Exam 1 Flashcards
Chapters 1-3
What is rule 72?
Used to find inflation rate. 72/annual inflation
What is inflation
a rise in general prices
What is interest rate?
Price to pay of borrowed money.
What influences interest rates?
Forces of supply and demand
Simple interest calculations
Refer to PV & FV sheets. (PV-Av)/AV = x
(Current x FV) = x
What is financial plan?
formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities.
Types of risks to plan for..
inflation, interest rate, income, personal, & liquidity
Money Management
Day to day financial activities necessary to manage current personal economic resources while working toward long-term financial security
Money Management activities
financial documents, financial statements, budgeting
Variable Expenses
Flexible payments that change from month to month. (Food, clothing, utilities)
Fixed Expenses
Payments that do not vary from month to month. (Rent or mortgage, loans)
Take home pay
Also known as net pay. A persons earnings after deductions for taxes and other items
Disposable Income
Also known as take home pay. The amount a person or household has available to spend.
Debt-Payments Ratio
Monthly credit payments divided by take home pay. Indicates how much of a persons earnings goes for debt payments.
What are goals? Lengths?
Where you want to see yourself financially. Long-term: 5+ years. Short-term: Months to 1 year. Mid-term: 2-4 years.
Opportunity costs
What you give up when making a choice. Also known as a trade off.
Compounding
Future value computations. Allows the FV of a deposit to grow faster than it would if interest were paid only on the original deposit.
Discounting
Present value computations.
Allow you to determine how much to deposit now to obtain a desired total in the future.
Personal Financial Statements
Tell you the starting point of your financial journey. (Report, measure, maintain, provide)
Balance sheet
Also called: Net worth statement. Reports what you own and what you owe. (Calculates net worth)
Cash flow
Is that actual inflow and outflow of cash during a given time period.N
Net worth
Difference between assets and liabilities.
Purpose of tax
To provide revenue for government funded services
Excise tax
imposed by federal government on goods such as gas, cigs, alcohol, tires etc
Real estate property tax
taxes on lands & buildings
Personal property tax
taxes on automobiles, boats, furniture, livestock
Estate tax
imposed on the value of a persons property at time of death
Inheritance tax
value of property from deceased
Filing statuses
Married, single, widowed, head of household
Tax credit
Results in a dollar for dollar reduction in the amount of taxes owed
Tax deduction
Reduces the taxable income on which taxes are based
Itemized deductions
Expenses a taxpayer is allowed to deduct from adjusted gross income. (Medical expenses, taxes, interest, contributions)
Tax forms
1040,
Types of income
Earned, investment, & passive
Earned income
usually in the form of wages, salary, commissions
Investment income
Also known as portfolio. Money received in the form of dividends, interest, or rent
Passive income
results from business activities in which you don’t participate in (limited partnership)
Adjusted gross income
gross income after certain reductions have been made
tax shelters
investments that provide immediate tax benefits and a reasonable expectation of a future financial return
tax deductions
an amount subtracted from adjusted gross income to arrive at taxable income
standard deduction
a set amount on which no taxes are paid
exemptions
allowed as a deduction from adjusted gross income for yourself of other dependents
marginal tax rate
highest bracket and associated rate that applies to your income
average tax rate
based on the total tax due divided by taxable income
tax credit
an amount subtracted directly from the amount of taxes owed
tax audit
a detailed examination of your tax return by the IRS
Types of audit
correspondence, office & field
