HDFS 357 1st Edition Exam 1 Study Guide Lectures 1 7 Chapter 1 Personal Finance Basics and the Time Value of Money Financial Planning Process o Step 1 Determine your current financial situation o Step 2 Develop your financial goals SMART Goals Specific know what your goals are to create a plan Measureable with a specific amount Action oriented identify the personal financial activities Realistic utilizing your income and life situation Time based identify the time frame to achieve the goal o Step 6 Review and revise your plan Opportunity Cost what you give up when you make a choice Influences on Personal Financial Planning o Economic Factors Supply Demand as demand increases so does the price Ex rent in Williston ND tops averages in New York City and Los Angeles Time Value of Money o Future Value the amount to which current savings will increase based on a certain interest rate and a certain time period o Present Value The current value of future amount based on a certain interest rate and a certain time period Chapter 3 Money Management Strategy Financial Statements and Budgeting Balance Sheet General overview of finances o Assets what you own o Liabilities what you owe o Net Worth assets liabilities net worth Cash Flow Statement the actual inflow and outflow for a given time period o Fixed Expenses Set expenses e g rent car payment phone bill o Variable Expenses Unpredictable expenses e g electricity groceries Budget Deficit when the difference between income and outflows are negative Chapter 5 Financial Services Savings Plans and Payment Accounts Truth in Savings Act requires the disclosure of fees on deposit accounts interest rates and other terms and conditions Evaluating Savings Plans Ask What is the interest rate When and how often can money be withdrawn What are the fees Certified Check personal check with guaranteed payment bank certifies that funds are available Cashiers Check check of a financial institution you pay bank they write the check Federal Reserve The Fed determines the supply of money available and interest rates o Interest rate decrease it more spending increase it less spending Chapter 4 Planning Your Tax Strategy Types of Taxes 1 Taxes on purchases 2 Taxes on property 3 Taxes on wealth 4 Taxes on earnings o Estate Tax o Income Tax Taxable Income earned income investment income and other income alimony awards lottery winnings and prizes Standard Deduction set amount on which no taxes are paid Exclusions sets aside certain incomes as nontaxable Tax Credit a sum subtracted from the total amount a taxpayer owes to the state Withholding a government requirement for the payer of an item of income to withhold or deduct tax from the payment and pay that tax to the government Tax Liability the total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable event Audits 3 types o 1 Correspondence for minor questions o 2 Office audit takes place in IRS office o 3 Field most complex IRS agent visits you at home business or your accountant s office Tax Evasion o Illegally not paying all the taxes you owe such as not reporting all income