Exam 2 Flashcards
Short Term Debt
Any debt lasting 90 days - 1 year
Long Term Debt
Debt lasting 1-3 years or longer
Unsecured Debt
Does not have any collateral behind it
Secured Debt
Backed by some form of collateral behind it
-in a better position than unsecured
Close-End Credit
One time loan for specific purpose that you pay back
-Ex: Loan, Mortgage
Open-End Credit
Use as needed until reaching credit max
-Ex: Credit Card
Fixed-Rate Mortgage:
Interest rate is fixed and does not change over the life time of the loan
Adjustable Rate Mortgage(ARM):
Interest rate varies w/market and index
-Rate is based on a formula
-Possible Cap/Floor for the rate
Front End Ratio:
(Monthly Housing Expense/ Borrowers gross monthly income)
-Used to find max $ creditors should lend
Back End Ratio:
(Borrowers Total Debt/ Gross Monthly Income)
Debt Payments to Income Ratio:
(Monthly Debt Payments/Net Monthly Income)
-Consumer credit payments should not exceed 20% of your net income
Debt to Equity Ratio:
Total Liabilities / Net Worth
-Should be less than 1
3 Major Credit Reporting Agencies(CRA):
1) Experian
2) Equifax
3) Transunion
-Get 1 free report per year
Credit Report Contains:
1) Identifying Information
2) Credit History
3) Public Records
4) Inquiries Section
FICO Credit Score Makeup:
35% - Payment History
30% - Amounts Owed
15% - Length of Credit History
10% - New Credit
10% - Types of Credit Used
Justin Castelli Notes:
-Where you start is not where you end up
-Be careful of “advice”
4 Types of Taxes:
Taxes on:
1) Purchases
2) Property
3) Wealth
4) Earnings
Tax Form 1040
Where you file your taxes
Schedule 1
Additional other income + expenses
Schedule A
Itemized Deductions
Schedule B
Taxable income/dividends that are received
Schedule D
Capital gain from investments
Adjusted Gross Income(AGI):
Gross income after certain deductions have been made
-Contribution to IRA, SEP or SIMPLE Retirement.
-Penalties for early withdrawal of savings
-Alimony payments
-Student loan interest deduction
Itemized Deductions
Specific items that give you deductions
-Medical expenses, contributions to charity
-Schedule A
Marginal Tax Rate
Rate you will pay on your last highest dollar of income
Effective Tax Rate
Average rate you pay on your total taxable income
ETR = Taxes Owed / Taxable Income
Tax Credit
Amount subtracted directly from the amount of taxes you owe
Tax Deduction
Reduces the income that is subject to taxes
Form 4868
Allows auto 6-month extension to file the federal return
W2 Form
Reported salary and wages by your employer
-reported by Jan 31st
To Minimize Taxes:
1) Same or lower tax rate next year
-Accelerate deductions
-Delay income
2) Higher tax rate next year
-Delay deductions
-Accelerate income
Pure Risk:
Personal, property, liability risk
-Insurable, chance of loss
-Accidental/unintentional
Life Insurance:
Protect someone who depends on you from financial loss related to your death
Estimating Life Insurance Needs:
1) 70% or your salary for 7 years
2) DINK = 1/2 debts + funeral expenses
3) Non-working spouse = # of years until youngest is 18 * $10,000
Types of Life Insurance:
1) Temporary/Term
2) Whole Life/Straight Life
3) Universal Life
4) Variable Life
5) Variable Universal
Temporary/Term Insurance
Protection for specified period of time
Whole life/straight life
Pay premium as long as you live
Universal life insurance
Gives you more direct control (can be changed)
Variable life insurance
Fixed annual premium
Variable universal insurance
Blended product from universal + variable policies
Education Needs Analysis
1) Estimate college cost in current dollars
2) Project costs allowing for inflation
3) Determine investment amount
-Lump sum vs Periodic Payment
FV Formula
PV x (1+r)^n
PV Formula
FV/ (1+r)^n
Education Financing Options
1) Pay as you go
2) Find someone to help you pay
3) Save now for later
-529 Plan, Coverdell Education Savings Account, U.S Savings Bonds, IRA
What are the 2 tax deferred education savings account?
-529 Plan
-Coverdell Education Savings Account
Coverdell Education Savings Account
Exclusively for qualified education expenses
-Exemption from federal taxation
-max of $2k per year per beneficiary
Expected Family Contribution Formula
Student Contribution + Family Contribution
Will
The legal declaration of a person’s mind as to the disposition of his or her property after death
-Transfers property according to your wishes at death
Die intestate
Die without a will
-State law determines distribution of assets
Will Executor
Takes control of assets of the estate
Will Guardian
A guardian assumes the responsibility for providing children with the personal care and managing the estate for them
Durable Power of Attorney
Legal document authorizing someone to act on your behalf
-Can be general or limited in nature
-When you are still alive but you are unable to do anything(In a coma)
Codicil
Change to your will
Advance Directive:
Additional things you want
-Health care proxy: tell doctor how you want to be treated
-Letter of last instruction
Trust
A legal arrangement through which a trustee holds your assets for your benefit or that of your beneficiaries
-takes care of or manages your property
-distribute your assets to your heirs
-all assets are taken out of your name and put in the name of the trust
Benefits of trusts
-Reduce estate taxes
-Avoid probate and transfer your assets immediately
-Free you from managing assets
-Provide income for a surviving spouse
-Ensures property serves desired purpose after death
Types of Trusts:
Living Trust: Set up while you’re alive to manage your property.
Testamentary Trust: Created by your will, after you pass away.
Credit-Shelter Trust: Helps reduce estate taxes, typically for married couples.
Life Insurance Trust: Holds life insurance policies to avoid estate taxes and control the payout.
Revocable vs Irrevocable Trust
-Revocable: you can change it during your lifetime
-Irrevocable: you cannot change the terms
Probate Process
The process of which the court validates the will and distributing a dead persons assets.
Intestate succession
the laws governing the allocation of a deceased person’s assets when they die without a valid will
Testate succession
When a person dies and leaves a valid will
Tax form 706
Estate tax form
3 required documents:
1) Will
2) Durable power of attorney
3) Advance Directive
