Goals of Financial Planning
- results that an individual wants to attain, such as buying a home, building a college fund, or achieving financial independence
- Long term goals indicate wants and desires for period covering about 6 years to out to the next 30 or 40
- Short term goals
Parts of Financial Planning
- Asset Acquisition Planning (accumulating assets)
- Liability and Insurance Planning
- Savings and Investment Planning
- Employee benefit planning
- Tax planning
- Retirement planning
Goal Setting
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Utility
- the amount of satisfaction received from purchasing certain types of quantities of goods and services
- this is what people want from their money
- People may choose one item over another because of a special feature that provides additional utility
Determinants of Income
- earnings received as wages, salaries, bonuses, commissions, interest and dividends, or proceeds from the sale of assets
Average Propensity to consume
- the % spent
- As income increases, this tends to decrease
- the percentage of each dollar of income, on average, that a person spends for current needs rather than savings
Real Asset
- Things that don't move
- Ex. A house
physical assets, such as real estate and automobiles, that can be held for either consumption or investment purposes
Financial Asset
intangible assets, such as savings accounts and securities, that are acquired for some promised future return
Liquid Asset
- cash or cash equivalents
- assets that are held in the form of cash or can readily be converted to cash with little or no loss in value
Fair Market Value
the actual value of an asset, or the price for which it can reasonably be expected to sell in the open market
Balance Sheet
- a financial statement that describes a person's financial position at a given point in time
- snapshot of right now
- List assets, subtract liabilities
Net Worth
- an individual's or family's actual wealth; determined by subtracting total liabilities from total assets
total assets - total liabilities
Solvency/Insolvency
total net worth divided by total assets; measures the degree of exposure to insolvency
net worth/total assets
Insolvency
the financial state in which net worth is less than zero
Budget
a budget that takes into account estimated monthly cash receipts and cash expenses for the coming year
Compounding Interest
when interest earned each year is left in the account and becomes part of the balance (or principal) on which interest is earned in subsequent years
when interest earned in each subsequent period is determined by applying the nominal ( stated) rate of int
Budgeting Mistakes
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Income Statement
- List income and expenditures
- A forward looking budget
- Take income, subtract expenditures, and you're left with either surplus or a deficit
- a financial statement that measures financial performance over time
Surplus
an excess amount of income over expenses that results in increased net worth
Deficit
- Can fix this by spending less, saving more, borrowing money, working more, etc.
- an excess amount of expenses over income, resulting in insufficient funds as well as decreased net worth
Progressive Tax Rates
- Tax rates in the US are progressive, as income increases, your tax rate increases
- Tax brackets, for example, below 30k you may have 15% tax, above 30k you may have 28% tax
Marginal Tax Rates
- the tax rate you pay on the next dollar of taxable income
- Tax brackets are also marginal
- For example, if you make 32K, you're not taxed 28% on all of it, you're taxed on the next $, the amount over 30k
Witholding
- Not optional
- For income taxes, US operates on a "pay as you go" system
- Some money is withheld from paycheck, this is evened out every year
- Line 5 of the W-4 is the amount of withholding
- The smaller the number of withholding allowances, the more
Filing Status
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Married filing options:
- jointly or separately
- never head of household
2015 Married with Dead Spouse Filing
- 1040
- year of death: file jointly
- 2 years after death: qualifying widower
- minor child
Personal independency Exemptions
- $4,000 reduces taxable income by this amount, each
- Example: $4,000 x 10% is $400 in savings
- 4x x 25% is $1,000 in savings
Exemptions
deductions from AGI based on the number of persons supported by the taxpayer's income
For a dependent to be claimed....
- Must support over 50%
- Related closer than a cousin and live with them all year
- Gross income: can't earn more than the person, $4,000 unless under 19 OR under 24 and a full time student
2018 Head of Household
- single with a dependent
Dependency
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Items Included/Items Excluded from Gross Income
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For AGI deductions (adjustments to income)
AGI: the amount of income remaining after subtracting all allowable adjustments to income from gross income
Adjustments: allowable deductions from gross income, including certain employee, personal retirement, insurance, and support expenses
Standard Deduction
- a blanket deduction that depends on the taxpayer's filing status, age, and vision and that can be taken by a taxpayer whose total itemized deductions are small
- Is based on filing status, age, and vision
Itemized Deductions
- personal expenditures that can be deducted from AGI when determining taxable income
- Things that are deductible from taxes
- Charitable contributions
- Charitable travel
- Medical expenses
- Casualty and theft losses
- Job related expenses
Schedule A
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Taxable Income
- the amount of income subject to taxes; it is calculated by subtracting adjustments, the larger of itemized or standard deductions, and exemptions from gross income
- Excess scholarships
- Illegal income
- Found things
- Payoffs
- Barter income (trading
Not Taxable Income
- Scholarships, tuition for books, fees, etc.
