FIN 310 CSUF MIDTERM 1 Bruce Xiao

Realistic and Attainable Financial Plan

realistic, attainable, affordable, based upon your short, intermediate, and long term goals.

Basic Steps in Personal Finance Planning

1. Evaluate Financial Health

2. Define Financial Goals

3.Develop a Plan

4. Implement Your Plan

5.Review Progress, Reevaluate, and Revise

Determinants of Your Future Income

- education

-skills

-marriage status

Ten Financial Principles

1. Best Protection is Knowledge

2.Nothing Happens without a Plan

3.The Time value of money

4.Taxes affect personal finance decisions

5.Liquidity is important

6.Smart Spending

7.Get Insurance

8.Risk and Return

9.Avoid Financial Mistakes

10.Just do it!

Important Functions for Financial Planning

-manage the unplanned

-accumulate wealth for special expenses

-save for retirement

-"cover your assets"

-invest intelligently

-minimize your payments to Uncle Sam

Financial Life Cycle

*Stage 1: The Early Years- Time of Wealth Accumulation

*Stage 2: Approaching Retirement- The Golden Years

*Stage 3: The Retirement Years

Assets and Liabilities

Assets: What you OWN(even if you owe money on them)

-list assets using their fair market value

-all values must be current

ex. monetary assets= cash or liquid asset, investments, retirement plans, and tangible assets

Liabilities: What you OWE (must be repaid in the future)

-current liabilities must be paid off within the next year

-list only the unpaid balances

ex. current bills, and loans

Balance Sheet

-snapshot of your financial status at a particular time

-assets you own

-debt or liabilities you owe

-your net worth or equity

Income Statement

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

-income and expenditures, net income statement

-based on actual cash flows

Important Financial Planning Documents

-balance sheet

-income statement

Tracking Different Types of Individual Expenditures

-easier to prepare taxes

-you know how much and where you are spending

-easier for someone to step in during an emergency and understand your financial situation

Fixed Expenditures:

Variable Expenditures:

Liquidity Concept in Personal Finance (Why and How?)

Liquidity: turning noncash assets into cash..."quick and easy access to your money".

ex. stocks and bonds

Rule of 72 (What is it and How does it work?)

Rule 72: tells you how long it will take for you to double your money

-the number of years for a given sum to double is found by dividing the investment's annual interest rate into 72

ex. If an investment grows at an annual rate of 9 percent per year, then it should take 72/9 = 8 years to double.

Discount Rate vs Interest Rate

Discount Rate= the interest rate used to determine the present value of future cash flow

Interest Rate= used to determine the future value of money

Federal Income Tax and Tax System

-progressive or graduate tax

-tax rates and tax brackets

-personal exemption

-itemized or standard deductions

-taxable income

Filing Status

-Single

-Married Filing Jointly and Surviving Spouse

-Married Filing Separately

-Head of Household

Deductions

-an item you can subtract from your taxable income to lower the amount of taxes you owe

-Standard=a single deduction at a fixed amount

-Itemized=Schedule A of your income tax return.

Incomes

Total/Gross Income= sum of all taxable income from all sources

Active Income= income from wages or a business

Passive Income= income from activities taxpayers don't participate in

Portfolio/Investment income= income from securities

Filing Requirement

Yes and No: it depends on the federal guidelines and what pertains to you

However, it is highly recommended that you file even if you don't have to because it is the only way to receive a refund

Types of Financial Institutions

Deposit-Type: institutions that provide traditional checking and savings accounts

ex.) commercial banks, credit unions, savings banks etc.

Non-Deposit Type: mutual fund companies, brokerage firms, and insurance companies that offer similar services as those offered by banks

Advantages and Disadvantages of Certificates of Deposit (CDs) as a cash management alternative

CDs= pay a fixed rate of interest while funds are on deposit for a period of time (30 days to years)

+: safe, fixed interest rates, convenient

-: early withdrawal penalty, fixed interest rates, minimum deposit required

Rate of Return (Real and Nominal)

Real Rate of Return: is adjusted for inflation

Nominal Rate of Return: is not adjusted for inflation

Capital Gain

what you make if you sell a capital asset for a profit...occurs when you sell an asset for more than what you originally paid for it

Effective Marginal Tax Rate

the percentage of the last dollar you earn that goes toward taxes or in other words, the tax rate paid on the next dollar of income.