Chapters 1-3 Flashcards
Personal financial planning
The process of managing your money to achieve personal economic satisfaction
Financial plan
A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities
Adult life cycle
The stages in the family situation and financial needs of an adult
Economics
The study of how wealth is created and distributed
Inflation
A rise in the general level of prices
Most harmful to people with fixed incomes
Types of Financial Goals
Short term goals
Intermediate goals
Long term goals
Short term goal
Achieved within the next year or so, like saving for a vacation or paying off small debts
Intermediate Goals
Within a time frame of two to five years
Long term goals
More than five years, such as retirement, college funds, or the purchase of a home
SMART financial approach
S- specific
M- measurable
A- action oriented
R- realistic
T- time based
Opportunity cost
What you give up when you make a choice, also called a trade off (like giving up down time to work extra hours and vice versa)
Interest calculations
Amount in savings × annual interest rate × time period = interest
Example: $500 deposited at 6% for 6 months
500 × .06 × 1/2= 15 so $15 is the interest
Future value
The amount to which current savings will grow based on a certain interest rate and a certain time period
Annuity
A series of equal deposits or payments
Present Value
The current value for a future amount based on a particular interest rate for a certain period of time
Bankruptcy
A set of federal laws allowing you to either restructure your debts or remove certain debts
Time value of money
Increase in an amount of money as a result of interest earned
Values
Ideas and principles that a person considers to be correct, desirable and important
Money Management
The day to day financial activity necessary to manage current personal economic resources while working toward long term financial security
Balance sheet
Report on what you own and what you owe
Assests
Cash and tangible property with a monetary value
Liquid assests
Cash and items of value that can easily be converted to cash
Liabilities
Amounts owed to others but do not include items not yet due, such as next months rent
Current liabilites
Debts you must pay within a short time, usually less than a year
Long term liabilities
Debts you do not have to pay in full until more than a year from now
Net worth
The difference between total assets and total liabilities
Insolvency
The inability to pay debts when they are due
Cash flow
The actual inflow and outflow of cash during a given time period
Discretionary income
Money left over after housing, food, and other necessities
Deficit
When actual spending exceeds planned spending
Surplus
When actual spending is less than planned spending
Excise tax
A tax imposed by federal and state governments on specific goods and services
Estate tax
Imposed on the value of a person’s property at the time of death
Inheritance tax
Tax levied on the value of property bequeathed by a deceased person
Taxable income
The net amount of income, after allowable deductions, on which income tax is computed
Earned income
Wages, salary, commission, fees, tips, and bonuses
Investment income
Money received in the form of dividends, interest, or rent from investments
Passive income
Results from business activities in which you do not actively participate, such as limited partnership or rental property that you do not actively manage
Exclusion
An amount not included in gross income
Adjusted Gross Income (AGI)
Gross income after certain reductions have been made
Tax shelters
Investments that provide immediate tax benefits and a reasonable expectation for a future financial return
Marginal tax rates
10-37% rate based on and applied to your income
Average tax rate
Total tax due divided by taxable income
Tax credit
An amount subtracted directly from the taxes owed
Tax audit
A detailed examination of your tax return by the IRS
Tax avoidance
The use of legitimate methods to reduce ones taxes
Tax evasion
The use of illegal activities to reduce ones taxes
Capital gains
Profits from the sale of a capital asset such as stocks, bonds, or real estate
