financial planning process step 1
Determine current financial situation
financial planning process step 2
Develop your financial goals
financial planning process step 3
Identify alternative courses of action
financial planning process step 4
evaluate alternatives-opportunity cost-evaluating risk
Evaluation risks
-Inflation Risk-Interest Rate Risk (2 parts)-Income Risk-Personal Risk-Liquidity Risk
What is inflation?
a general increase in prices and fall in the purchasing value of money.
what are the two parts of interest rate risks?
-what it cost to borrow-how much you can make on an investment
financial planning process step 5
Create and implement your financial action plan
financial planning process step 6
Review and revise the financial plan
What is liquidity?
the ease with which an asset can be converted into the economy's medium of exchange
What is the cost of money?
interest rate
interest rate
what is costs to borrow money
financial security
ability to prepare for future needs and meet current expenses to live comfortably
Debt Investments
investments in government and corporation bonds
equity
you own something
debt securities
notes and bonds that pay interest and have a fixed maturity date-borrowed by companies or government
equity securities
Represent ownership in a corporation -ex: stocks, mutual funds, CD's
economics
the study of how wealth is created and distributed
Federal Reserve System
the "feds" is responsible for maintaining an adequate money supply
what does the federal reserve change?
the discount rate
How does the Federal Reserve control the money supply?
influencing borrowing, interest rates, and the buying and selling of government securities
present value
the amount of money you would need to deposit now in order to have a desired amount in the future
future value
the amount of money in the future that an amount of money today will yield, given prevailing interest rates
time value of money
the increase of an amount of money due to earned interest or dividends
compounding
interest earned on previously earned interest. future value
annuity
a series of equal deposits or payments
discounting
The process of finding the present value of a cash flow or a series of cash flows; discounting is the reverse of compounding.
cafeteria-style benefits
an approach to employee benefits that gives all employees a set dollar amount that they must spend on company benefits, allocated however they wish within broad limitations
flexible spending plans
employees set aside pretax dollars up to the amount offered in the plan to pay for particular benefits, such as healthcare and dental premiums
what are the benefits of a flexible spending plans
-not taxed-not used lost
Medical Spending Account or health savings account
pay health care with pre tax dollars-health insurance with high deductible-tax deferred saving account for medical expenses -can be used for other expenses-(taxed & penalty)
what is an example of career planning?
-401K company retirement plan-you contribute 100$ per month-employer contributes 50$ a month
fully vested
A person's right to the full amount of some type of benefit, most commonly employee benefits (e.g., stock options, profit sharing, or retirement benefits.)
vesting period
The minimum number of years a worker must be employed before the company's contribution to a retirement account becomes permanent.
money management
The Day to Day financial activities to manage current personal economic resources while working toward long-term financial security.
what are the three components to Money Management?
1. Financial records2. Financial statements3. Budget
financial records
to keep good records of spending by categoryex. Quicken
what is on a balance sheet?
assetsliabilitiesnet worth
a balance sheet is called a
net worth statement
Balance Sheet Equation
-items of value you own minus amounts owed equal net worth-assets- liability = net worth
assets
Items of value such as cash, real estate, jewelry, cars, any personal possessions
liquid assets
assets that can be easily converted to cash
liabilities
amounts you owe others
current liabilities
due within one year (with current fiscal year)
long term liabilities
due more than one year from now
Is a 30 year mortgage a long term liability or short term?
both
solvent
having assets in excess of liabilities; able to pay one's debts.
insolvency
the inability to pay debts when they are due (liability exceed assets)
Cash Flow Statement
A summary that shows total income and spending for a given time period
personal income
Salaries and wages as well as investment income and government payments to individuals
expenditure statement
actual inflow and outflow of cash during a given time period
cash flow statement
A summary that shows total income and spending for a given time periodtotal cash income minus cash outflow = cash surplus or deficit
Steps of budget process
1. set financial goals2. estimate income3. Budget for emergency fund and savings4. budget for fixed expenses5. budget for variable expense6. record spending amounts 7. review spending and savings patterns
SMART process for budgeting
SpecificMeasurable Action-orientedRealisticTime-Based
budget variance is either?
a deficit or surplus
budget variance
the difference between the budgeted amount and the actual amount that you spend
Positive budget balance
budget surplus
Negative budget balance
budget deficit
When is Tax Freedom Day?