- Child support
- Workers compensation
- Some lawsuit settlements, if for compensation
- Life insurance proceeds
- Gifts
- Inheritances
- Municipal bond interest g
Capital Gains
- if you sell something for more than you paid for it
- longer than 1 year = long term capital gain
Tax Credits
- deductions from a taxpayer's tax liability that directly reduce his or her taxes due (rather than reducing taxable income)
- Child independent - child care expenses
- Education credits (not room and board, other fees up to $1000 is refundable)
- Child t
Earned Income Credit
- For working people with children who make low amounts of money
- Max out on 3 children
Tax returns are due
- April 15th or 17th
- If you owe additional tax, it's important to file by that date, otherwise you have 3 years to get a refund
- 3 years to amend a 1040X tax return if you messed up or are going to owe additional tax
Child Tax Credit
just having a child, up to 16 or 17 ($2000), above that age is $500, refundable up to $1400 (or 1000)
Audits
- an examination by the IRS to validate the accuracy of a given tax return
- 3 year status of limitation on audits
Estimated Taxes/1040 ES
- People who are self employed
- File 1040 ES
- tax payments required on income not subject to withholding that are paid in four installments
1040 X
- Adjusted gross income (take income, subtract adjustments to income and you have AGI)
- Choose either standard deduction or itemized deduction, whichever is bigger
Gross Income
the total of all of a taxpayer's income (before any adjustments, deductions, or exemptions) subject to federal taxes; it includes active, portfolio, and passive income
Tax Filing methods/software
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Money Market Deposit Account
- at banks
- used to have higher interest rates than now
- Savings accounts you can pay bills directly out of
- No more than 6 a month, typically
- a federally insured savings account, offered by banks and other depository institutions, that competes with
Credit Unions
- mutual association
- non profit
- members, not customers,
- often employment related
- must be part of an identifiable group
- owned by depositors
- deposits are federally insured
Money Market Mutual Fund
- Brokerage firms or mutual fund companies
- Similar to money market deposit account
a mutual fund that pools the funds of many small investors and purchases high-return, short-term marketable securities
Truth in Savings Act of 1994
- said that the math has to be done for you (interest rates/compounded rates)
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APR
- the actual or true rate of interest paid over the life of a loan; includes all fees and costs
Compounding/APY
- The compounded rate is the Annual Percentage Yield (APY) = the effective rate
- The Truth in Savings Act of 1994 requires that this be calculated for you
The APY, if compounded more than annually, is higher than the APR
Nominal/Stated interest rate
the promised rate of interest paid on a savings deposit or charged on a loan
- APR: rate before compounding
- APY: rate after compounding
The Truth and Savings Act requires that they tell you this
Effective Rate of Interest
- the compounded rate/ APY
- the annual rate of return that is actually earned (or charged) during the period the funds are held (or borrowed)
Certificates of Deposit
- high or low interest rate?
- a type of savings instrument issued by certain financial institutions in exchange for a deposit; typically requires a minimum deposit and has a maturity ranging from seven days to as long as seven or more years
Overdrafts
- the result of writing a check for an amount greater than the current account balance
overdraft protection: an arrangement between the account holder and the depository institution wherein the institution automatically pays a check that overdraws the acc
Federal Deposit Insurance (FDIC)
- $250,000 maximum insurance
- a type of insurance that protects funds on deposit against failure of the institution; can be insured by the FDIC and the NCUA
Treasury Direct Savings Funds
- only earn interest for up to 30 years
Stop Payment
- stops after 6 months
- stops a written check from going through
- an order made by an account holder instructing the depository institution to refuse payment on an already issued check
Appropriate Uses of Credit
- student loans
- cars
- mortgage
- emergency
- maybe for an investment
Potential exclusions for tax filing being free
Income, age
Improper Uses of credit
Anything not listed in the appropriate uses of credit
Establishing Credit
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The 5 C's of Credit
1. Character: credit score
2. Capacity: the ability to pay it back, do you have a job, other debt, etc.
3. Capital: do you have other assets or money
4. Collateral: other loans, mortgages, etc. Collateralized loans or debt
5. Condition: What do you want t
Maximum consumer credit payment percentage (Debt safety ratio)
- the proportion of total monthly consumer credit obligations to monthly take-home pay
- no more than 20% of take home pay
Fees on Credit Cards
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Cash Advance
- a loan that can be obtained by a bank holder at any participating bank or financial institution
- fee
- no grade period
- higher interest rate
Credit Bureau
- Make money buying and selling information about you
- Ex. Equifax
- You can put a credit freeze on your credit bureaus, SC doesn't allow a fee for this, it means that no one can look at your credit or get credit in your name and makes sure that no one i
Credit Report
Shows
- jobs you've held
- places you've lived
- loans/debt
- credit cards
- old medical debt that didn't get paid
- parking fines, library fines
- name changes
Things stay on for 7 years, 10 years for bankruptcy
Anytime you shop for credit, it's affected
Credit Limit
a specified amount beyond which a customer may not borrow or purchase on credit
Credit Scoring
35% of credit is payment history
30% is amounts owed
15% is length of history
10% is types of credit
10% is new credit
Credit scores change frequently, used to predict many different things like the statistical likelihood that you're going to do whatever
Debit Card
specially coded plastic cards used to transfer funds from a customer's bank account to the recipient's account to pay for goods or services
Prepaid Card
- can be used to pay bills if you don't have a bank account
Grace Period
- a short period of time, usually 20 to 30 days, during which you can pay your credit card bill in full and not incur any interest charges
- time between when a card is charged and when they start charging interest
Minimum Monthly Payment
in open account credit, a minimum specified percentage of the new account balance that must be paid in order to remain current
Reward Credit Card
a bank credit card that combines features of a traditional bank credit card with an additional incentive, such as rebates and airline mileage
Secured Cards
- ideal for people with no or bad credit
- a type of credit card that's secured with some form of collateral, such as a bank CD
Bankruptcy
2 kinds:
1. Chapter Seven: Clean Slate
- turn over everything you have of value
- can't overturn things like student loans or alimony but other debt can be discharged, such as medical debt or lost jobs. All of it gets wiped out.
- Lays out what you can ke
Equal Credit Opportunity Act
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Truth in Lending Act
- Required
- Comes in credit card offers, black and white paper
Fair Credit Reporting Act
- You can see a report at least every 12 months
- Right to dispute items on your credit report
- Right to see any score used to deny you and to tell you what any cutoff score may have been
Fair Credit Billing Act
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Identity Theft
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