3.3-4.4 Personal Finance Test Study Guide

1. What are the different types of banks?

I. Depository

A. commercial banks

B. credit unions - “members only” banks

II. Non depository

A. for loans, investments, retirements, etc.

2. How do you choose a bank?

-high vs. low fees

-high vs. low minimum deposit required

-high vs. low interest paid on deposit

-high vs. low access to money

3. What is a checking account

an account in which you deposit money or withdraw by writing checks or using a debit card

a check is written order form instructing our bank to pay money from your account to another party

When would I ever use a check?

-gifting money

-making large payments

-when businesses want to avoid an electronic fee

-paying rent

4. What is a debit card & how does it work?

-enables you to withdraw cash or make purchases from your account

-requires a PIN number for security

Step 1

Gather your documents:

-Bank statements, investments records, receipts

-W-2: statement from your employer that shows your annual wages & the amount of taxes withheld

-1099: tax form for reporting things other than wages from an employer such money earned from a business, rental property, or freelancing

-1098: tax form for reporting all your deductions

Standard deduction

dollar amount that you could subtract from your income to lower the amount of income you’re taxed on

Itemized deduction

list of allowable deductions that are usually more than a standard deduction

Example of deductions

-charitable donations

-interest on student loans

-interest on mortgage payments

-real estate taxes

-unreimbursed medical expenses

Tax credit

a benefit that directly reduces the amount you owe to the gov. (ex: hold tax credit & earned income tax credit)

Step 2: Figure out your filing status

ex:

-single

-head of household (must be unmarried & have a qualified dependent)

-married filing jointly

-married filing separately

Advantages of filing jointly

potential larger standard deduction

ex: single or filing separately - standard deductions are only up to $14,600 (2024)

Filing jointly - standard deductions are $29,900 (2024)

Advantages of filing as head of household

1. larger standard deduction (around $20,000 as of 2024)

2. potential qualifier for child tax credit

Step 3: decide how to file

1. using a tax software (Turbo Tax)

2. going to a professional (H&R Block)

3. on paper (1040 form)

Step 4: calculate your gross income & adjusted gross income

a. add up all your income including wages tips, etc. on your W-2

b. add up your income on business, rental property, etc. in your 1099

c. adjusted gross income = subtract your deductions from your total gross income

d. input your tax credits

Step 5: get your refund or pay your taxes

if the taxes on your adjusted gross income are less than the amount of taxes withheld, then you get a deduction

if not, you just pay the difference

Steps to filing your taxes

take your documents

assess your filing status

examine how to file

estimate your gross income & adjusted gross income

secure your refund or pay taxes

Bounced check

A check that has insufficient funds

-check that is over the amount of the account

Cashier’s/certified check

A check that is verified by the bank that the money is there

Purpose: Receipt can cash it knowing it is real and will not bounce

Money orders

Method of payment that you can get without a bank and guarantees payment

-form of payment

-works like a check but does not include bank details

-allows people to securely funds without a check or bank

FDIC (federal depository insurance corporation)

Insures your money in case a bank goes bankrupt

-insures your money up to $250K

CD account

savings account where you cannot make withdrawals until a maturity age

Money market account

savings account that offers higher interest but limited withdrawals

Compound interest

earning money on accumulated interest over time

ex: $100 at 10% interest

Rule of 72

72 divided by the interest rate=number of years it takes for an investment to double

ex: if you have 8% interest rate

$1000 turns into $2000 in 9 years

IRA (individual retirement account)

contributions are tax deductible, but any money taken out at retirement is taxes

Roth IRA

contributions are NOT tax deductible, but any money taken out at retirement is tax-free

Pension plans

retirement plan offered by employers (2 types)

1. defined benefit plan

2. defined contribution

Defined benefit plan

guarantees a specific monthly payment to employees at retirement, amount is usually based on years of service

Defined contribution plan

employees & employers contribute to a plan, amount you get at retirement depends on how much you contribute & the overall performance of the investment

401(k) or 403(b)

defined contribution plan, employer typically matches a certain amount into the investment

What is a stock?

-stocks represent ownership of a company

-they are sold in shares

-owners are called shareholders

-if you own majority shares (over 50%), you own the company

-when you buy or sell a stock it is called trading

Why do companies sell stock?

to raise money for expanding their business

How do you make money on stocks?

a. sell the stock for more than what you paid for it

b. through dividends

Dividends are payments made to owners from the company’s profits

Where can you buy stocks?

a. NYSE - physical location

b. NASDAQ - online location

c. stock broker

Bear market

downward trend in stock prices

Full market

upward trend in stock prices

Dow Jones

tracks the largest 30 US companies

if they are doing well, that means the economy is doing well overall

What expenses are included in mutual funds?

-manager

-broker

What is a mutual fund?

pool money

with other investors

to invest in different stocks/bonds

called a portfolio

What are the types of mutual funds?

growth stock funds: invests in companies that gain more interest but they are riskier

small/midsize/large cap: invests in small, medium, large companies

index funds: invests in stocks based on an index like S&P 500