Personal Finance Basics

• Personal Financial Planning refers to a systematic process considering important elements of an individual's finances.

S.M.A.R.T. Goals

• S: "Specific" refers to what you want to do.
• M: "Measurable" refers to how you will know when you have reached it.
• A: "Achievable" refers to if it is in your power to accomplish it
• R: "Realistic/Relevant" refers to can you realistically achieve it
• T: "Timely" refers to when do you want to accomplish it
• Financial Goals are results that an individual wants to attain, such as buying a home, building a college fund, or achieving financial independence.
• One critical part of the Short-Term Goal is an Emergency Fund that represents at least 6 months of your salary

The Personal Financial Planning Life Cycle

• Asset acquisition (Chapters 4 and 5)
• Liability and insurance (Chapters 6 and 7)
• Savings and investment (Chapters 2, 4, 11, 12 and 13)
• Employee benefit (Chapters 2, 3, 8, 9 and 10)
• Tax (Chapter 3)
• Retirement and Estate Planning (Chapter 14)
• Investment is an asset (something of value) or item acquired with the goal of generating income or appreciation.
• Interest is the cost of money, often presented as a percentage (i.e., interest rate).
• Principal is the original sum invested or lent.
• Rate of Return is the money you earn from your investment, added to the principal.
• Compound Interest is earned interest from your investment.
• Professional Financial Planner refers to an individual or firm that helps clients establish financial goals and develop and implement financial plans to achieve those goals.
• Their role is like that of a personal trainer at the gym.

Assets

• Assets are things that you own.
• Liquid assets are held in the form of cash.
• Investments are acquired to earn a return.
• Real property consists of immovable assets.
• Personal property is movable and used in everyday life.
• Total assets = Total liabilities + net worth

Liabilities

• Liabilities are things that you owe, like debts such as credit card charges, loans, and mortgages.
• Current or short-term liabilities are due within 1 year of the date of the balance sheet.
• Open account credit obligations are current liabilities that represent the balances outstanding against established credit lines.
• Long-term debt is due 1 year or more from the date of the balance sheet.
• Net worth is the difference between assets and liabilities, representing someone's financial value or a family's actual wealth.
• Equity represents the actual ownership interest in a specific asset or group of assets.
• If the net worth is less than zero, then the individual or family is insolvent.
• Net worth = Total assets - total liabilities
• Financial Plans are the roadmaps that show you the way.
• Financial Statements let you know where you stand financially (where you are).
• Budgets are detailed short-term financial forecasts that compare estimated income with estimated expenses, allowing you to monitor and control expenses and purchases in a manner consistent with your financial plans.

Balance Sheet

• Describes a person's financial position at a given time.
• Total assets = Total liabilities + net worth
• Net worth = Total assets - total liabilities
• Income and expense statement: reports how you did financially over a period of time

Income and Expense Statement

• Cash surplus = Excess amount of income over expenses, resulting in increased net worth
• Cash deficit = Excess amount of expenses over income, resulting in insufficient funds and decreased net worth (Insolvent)
• Income = earnings received as wages, salaries, bonuses, commissions, interest and dividends, or proceeds from the sale of assets
• Expenses = Money spent on living expenses and to pay taxes, purchase assets, or repay debt
• An Emergency Fund provides at least 6 months' worth of income.
• Living within your means pays off in the long run.
• Invest in a 401K on day one if it's available.
• The US Constitution mandates taxes.
• Government provides Public Goods and Services.
• Government provides Protective Services (Armed Forces, Local Police, Fire, EMS etc.).
• Taxes pay for all Federal/State/Local Workers, Representatives, Consultants, etc.
• Taxes are considered "Dues paid for membership in a society" and the "Cost of living in a country."
• Gross Pay refers to any and all income before various deductions.
• Net Pay is the remaining income after various deductions, also called take-home pay.
• Administering and enforcing federal tax laws is the responsibility of the Internal Revenue Service (IRS), a part of the U.S. Department of Treasury.

Tax Forms

• Everyone can file Form 1040.
• For 2018, form 1040 is supplemented by six schedules (Schedule 1, 2, 3, 4, 5, and 6) to report additional income, credit, and taxes.
• Tax preparation software (e.g., Turbo Tax, Tax Act) reduces time and effort in filing.

Tax Rates

• The federal income tax is a progressive tax rate, increasing with income.
• Sales tax can be a regressive tax rate since higher-income taxpayers spend less of their income on items subject to it.
• Average tax rate = Total tax / taxable income
• Marginal tax rate is the tax on the last or next dollar of taxable income.
• The average tax rate is used for long-range planning, while the marginal tax rate is for short-term planning.
• Progressive tax structure: Larger the amount of taxable income higher the rate at which it is taxed.
• Gross income includes wages, salaries, bonuses, commissions, tips, interest, dividends, alimony, business and farm income, gains from the sale of assets, pensions, annuities, rents, partnerships, prizes, lottery, and gambling winnings.
• Estimated taxes are payments required on income not subject to withholding, paid in four installments by self-employed individuals or those with additional income from cash payment jobs.
• The usual filing deadline is April 15th.
• The IRS enforces tax laws and selects returns for audit based on the probability of error or on a random basis.

