PFP 105 Exam 1 (kstate)

Personal Finance

the process of planning your spending, financing, and investing to optimize your financial situation

personal financial plan

a plan that specifies your financial goals and describes the spending, financing, and investing plans that are intended to achieve those goals

opportunity cost

what you give up as a result of a decision

Components of a financial plan

Budgeting and tax planning

Managing your liquidity

Financing your large purchases

Protecting your assets and income (insurance)

Investing your money

Planning your retirement and estate

2 different types of spending behavior

1.) focus on immediate satisfaction and peer pressure

2.) focus on the future

Developing the financial plan

1) Establish your financial goals

2) Consider your current financial position

3) Identify and evaluate alternative plans that could achieve your goals

4) Select and Implement the best plan for achieving your goals.

5) Evaluate your financial plan

6) Revise your financial plan

Focus of Ethics: personal financial advice

-your objective is to get the best advice appropriate to your needs

- be wary of unethical behavior

- be wary of incompetent advice

choosing a personal financial planner

- check accreditation

- Check experience

Commission only

Sell investment and insurance products to clients and receive a commission

Fee+ Commission

charge a fee for financial plan and also sell investment and insurance products to clients and receive a commission

Fee-only

charge fees only for financial plan. no commissions. only compensation comes directly from the clients

Investment Advisers (CFP)

planners are required to put their clients interest first. they have a fiduciary obligation to their clients

Broker Dealers

planners are not required to put their clients best interest ahead of their own. they are only required to make recommendations that are suitable for their clients

Personal Cash Flow Statement

a financial statement that measures a person's cash inflows and outflows

Net Cash Flows

cash inflows minus cash outflows (want it to be positive or break even)

Gross Income

All reportable income (Salary, Wages, interest and dividends, capital gains)

net Income

Gross Income- Taxes

discretionary income

net income minus non discretionary expenses

Non discretionary expenses

regular, needed expenses ( Phone bill, groceries, insurance, rent)

Discretionary expenses

Any expenses that are not considered essential to the household or business. Examples include movie tickets, eating out, expensive clothes, and video games.

Financial motion picture

tells you where your money has come from and where it has gone over some period of time

cash basis

based on actual cash flows

cash transaction

may not leave a paper trail

Preparing a budget

- estimate anticipated after tax income

- estimate living fixed and variable expenses

- estimate income available for saving and investing

Implementing a budget

- put it in place for a month

compare actual expenditures in each categot with budget amounts at the end of the month

- stick to your desired budget for a month witha system

Budgeting

track every inflow and outflow

- if you track it you can control it

- foundation for everything related to your personal finances

The importance of Time value of money

A dollar recieved today is worth more than a dollar received in the future

annuity

a series of equal cash flow payments that are received or paid at equal intervals in time

Simple interest

Interest calculated on original principal only

compounding interest

the process of earning interes on interest

Rule of 72

How many years it will take to double your money (72/interest)

IRS

Administers the federal tax system

Tax year for federal income tax ends on

Dec 31 tax filed by April 15

How are taxes paid?

through transactions, through payroll withholding (form W4) b y making estimated quarterly deposits

Tax Filing Status

1. Single

2. MFJ

3. MFS

4. Head of Household

5. Qualifying Widow with Dependent Child

-Tax advantage for Head of House or MFJ

**status is determined by your marital status as of the last day of the year (December 31)**

Tax Steps

1.) sum of all taxable income from all sources

2.) calculating adjusted gross income

3.)subtracting deduction

4.) Calculation your taxable income and from that calculation your base income tax

Capital gains

any asset we purchase that increases in value

short-term capital gain

a gain on assets that were held less than 12 months (ordinary tax rate)

long-term capital gain

a gain on assets that were held for 12 months or longer (Capital gains rate)

taxable income

AGI - deductions

progressive tax

a tax system in which tax rates increase for higher incomes (USA has)

Alternative Minimum Tax (AMT)

ensures that wealthy pay enough taxes

marginal tax rate

tax rate imposed on the last dollar of income earned

Tax credits

reduce actual taxes paid dollar for dollar