Questions and Answers
What is a budget?
A plan based on your goals and financial obligations that limits spending in different categories
What does the current ratio measure?
What is the month's living expenses covered ratio?
What is an emergency fund?
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What does the debt ratio indicate?
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What is the long-term debt coverage ratio?
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What does the savings ratio measure?
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What is the time value of money?
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What does the term principal refer to?
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What is present value?
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What is the annual interest rate?
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What does future value refer to?
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What is reinvesting?
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What does the rule of 72 help determine?
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What is an annuity?
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What is an amortized loan?
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What is a progressive tax?
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What are tax brackets?
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What is adjusted gross income?
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What does the marginal tax rate indicate?
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What does the term capital asset mean?
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What is a capital gain?
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What is a capital gains tax?
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What is bracket creep?
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What is Social Security?
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What is Medicare?
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Which one of the following is the 'enemy' of compound interest and makes it very difficult to reach your financial goals?
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Joseph can qualify for all of the following except:
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Which of the following statements about portfolio income from investments that are not held in a tax-deferred account is accurate?
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What would be the interest rate on a loan of $39,927.10 that you paid off with annual payments of $10,000 for each of the next five years?
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If Monica invests $15,750 at 8% annual interest, how much would she have after 8 years?
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Approximately how long will it take Enrique's investment to grow into $2,000 if he invests $1,000 at 8% interest?
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Which factors affect your choice between claiming itemized deductions and the standard deduction?
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Which adjustments, deductions, or credits might apply to Danielle?
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What are deductions calculated using the federal tax form 'Schedule A' called?
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How much is now in your college account if your great-uncle placed $500 a year for 18 years at an annual rate of return of 6%?
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FICA deductions from your paycheck are for which mandatory federal insurance programs?
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Which of the following is closest to the amount Adrian will have to save each year for a $30,000 down payment in 5 years at a 9% rate of return?
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Generally, wages are reported on a ___ form while interest and dividends are reported on a ___ form.
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Using the Rule of 72, if it will take approximately 12 years for your money to double, at what annually compounded interest rate is it invested?
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What is the basic step to personal financial planning when establishing your personal financial goals?
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A personal income statement is prepared:
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Your financial situation is insolvent when:
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Which of the following typically occurs during stage 1 of the financial life cycle?
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Why do you need to review your progress and reevaluate your plan (Step 5)?
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What is an economic condition in which rising prices reduce the purchasing power of money called?
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When including an asset such as a car on your balance sheet, you should:
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Your net worth is found by:
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___ is the process of identifying a job that you feel is important and that will lead to the kind of lifestyle you desire.
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What is Cathy's net worth if her assets include a car worth $10,000 and a checking account balance of $5,000, while her liabilities include a student loan of $2,000 and a car loan of $8,000?
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Which step requires you to prepare a personal balance sheet?
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What aspect of financial planning might you discuss with a friend who buys fancy coffee drinks and prefers impulse buying?
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What is the first step if you have recently expanded your online marketing business and neglected your personal finances?
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While reviewing your current financial plan, you discover you won't achieve your long-term financial goals. What should you do?
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What is Kareem's current ratio if he has $6,000 in monetary assets and $2,000 in current liabilities?
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The first section of a balance sheet represents your:
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Which of the following is not a type of long-term debt?
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Which of the following is a relevant question to ask a financial planner?
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Is it possible to save $585,000 for retirement instead of $310,000 without requiring much more to be invested every month?
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Hector's month's living expenses covered ratio is 0.25 months. He just broke his leg. Without a paycheck for 6 weeks, what will Hector most likely experience?
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What is the present value of an IOU for $1,000 due to be paid in 2 years if the discount rate is 8%?
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Which indicates the correct order for completing your tax returns?
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What is Alisha's current ratio if she has $500 in monetary assets and $5,000 in current liabilities?
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How can we describe Jorge's and Jose's current financial situation if Jorge has a debt ratio of 37% and Jose has a ratio of 102%?
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Which of the following adheres to the financial principle 'just do it'?
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What are excise taxes?
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What interest rate do you need to earn in order to have $20,000 in your account in 10 years if you currently have $11,167?
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What does planning for your eventual death and the passage of your wealth to your heirs refer to?
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Personal financial planning will enable you to:
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List the 5 basic steps to personal financial planning.
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What is liquidity?
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List the 3 stages in the financial life cycle.
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List the four key factors involved in step 3 of personal financial planning basics.
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List the ten principles of personal finance.
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What is interest paid on interest called?
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What is diversification in finance?
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What is a personal balance sheet?
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What is assets?
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What are liabilities?
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What is net worth or equity?
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What is fair market value?
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What is a tangible asset?
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What is a blue book?
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What does it mean to be insolvent?
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What is an income statement?
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What is a variable expenditure?
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What is a fixed expenditure?
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What is a plan for controlling cash inflows and cash outflows?
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Study Notes
Personal Finance Key Concepts
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Inflation: Considered the enemy of compound interest, it complicates achieving financial goals by reducing purchasing power.