April 16
sales tax
taxes on purchases
excise tax
imposed by federal and state governments on goods like gas, alcoholic, tires, air travel, etc
use tax
a tax charged on the use, storage, or consumption of a good that was purchased in one state but used in another state
Real estate property tax
based on the value of land and buildings
Personal Property Tax
Annual tax imposed on certain personal property, such as cars or boats and based on the value of the property.
estate tax
FEDERAL tax imposed on the value of a person's property at the time of his or her death
inheritance tax
STATE tax levied on the value of property given to someone
when are gifts taxable?
-Gifts in the amount of $15,000.00 are not taxable when received. (2018-2021)-For 2022 it's $16,000.00-Gifts in excess are taxable over the$16,000.00
Gifts are not taxable if given for
tuition and medical expenses
FICA
Federal Insurance Contributions Act6.2%
medicare tax
(1.45%) both the employee and employer
income taxes
state and federal
local income taxes
taxes paid to a local government, such as a county or city
taxes on OUR earnings
FICAmedicareincomelocal
december 22, 2017
Tax Cuts & Jobs Act(TCJA) was signed into law.-Included: Reductions in tax rates-Larger Standard Deductions-Limits on certain deductions: For Example-Mortgage interest-State & local taxes
taxable income (federal form 1040)
earned: wages, salary, commission, fees, tips bonuses investment: portfolio incomepassive: business activitiesother: alimony, awards, lottery, prizes and others
federal tax exclusion
Amounts not included in gross income ( example: foreign earned income)
tax exempt income
Income not subject to tax (Ex: State & City bonds, child support, welfare)
tax-deferred income
income that will be taxed later (Ex: 401-K, IRA's, 457, 403-B)
tax reduction
the general call to lower taxes
taxable income minus reductions = ?
adjusted gross income or AGI and tax shelters
reductions to income
form: schedule 1-Contributions to (some) IRA's-Keogh retirement plans-Penalties for early withdrawal of savings-Alimony payments-Student Tuition(1098-T)-Student Loan Interest (1098-E)-Tuitions and Fees (limits)-Moving Expenses-And many more
American Opportunity Tax Credit
a credit for qualified education expenses paid for an eligible student for the first four years of higher education
Lifetime Learning Credit
for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for under graduate, graduate and professional degree courses — including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return
Federal Form 1040
-computing taxable income-tax deductions are subtracted from AGI-1st standard deduction
first standard deduction
a set amount of money on which no taxes are paid
standard deductions and filing status 2017: single
$6,350 for 2017$12,000 for 2018 (Tax Laws Changed)$12,200 for 2019$12,400 for 2020$12,550 for 2021$ 2022 ?Never married, divorced, or legally separated individuals with no dependents
married filing joint return
Standard Deduction $12,700-2017$24,000-2018)$24,400 for 2019 $24,800 for 2020 $25,100 for 2021
married filing separate returns
Standard Deduction $6,350 - 2017$12,000-2018)$12,200 for 2019 $12,400 for 2020$12,550 for 2021
head of household
Standard Deduction $9,350For 2018 $18,000For 2019 $18,350For 2020 $18,650For 2021 $18,800An unmarried individual or a surviving spouse who maintains a household (paying for more than half of the costs) for a child or dependent relative
qualifying widow or widower
Standard Deduction $12,700 For 2017For 2018 $24,000For 2019 $24,400For 2020 $24,800For 2021 $25,100An individual whose spouse died within the past two years and who has a dependent; this status is limited to two years after the death of the spouse.
Additional Standard Deduction
-over 65 and blind-65 years of age, add $1,700.00 to the standard deduction-Blind, add $1,700.00 to the standard deduction-Could total an additional $3,400.00 to Standard Deduction.
