Financial Stewardship exam 1

Aspects of financial success

1. knowledge of financial principles.

2. understanding your unique values and preferences.

3. goal setting and planning.

4. discipline.

Theories on happiness and money: Deaton & Kahneman

- high income improves evaluation of life but not emotional well-being.

- those who made less than $1,000 a month: 51% were sad/stressed the previous day.

- those who made more than $3,000 a month: 24% reported similar feelings.

- higher income seems to promote less sadness and stress.

Theories on happiness and money: Hedonic Treadmill

process - psychological phenomenon where people quickly return to a relatively stable level of happiness/emotional well-being after having positive or negative changes in their life.

- ex: lottery win, limb amputees.

impact - the effects diminish as they get used to the new circumstance.

nature of happiness - happiness is influenced by one's baseline level of well-being rather than external events.

Theories on happiness and money: World Studies

- world study of happiness says that income and happiness are positively related.

- correlation isn't causation, lots of other things going on.

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Biblical Perspective of Personal Finance

- God owns everything: "the earth is the Lord's and all in it."

We are stewards: managing another's property/financial affairs. We are entrusted, not given. we'll be evaluated at the end.

- God wants our heart, not money: Zacchaeus gives half his possessions and repays those he cheated.

Rich young ruler "sell all you possess and give to the poor."

- Riches can't make you happy: "those who love money never have enough."

- We must use judgement as stewards: carefully learn, think. pray, read scripture.

above all, be faithful.

Financial Planning: Goals, process

6 step process:

1. define financial goals.

2. develop financial plans.

3. implement plans.

4. use budgets to monitor and control progress.

5. use balance sheet to evaluate results. correct as needed.

6. redefine goals as life changes.

importance of goals: by defining goals, you accomplish a greater understanding of the challenge. you are forced to pick your priorities.

Financial Planning: phases in the life cycle, SMART goals

SMART goals:

Specific - say what you'll do.

Measurable - a way to evaluate, data.

Achievable - possible.

Relevant - makes sense for you.

Time-bound - when.

3 most important goals

- short term goals: within the next year. save for emergency. get 3-6 months of living expenses.

- medium term goals: within next 2-5 years. pay off debt. credit cards, student debt, auto/consumer, home loan.

- long term goals: 5 or more years. save for retirement. $2 mil is good for Americans.

Income and Career - employee benefits

benefits: health and life insurance, dental and vision insurance. retirement matching if you put $ towards it.

- sometimes offered: childcare/education help, disability/long term care insurance.

determinants of your pay, determinants of specific job pay

factors of your pay: education, experience, previous promotions, the job you have.

factors of specific job pay: supply of workers, demand for that work, desirability of work, education/experience required, cost of living for the city/country.

Budgeting purpose

The Real Reason to Budget: to be prepared for your financial needs and achieve your goals.

- make your dollars go where you want them to/don't fall into temptations and shortsightedness.

- gives realistic understanding of what you can afford.

- helps achieve short-term goals, save, gain wealth.

it's like a personal calendar.

budgeting successful, categories

the 50/30/20 rule: 30% wants, 50% needs, 20% savings.

income: cash in.

categorizing expenses:

1. essentials. housing, food.

2. security. emergency, debts.

3. goals. new car, vacay.

4. lifestyle. grooming, clothes, gifts.

5. discretionary. restaurant, entertainment.

types of budget items, varying budget approaches

types of budget items: housing, utilities, food, transport, health, insurance, personal, recreation, saving, giving.

approaches: creating a budget in 5 steps:

1. gather info about your income and expenses.

2. print out a copy/use digital.

3. fill in the document using exact numbers.

4. fix a surplus or deficit so each month there's $0 left over.

- surplus: income greater than expenses.

- deficit: expenses greater than income.

5. review monthly. compare actual spendings, then adjust.

Balance Sheet Equation

assets = liabilities + net worth

- the sides must be equal.

- assets: things you own.

. liquid assets - cash. low risk.

. investments: not for personal use.

. real property: immovable. land, house.

. personal property: movable. cars, furniture.

- liabilities: money you owe.

Examples of balance sheet equation, use of the equation

$10,000 liabilities, $12,000 assets, what net worth?

$12,000 = $10,000 + NW

A = L + NW

solvency

- solvency: ability to pay off your debt.

- solvent: net worth greater $0.

- insolvent: net worth less than $0.

. assets - liabilities = net worth.

Taxes: how marginal tax rates work

- we have a marginal (each additional dollar) tax system. only the income you earn over the

- taxpayers don't need to worry that getting higher pay. it helps more than hurts.

types of income tax

income tax: payments made by us and cooperations to a government entity based on their taxable income.

- capital gains tax

- individual income tax

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standard vs. itemized deductions

standard deductions: most common way Americans use deductions. $12,000 individual, $24,000 married.

- deductions mean you get the first $12,000 of income tax free.

itemized deductions: qualifying for deductions greater than standard. you can reduce taxes further.

- includes: medical, dental expenses. mortgage interests. charitable contributions, loss.

tax credit vs. deduction

- tax credit: after a deduction has applied and taxes liability have been calculated, any tax credit you are eligible for further reduce your tax liability.

- tax credits are 'better' than deductions to the taxpayer. - child and care expenses, adoption, electric car.

- deduction: reduce your taxable income, indirectly lowering tax liability.

reductions of tax liability

- many ways to reduce your tax liability.

- find ways to take advantage of the breaks intended to help you.

- tax fraud: when one willfully falsifies info on a tax return to limit the amount of tax liability.

Commercial Banks

- largest type of traditional financial institution.

- regulated by federal government.

Credit Unions

- provide financial products and services to people with a common connection. (location, employment).

- nonprofit, member owned financial cooperative.

- interest rates on deposits are often higher than banks.

Protections of FDIC and NCUA

- these make banks and credit unions safe.

- federal deposit insurance corporative (FDIC). insured against bank failure, theft.

- national credit union administration (NCUA). insures accounts at credit unions.

- both insured up to $250,000

Basic vs. compound interest

- interest rates are the price a borrower pays you to access your funds.

- basic interest: interest payment = principle x interest rate.

- compound interest: would make that a little higher.

APR and APY and their difference

- APR: annual percentage yield. will appear to be a bigger percentage rate because it includes compounding.

- APR: annual percentage rate. appears smaller because it excludes the effect compounding.

- both reflect the same interest rate but look at it from two different perspectives.

Liquid Accounts

- Checking Account: debit card, checks, ATM withdrawal card. if sufficient funds, banks must pay amount of check/debit.

- Savings Account: remains on deposit for longer period of time. only a few withdrawals a month or pay penalty. pays a better interest rate.

other liquid assets:

- certificate of deposit (CD): funds remain on account for a given time period. early withdrawals incur a penalty.

- U.S. treasury bonds: debt securities issued by US treasury. a promise from the government to pay you back, plus interest. sold at a discount; $1,000 minimum.

high vs. low liquidity, the relationship of liquidity to interest rates

order of most liquid to least:

- cash

- checking accounts

- savings account

- certificate of deposits (CD)

- U.S. Treasury Bonds

order best interest rates to least best:

- US Treasury Bonds

- CD

- savings account

- checking account

- cash

less accessible accounts have higher interest rates.

- interest rates: 'price' the borrower pays to use the funds from you.

- price is higher if when the bank can borrow your money for a longer period, with more certainty they can keep it for longer.