Introduction to Personal Finance

Income and Budgeting

  • Importance of having a surplus at the end of every month.
    • Deficit: When expenses exceed income.

Assets

  • Definition of assets: Things that you own.
    • Relation to budgeting: Spending more than income leads to a deficit, hindering wealth accumulation.

Savings Ratio

  • Definition: The percentage of income actively saved.
    • Under age 30: Savings ratio is 12%.
    • Ages 30-40: Increases to approximately 15%.
    • Importance of starting to save early: Easier to save 12% than 25% closer to retirement.

Payroll Deduction

  • Definition: Employer automatically deducts money from your paycheck for savings or retirement accounts (e.g., 401(k) or 403(b)).

Accumulating Wealth

  • Best practices include:
    • Keeping money working for you as long as possible.
    • Starting to save or invest surplus as early as possible.

Income Sources

  • Definition of income: All sources of money obtained by individuals and households.
    • Earnings: Compensation received from a job.
  • Types to differentiate:
    • Earned income: Money from employment.
    • Unearned income: Money received from investments (e.g., dividends, interest).

Earnings Structure

  • Wage: Payment received for hourly work.
  • Overtime: Defined as working more than 40 hours in one week, paid at time and a half (1.5 times normal wage).

Commissions and Income Types

  • Commissions: Earnings from the sale of a product or service.
  • Importance of converting earned income into unearned income through investments.

Dividends

  • Definition: An investor's share of the profits from their investment in a company (e.g., receiving dividends from stock ownership).

Deposits and Interest

  • Explanation of bank deposits: When you deposit money, you lend it to the bank; the bank lends that money out, charges interest, which they partially return to you as interest on your deposit.

Government Benefits

  • Example: Medicaid (federal health insurance).

Social Security Benefits

  • Based on earnings history; individuals must pay into Social Security for a minimum of 10 years to qualify for benefits upon retirement.

Capital Gains

  • Definition: Profit made from selling an asset for more than its purchase price.

Taxes

  • Definition: Financial obligations imposed on individuals and businesses by the government.
  • Purpose of taxes: Funding for infrastructure, national defense, and social welfare programs.
    • Examples include SNAP, TANF, and public libraries.

Federal Income Tax

  • Most working adults in the U.S. are subject to federal income tax; not all states impose a state income tax.

Sales Tax

  • Defined as a tax paid when purchasing goods and services, varying by item.

IRS

  • Definition: Internal Revenue Service, charged with collecting and enforcing tax laws.

Tax Law Creation

  • Created by Congress; they propose changes or new laws, which must pass through the Senate and House.

Tax Return Forms

  • Standardized form used for filing taxes is the tax return, specifically form 1040.
    • W-2 form provides earnings and tax withholding information necessary for form 1040.

Dependents and Filing Status

  • Dependency categories:
    • Qualifying children and relatives you financially support.
  • Filing status definitions:
    • Single: For unmarried individuals without dependents.
    • Head of Household: For unmarried individuals who are primary providers for a dependent (under 18 or a full-time student under 24).

Exclusions from Gross Income

  • Examples of exclusions: Death benefits, scholarships, fringe benefits, gifts, loan proceeds. These amounts are subtracted to determine adjusted gross income (AGI).

Tax Credits and Deductions

  • Tax credit: Dollar-for-dollar reduction in tax liability (negates owed taxes).
  • Tax deductions: Either standard or itemized deductions (choose the greater value).
  • Tax exemptions: Withholdings from W-4
  • Examples include the earned income tax credit, education tax credits, etc.

Tax Refund

  • Occurs when too much tax has been withheld from paychecks throughout the year.

W-2 Form

  • Statement received at year-end summarizing earnings and taxes deducted.

Allowances and Paycheck Impact

  • Increasing the number of allowances claimed on a W-4 decreases the amount withheld for taxes from paychecks.
  • Clarification on terminology: Allowance equals withholding regarding tax implications.

Conclusion

  • Summary of key points discussed, emphasizing the importance of understanding personal finance concepts like income, savings, taxes, and benefits.