2nd exceptions
itemized deductions
3rd personal exceptions
-no longer on federal return but still on some states-for 2017 each personal exceptions is $4,050.00ex. family of 4 total is 16,200.00
calculating taxes owed
gross income -reductions= AGIless: itemized deductions or standard -deduction-personal exemptions= equals taxable income
tax credits
Dollar-for-dollar reductions from your tax liability-states have tax credits
non-refundable tax credit
The portion of the credit that is not needed to reduce your tax liability will not be paid to you and cannot be carried forward to reduce your tax liability in the future
refundable tax credit
a tax credit that can reduce one's income tax liability to below zero with the excess being refunded to the taxpayer
types of audits
correspondence, office, field
tax avoidance
the use of legitimate methods to reduce one's taxes
tax evasion
the use of illegal actions to reduce one's taxes
tax exempt investments
state and municipal bonds
tax deferred investments
•Tax deferred annuities•Section 529 education savings plans•Retirement Plans -IRA, Keogh or 401(k)-A type of tax shelter
TSA
Tax-sheltered annuity
capital gains
Profits from the sale of a capital asset such as stocks, bonds, real estate etc.
short term capital gains
(held less than a year) Taxed at ordinary income level
long term capital gains
(held more than a year)Taxed at a lower rate than ordinary income
capital losses
decreases in the value of existing assets
children's investments
income shifting-A child under the age of 18 can earn up to$2,200.00 in investment income.-After $2,200.00 the income is then taxed at the parent's higher rate
traditional IRA
Contribution limit is $6,000 (post tax) but if over 50 can contribute up to $7,000May be able to deduction contribution from taxes
Taxable income when you withdraw at age ____ without penalty
59 1/2If funds are withdrawn earlier, a 10% penalty plus all taxes due. Funds can be withdrawn for death, disability, for medical expenses or for higher education expenses with out penalty.**MANDATORY DISTRIBUTIONS: AGE 72**
Roth IRA
Contribution limit is $6,000 (post tax) but if over 50 can contribute up to $7,000Cannot deduct contributions from your taxes
Tax Free Income when you withdraw at
age 59 1/2 or after five years invested. If funds can be withdrawn before 59 ½ if owner is disable or for the purchase of first home up to a$10,000 max.NO MANDATORY DISTRIBUTIONS AT AGE 72
retirement plans RMD
-Traditional IRAs, SEP IRAs, SIMPLE IRAs-401(k) plans. 403(b) plans, 457(b) plans-profit sharing plans-other defined contribution plansThese plans require a RMD if your 70th birthday is July 1, 2019 or later, you do not have to take withdrawals until you reach age 72.DOES NOT APPLT TO ROTH IRA's
retirement and educational plans
-Coverdell Education Savings Account-529 Plan (Educational plan)-Keogh Plan (Self-Employed)-SEP Simplified -Employee Pension Plan-401-K-457-403-B
marginal tax rate
the tax rate paid on the next dollar of income. Under the progressive income tax method used for federal income tax in the United States, the marginal tax rate increases as income increases. Marginal tax rates are separated by income levels into seven tax brackets
alternative minimum tax
Tax that is designed ensure those who receive tax breaks also pay their fair share of taxes
what is the AMT tax rate for 2021?
26%If your income is over the stated level, you're taxed at a rate of 28 percent on the excess income. This means that for a single person who earned more than$73,600 in 2021, but less than $199,900, the AMT rate is 26 percent. If that person earned more than $199,900, the AMT tax rate goes up to 28 percent.
Withholding
taking tax payments out of an employee's pay before he or she receives it
W2
wage and tax statement
W4
The withholding form each new employee fills out, stating the number of exemptions. the more exemptions listed, the less withholding tax will be taken from the paycheck.
estimated tax payments are due?
April 15, June 15, September 15,January 15
tax table
The table in the 1040EZ booklet showing levels of income on one side and the tax owed on the other side.
schedule A
itemized deductions
form 1040
a tax form used by people that have other types of income such as royalties, alimony, or prizes; also called the long form
form 1040A
A two-page form that allows more options for income and deductions to be entered
form 1040EZ
The simplest of the basic income tax forms, often used by young people and others whose finances are fairly uncomplicated
Form 1040SR
larger type and larger boxes to write numbers in, making it slightly easier for seniors to read and fill out
form 1040X
Amended U.S. Individual Income Tax Return
managing money mistakes
-overspending due to impulse buying-cannot pay current bills-using savings to pay current expenses
types of financial services
savings, payment services, borrowing, investing
trust
a legal agreement that provides for the management and control of assets by one party for the benefit of another
who creates the trust
The trust grantor, settlor, or trustor.