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Tax Filing: Individual circumstances like income, dependents, and types of deductions impact eligibility for tax credits and deductions.
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Portfolio Income: Includes income from non-tax-deferred investments such as dividends and interest that must be reported on tax returns and may be taxed differently than wages.
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Interest Rate Calculation: A loan payment structure can determine interest rates; e.g., a loan of $39,927.10 repaid in five annual payments of $10,000 equals an 8% interest rate.
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Investment Growth: Investing at an annual interest rate accumulates over time; e.g., $15,750 at 8% grows to $29,152.15 in 8 years.
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Compounding Effect: Long-term saving strategies emphasize self-discipline, such as leaving an $1,000 investment untouched to double in approximately 9 years.
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Deductions and Standard Deductions: Factors influencing decision-making between itemized deductions and standard deductions include home ownership, deductible expenses, and record-keeping requirements.
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Parenting Financial Adjustments: Single parents may qualify for various deductions, such as student loan interest adjustment and child-related credits.
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Itemized Deductions: Deductions calculated from Schedule A that lower taxable income can significantly affect tax obligations.
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Savings for Down Payments: Calculating future savings to meet down payment requirements, e.g., $30,000 needed in 5 years at 9% return requires annual savings of about $5,013.
Understanding Financial Statements
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Wage Reporting: Wages are reported on W-2 forms, while interest and dividends are reported on 1099 forms.
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Personal Balance Sheet: This financial position statement includes assets, liabilities, and calculates net worth (assets minus liabilities).
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Income Statement: Reflects money flow, detailing income sources and expenditures over time to manage budgeting effectively.
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Fixed vs. Variable Expenditures: Understand control over expenses; fixed expenditures are obligatory, while variable expenditures can fluctuate.
Financial Ratios and Indicators
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Current Ratio: Measures liquidity, defined as monetary assets divided by current liabilities.
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Debt Ratio: Indicates financial health, calculated as total liabilities divided by total assets.
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Long-Term Debt Coverage Ratio: Assesses ability to meet long-term debt obligations by comparing income available for living against long-term payments.
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Month's Living Expenses Covered Ratio: A liquidity indicator that measures monetary assets against annual expenditures divided by 12.
Principles of Personal Finance
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Rule of 72: A time-saving method to estimate how long it will take for an investment to double; divide the annual growth rate into 72.
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Time Value of Money: Emphasizes that a dollar today is worth more than a future dollar, affecting savings and investment comparisons.
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Diversification: Mitigates investment risk by spreading investments across various assets.
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Liquidity: Refers to the ease of converting assets to cash, crucial for meeting financial obligations.
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Personal Financial Planning Steps: Include evaluating financial health, defining goals, developing a plan, implementing it, and regularly reviewing progress.
Final Notes
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Tax Planning: Understanding expenses, exemptions, and the progressive tax system is crucial for minimizing tax liabilities.
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Emergency Fund: Essential for financial stability, it ensures availability of cash reserves during unforeseen circumstances.
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Estate Planning: Involves preparing for wealth transfer and ensuring that assets are managed according to one’s wishes after death.
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Investment Terms: Key concepts like principal, future value, present value, and annuity are foundational in understanding financial returns and investments.### Deductions and Income Terms
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Allowable deductions are calculated and subtracted from adjusted gross income to determine taxable income.
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Itemized deductions refer to specific expenses that taxpayers can list to reduce taxable income, rather than opting for the standard deduction.
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Standard deduction is a fixed dollar amount determined by the IRS, available regardless of actual expenses incurred by the taxpayer.
Income Definitions
- Taxable income encompasses all income that is subject to taxation.
- Adjusted gross income (AGI) includes all sources of income minus certain adjustments such as IRA contributions, student loan interest, and alimony paid prior to standard or itemized deductions.
Tax Rates and Categories
- Marginal tax rate or marginal tax bracket denotes the tax rate applied to the last dollar earned by the taxpayer.
- Bracket creep occurs when taxpayers move into higher tax brackets due to inflation-driven wage increases, leading to higher effective tax rates.
Capital Gains and Assets
- Tax-deferred income refers to earnings on which taxes are postponed until a later date, allowing for potential growth over time.
- Capital assets include personal property such as stocks, bonds, and real estate, excluding certain business assets.
- Capital gain is defined as the profit realized from the sale of a capital asset when the selling price exceeds its purchase price.
- Capital gains tax is the tax imposed on the realized profit from the sale of capital gains.
Social Programs
- Social Security is a federal program providing benefits for disability and retirement based on an individual's work history and contributions.
- Medicare is the federal insurance program offering medical benefits to individuals aged 65 and over.
Studying That Suits You
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Description
Test your knowledge on the essential concepts from Chapters 1-4 of Personal Finance. This quiz covers critical topics such as the impact of inflation on compound interest and understanding tax returns. Enhance your financial literacy with these flashcard-style questions.