Tax Preparers

• Commercial tax return preparers (e.g., H&R Block, Jackson Hewitt, Liberty Tax).
• Certified Professional Accountants (CPAs).
• Lawyers who specialize in tax are Tax Attorneys.
• Enrolled Agents.
• Many "Software Programs" are available.
• All professional preparers must register with the IRS.
• Tax evasion refers to the illegal act of failing to accurately report income or deductions and failing to pay taxes.
• Tax avoidance is the act of reducing taxes in ways that are legal and compatible with the intent of Congress.

Objectives of Tax Planning

• To reduce taxes
• To shift taxes
• To defer taxes
• Financial Institutions include Banks (Commercial, Investment, etc.).
• Credit Unions.
• Savings and Loan (S&L).
• Brokerage Company
• Money services business
• Check cashing service
• Insurance Companies
• Financial institutions earn money through interest rates and rates of return.
• Interest rate = Rate of Return
• Today's financial marketplace offers consumers a full range of financial products and services.
• Unlike money market mutual funds, money market deposit accounts are federally insured.
• Banks may charge a service fee if your checking account balance falls below the minimum required amount.
• Interest Rate is the cost one pays to borrow money.
• Debit cards may make it easier to overspend.
• Discount securities are sold at a discounted price.
• Direct Interest is added to the account or paid directly.
• Compound interest is determined by applying the nominal (stated) rate of interest to the sum of the initial deposit and the interest earned in each prior period.
• Simple interest is paid only on the initial amount of the deposit.

Financial Facts or Fantasies?

• For most people, an automobile will be their second largest purchase.
• The amount of money you earn has a lot to do with the amount of money you can borrow.
• In an adjustable-rate mortgage, payment will change periodically, along with prevailing interest rates.
• Operation Expenses are the out-of-pocket costs of operating an automobile include not only car payments but also insurance, licenses (tags), fuel, oil, tires and other operation and maintenances outlays.

Fixed Operation Expenses

• Fixed expenses will virtually stay the same amount regardless how much or often you drive the vehicle.
• Includes Loan or Lease Payments and Insurance Premiums.

Variable Operation Expenses

• Variable: These expenses will change based on how often you drive the vehicle.
• Example of VARIABLE Expenses: Fuel and Routine and not so routine maintenance.

Purchasing a Car

• Drive the car and complete your evaluation of the car before you talk price.
• Sticker Price is the suggested retail price.
• Know the dealer's cost by searching Edmunds and Kelley Blue Book.
• Decide your price
• Mark-up 3-4 percent for car less than $20,000;
• 6-7 percent for higher price cars
• Buying Services are available
• Arrangement to sell cars at a predetermined price;
• Provide you with bids from several local dealers;
• Place an order with the factory

Housing Types

• Single Family
• Condominiums
• Cooperative apartments
• Rental Units
• Rent Ratio: The ratio of the average house price to the average annual rent, which provides insight into the relative attractiveness of buying a house versus renting in a given area of potential interest.
• Buying was on average 23% cheaper than renting (based on 2015 data).

Cost of Homeownership

• Down Payment
• Mortgage Points are fees charged by lenders at the time that they grant a mortgage loan that can reduce interest.
• Closing cost
• Mortgage payments
• Property taxes
• Homeowner's Insurance
• Maintenance and Operating Expenses
• Loan-to-value ratio, if 80% then down payment 20%
• May use funds from IRA for part of down payment on first home

Mortgage

• If the down payment is less than 20%, the buyer may be required to obtain private mortgage insurance (PMI) which protects the lender if borrower defaults on the loan.
• PMI ends when mortgage is paid down to 78% of the home's original value.
• Home-Buying Process
• Research the market, may use an agent to gather information.
• Conventional wisdom, using an agent does not add to the cost of purchasing a home.
• Agents using a Multiple Listing Service (MLS) have access to the entire market.
• Buyer could contract with an agent to represent their interest.
• Prequalifying for a mortgage speeds the process.
• All real estate transactions must have a written contract
• Title check will disclose any liens or deed covenants.

Fixed-Rate Mortgages

• The most common is 30-years, but 15-year loan becoming more popular.
• Normally there is no penalty for the early payment of a loan.

Adjustable-Rate Mortgages

• The rate is fixed for a period (say six months or five years) after which the rate may be changed for another term.
• The rate will be adjusted based upon an index rate
• Rates have a maximum stated as a margin between initial rate and maximum rate.
• Payment may also have a cap that limits how much the payment may be increased.