who manages the assets in the trust?
trustee
asset management account or cash or wealth management account
this service provides complete financial services for a single fee
banking services
-online banking-mobile banking-ATM-debit cards-prepaid debit cards
when rates are rising
take advantage of long term loans and short term savings
when rates are falling
short term loans and long term savings
commercial banks
Full Ranger of Financial Services◦ Checking, savings, lending, etc.◦ Organized as a Corporation with Investors (stockholders)◦ Includes National Banks, Regional Banks, Community Banks, Online Banks
deposit institutions
-savings and loans=mutual savings banks-credit unions
savings and loans
Specialized in Savings & Home Mortgages
mutual savings banks
-Chartered by a central or regional government-Owned by depositors-Specialized in Savings & Home Mortgages Located in Northeastern US
credit unions
-User Owned, Non-Profit Cooperative Financial Institution-Lower Fess, Lower rates,- Higher Customer Service-Offer Full Range of Financial Services
discount rate
The rate financial institutions are charged to borrow funds from the Federal Reserve Banks
prime rate
is the interest rate that banks charge their preferred customers, large corporations or those with the highest credit ratings. It is used to determine borrowing costs on many short-term loan products
financial institutions
-life insurance companies-investment companies/brokerage firms-finance companies-credit card companies -mortgage comanies
where do you never go for a loan?
-pawnshop-check cashing outlets-payday loans-rent to own centers-car title loan
Payday Loan
a relatively small amount of money lent at a high rate of interest on the agreement that it will be repaid when the borrower receives their next paycheck.
regular savings accounts
Involves low to no minimum balance. Can withdraw money at any time. Earnings are very low. (Credit Union: Shared Account)
certificates of deposits
is a savings plan requiring that a certain amount of funds be left on deposit for s stated time period ranging from 30 days to five years or longer
penalties for certificate of deposit
or with drawing the funds before maturity are significant
callable
a bond feature that allows the borrower to repay the bonds before their scheduled maturity date at a specified call price
Callable CD
Start with higher rates and usually have long maturities as high as 10 to 15 years
callable stock
The issuer has the right to pay back investors and retire the issue at its discretion.
callable bonds
bonds that the issuing company can redeem (buy back) at a stated dollar amount prior to maturity
accounts are covered by?
the FDICfunds are not insured tho
if money is deposited in a credit union, it's insured by the ?
national credit union association or NCUA
___ and ___ provides insurance for certain retirement accounts
FCIC and NCUAex. traditional IRA, roth IRA
SEP
Simplified Employee Pension
EE Bonds
Savings bond. Purchased at 1/2 the face value
are earnings from EE savings bonds taxable income
yes unless used for Tuition and Fees at a college, University, or Technical School for you or a dependentor you make too much money
HH bonds
No longer available, pays interest every 6 months. Rate changes every 10 years
I bonds
Interest Rate Based on Two Components◦ A fixed rate for the life of the bond◦ An inflation rate that changes twice a year◦ Purchased at Face Value◦ Same Tax and Education benefit as EE bond
Truth in Savings Law
states that financial institutions have to inform you of fees on deposits, interest rates, annual percentage yield, and terms & conditions of savings plans
financial institutions must disclose the following information on savings accounts
-fees-interest rate-annual % yield (APY)-any other terms and conditions of the plans
compounding
refers to interest that is earned on previously earned interest
t/f The yield (earnings) on your savings usually will be greater than the stated interest rate
true
Tax Considerations
taxes affect the real rate of return on investments
payment methods
-debit cards -online payments-mobile transfers-stored-value cards -smart cards
smart card
A plastic card with a built-in microprocessor, used typically for electronic processes such as financial transactions and personal identification
Types of checking accounts
regular, activity, and interest-earning
Evaluating Checking Accounts
Restrictions, fees and charges, interest, and overdraft protection
certified check
Personal check but funds are removed from your account at the time the bank certifies your check
cashier's check
A check issued by bank removing funds from your account plus a fee and the recipient knows the check is valid
cashiers check vs certified check
Cashiers Check: (normally a is fee charged)-Check signed by bank-Funds are drawn on bank's accountcertified check:-signed by consumer-funds drawn against owners account
dormant account
an account that has not been accessed for a lengthy period