Midterm 1 Study Guide: Financial Planning and Measuring Financial Health - Prof. William A, Study notes of Business Finance

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Midterm 1 Study Guide Chapter 1: Financial Planning “ The ties that bind” - Financial Planning process o Evaluate Financial Health o Define your financial goals o Develop a plan of action o Implement your plan o Review your progress, reevaluate, and revise your plan - The importance of financial goals o Cannot get what you want if you don’t know what you want o Goals should be specific, measurable and timed.  Short term (less than 1 year)- pay off credit card debt by end of yr  Intermediate (1-10 years)-  Long-term (over 10 years)- retire by 65 with $1 million in the bank o Over time goals change  Life events, aging, accomplishing other goals, etc. - Why Personal Financial Planning? o Need a financial plan because it’s easier to spend than to save o Want a financial plan since it helps you achieve financial goals o Use financial planning, not to make more money but to achieve goals. o Control you finances or they will control you. - The 15 Principles of Financial Planning ( pick 5 that are important to you) o Nothing happens without a plan  People spend money without thinking, but you can’t save without thinking about it  Saving must be planned. Start modest and later modify and expand  Remember- time is your best friend, earlier the better. o The best protection is knowledge  Take responsibility for you financial affairs.  Take advantage of changes in econ, understand personal finance and apply it, protect yourself from incompetent advisors  Ask questions and research before acting  Slow down and think o The time dimension of investing  Take more risk on LT investments  Large companies have been making more in the last 80 yrs  Invest young and reek benefits later (retirement fund) o Pay Yourself First  Savings are residual so save what’s left over  Reinforce the importance of long-term goals, ensuring goals get funded o Money isn’t everything  See more than $$$, know what is important in YOUR life  Money doesn’t bring happiness, but facing expenses without the funding brings on anxiety  John Q said “money makes everything easier” Chapter 2- Measuring your Financial Health - Balance Sheet o You need a balance sheet to show what you own vs what you owe (on a given date) o Components:  Assets - what you own listed at fair market value  Monetary- cash, checking, savings, CDs, MMAs, emergency funds  Investments- stocks, bonds, mutual funds, real estate, cash value of life insurance, annuities  Retirement assets- value of IRAs, 401k, pensions  Housing- value of owned residences o Personal residence is a tangible asset and rental property is an investment asset  Automobiles- value of all autos (Kelly blue book)  Personal Property- collections, clothing, furnishings, etc.  Other- anything else not listed above, value of any business you own and money owed to you.  Liabilities - your debts, what you legally owe to someone as of TODAY  Current- due within 1 yr o Payables- bills you owe but haven’t paid yet like utilities, taxes, insurance premiums, etc o Credit Card balances (principal only  Long-term or non-current o Principal remaining on like auto loans, mortgage, student loans, etc.  Net Worth - what you are “worth” in $  Net worth= total assets- total liabilities  NOT a measure of self-worth, want it to be positive and grow over time until retirement - Income Statements o Tracks your money over a period of time o Cash accounting- record when the cash changes hands o Easier to do on a monthly basis usually o Helps identify ways to reduce spending, project a budget for the future, and determine how much you can save/invest per month o Easiest way to improve your situation is to reduce expenses o Marginal tax rate = the taxes owed on the next dollar you earn (used more often) o Average tax rate = total taxes/ taxable income - The 1040 tax form: o The differences between the types of filing statuses  Single- just you  Married filing jointly-  Married filing separate- separated or one make more, but no advantage really to doing thing  Head of household (w/dependents)- single parent or taking care of parents, single with dependents  Qualifying widower with dependent children- time limit is 2 yrs o What is a dependent?  If your income is less than $17,800 and depending on your filing status, age and whether you can be claimed on someone else statement on someone else tax return  With income: include children who have a job or elderly who have investments.  Under 19, under 24 and full time student o The Income Section- What belongs?  Gross income (W-2 forms)  Wages, salaries, tips  Interest earned- taxable or tax exempt  Dividends- ordinary, qualified  Business or farm income  Capital gain/loss  IRA distributions, pensions, unemployment (include Social Sec.) o Adjustments Sections  These REDUCE your total income  Adjusted Gross Income(AGI)= Total income-adjustments  Main adjustments for students and grads  Moving expenses  Self employment items  Traditional IRA contributions  Student loan interest payments (up to $2500)  Tuition and fees deduction (up to $4000) o Standard vs. Itemized deductions  Reduces your AGI, use larger of the two  Standard deduction-= $5350 for single  Itemizable expenses-  Medical and dental expenses  State and local income taxes or sales tax  Real estate and personal property taxes  Interest paid  Gifts to charity  Unreimbursed job expenses and misc. o Calculating total deductions for exemptions (line 42 of 1040 form)  If line 38 or AGI is less than $117300  $3400 * # of exemptions claimed in 6d o Calculating taxable income  (AGI-itemized or standard deductions)- total deductions for exemptions o Calculating total tax owed (line 44)  Go to worksheet “2007 Tax Rate Schedules” then pick the schedule appropriate to your filing status  Pick the range of your income then plug in the numbers  $8772+[(taxable income-lower bound)*25%]  8772 + [(81725-63700)*25%]  = $13279 o Education (hope vs lifetime)  Hope: up to $1650 per child if they are eligible, must be a freshman or sophomore (first 2yrs of college)  Lifetime: for juniors or people continuing education, up to $2000 per yr o If Total payments > Total Tax = REFUND - Ways to Reduce Taxes Legally o Reduce taxable income- 410k, 403b retirement contributions. o Increase your adjustments- IRA contrib, student loan interest o Increase your itemized deductions- own a house, medical exp, donations o Capital gains- no taxes due til sell asset o Qualified dividends- hold stocks atleast 60 days o Tax exempt income- municipal bonds - APRIL 15= DEADLINE FOR TAXES