personal finance test

Lesson 3.1 - budgeting

Gross income - total income from your job

Net income= total income from job - taxes

(aka - disposable income or take home pay)

Discretionary income - income after taxes and expenses

3 types of savings

1. Emergency savings (for immediate needs and needs to have at least $1000)

2. Short term savings (1-5 years)

Vacation, car & house repairs

3. Long term savings (5 years or longer)

Retirement, house, college

MAIN RULE for budgeting: Pay God first and yourself

second

Pay your tithe and offerings

Prioritize saving and investing (at least 10% of your budget for investing)

Steps to create a budget

1. Make a list of all income per month (cash inflow) including:

Income from your job

Income from investments - real estate, side jobs, bonuses, etc.

Child support payments

Food stamps/welfare

Steps to create a budget

2. Project or Forecast your expenses and then identify your actual monthly

expenses (Cash outflow)

A. Variable expenses - expenses that change from month to month - electricity,

water, repairs

B. Fixed expenses - expenses that stay the same - rent, subscriptions,

mortgage,

Steps to create a budget

3. Calculate net cash flow for the month and the year

Net cashflow = Total cash inflow - Total cash outflows

Lesson 3.2 - Taxes

What is a tax?

Money collected by gov for operating the country

Taxes pay for

Military

Fire dept

Police

Social security

medicare

What are the different types and examples of taxes?

1. Local -

Examples:

Sales tax

property taxes

utilities

What are the different types of taxes?

2. State -

Examples

Income (Does not apply to certain states)

Property

What are the different types of taxes?

3. Federal

Income (progressive tax)

Capital gains - a tax on the profit (gain) made from selling an asset, such as

stocks, real estate, or other investments.

Payroll taxes - FICA - Insurance (medicare - healthcare for elderly, medicaid -

healthcare for people with financial needs), Social Security - government money

for retired, elderly, disabled people

Income tax bracket

An income tax bracket is a range of income that is taxed at a specific

rate.

Example (using hypothetical brackets for illustration):

● $0 – $10,000 bracket is taxed at 10%

● $10,001 – $40,000 bracket is taxed at 12%

● $40,001 – $85,000 bracket is taxed at 22%

Lesson 3.3 - Filing and paying your taxes

Step 1

Gather your documents:

-Bank statements, investment records, receipts

-W-2 - statement from your employer that shows your annual wages and 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

1. What is the first step in filing your taxes?

2. What documents will you need in filing your taxes?

3. Match the following tax documents with their definitions:

W-2 tax form for reporting all your deductions

1099 statement from your employer that shows your

annual wages and the amount of taxes withheld

1098 tax form for reporting things other than wages

from an employer such money earned from a

business, rental property, or freelancing

Understanding deductions

Standard deduction is a 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

Examples of deductions

Charitable donations

Interest on student loans

Interest on mortgage payments

Real estate taxes

Unreimbursed medical expenses

Certain job expenses

Business expenses

Certain retirement contributions

Understanding Tax Credits

Tax credit - a benefit that directly reduces the amount you owe to the gov.

Examples

Child Tax credit

Earned Income Tax credit

Step 2 - figure out your filing status

Examples:

Single

Married filing jointly

Married filing separately

Head of household (must be unmarried and have a qualified dependent)

Advantages of filing jointly

Potential larger standard deduction

Example -

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 and adjusted gross

income

A. Add up all your income including wages, tips, etc. on your W-2.

B. Add up your income from 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 and adjusted gross income

Secure your refund or pay taxes

Lesson 4.2 - Other Banking Services

1. Bounced check

A check that is over the amount of the account

How do you use a check if you know it’s going to bounce?

2. How do I ensure that a check will not bounce?

Cashier’s checks/certified checks

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

Purpose:

Recipient can cash it knowing it is real and will not bounce

3. Money Orders

-form of payment

-works like a check but does not include bank details

-allows people to securely funds without a check or bank

4. What if my bank goes bankrupt, do I lose all my

money?

FDIC

Federal Deposit Insurance Corporation

Insures your money up to $250,000 in case your bank fails

5. CD accounts

Type of savings account

you cannot make withdrawals until a maturity date

Offers higher interest yields than a savings

The longer the maturity date, the more interest paid

6. Money Market accounts

Type of savings account

Limited withdrawals per month

Higher interest than a traditional savings

Lesson 4.3 - Retirement accounts

Compound interest - earning money on accumulated interest over time

Example:

$100 at 10% interest

Rule of 72

72 divided by the interest rate =

Number of years it takes for an investment to double

Example

If you have 8% interest rate

$1000 turns into $2000 in 9 years

Examples of retirement investments

1. IRA -

Individual retirement account

Contributions are tax deductible

But any money taken out at retirement is taxed

Examples of retirement investments

2. 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 -

Guarantees a specific monthly payment to employees at retirement

Amount is usually based on years of service

2. Defined contribution plan

Employees and employers contribute to a plan

Amount you get at retirement depends on how much you contribute and the

overall performance of the investment

401(k) or 403(b)

Defined contribution plan

Employer typically matches a certain amount into the investment

Lesson 4.4 - Investing in the Stock Market

1. What is a stock?

Stocks represent ownership of a company

They are sold in shares

Owners are called shareholders

If you own the majority of shares (over 50%), you own the company

When you buy or sell a stock it is called trading

2. Why do companies sell stock?

To raise money for expanding their business

3. 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

4. Where can you buy stocks?

A. NYSE - physical location

B. NASDAQ - online location

C. Stock broker

6. What is a bear market or bull market?

Bear market

Downward trend in stock prices

Bull market

Upward trend in stock prices

7. What is the Dow Jones?

Tracks the largest 30 US companies

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

1. What are mutual funds?

Pool money

With other investors

To invest in different stocks/bonds

Called a portfolio

2. What is the motive for investing in mutual funds?

Professionally managed

3. What expenses are included in mutual funds?

Manager

broker

4. 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 the S&P 500