry that requires you to clarify or document minor questions about your tax return), office audit (requires visit to IRS office to clarify some aspect of your tax return), field audit (IRS agent visits at your home, business, or CPA office to access your records)

traditional IRA

retirement plan

ROTH IRA

traditional IRA plan but the earnings on the account are tax free after 5 years

Coverdell education savings account

assists parents saving for the education of their children

529 Plan

education savings plan helping parents save for college education for their kids, earning grow tax free

Keogh plan

retirement plan for those who are self employed and own their own business

401(K) plan

tax deferred retirement plan sponsored by an employer