FHCE Module 2 Textbook Notes
FHCE Module 2 Textbook Notes FHCE 3200
Popular in Intro to Personal Finance
verified elite notetaker
Popular in Department
verified elite notetaker
This 5 page Class Notes was uploaded by Morgan Notetaker on Friday August 26, 2016. The Class Notes belongs to FHCE 3200 at University of Georgia taught by Matthew Goren in Fall 2016. Since its upload, it has received 10 views.
Reviews for FHCE Module 2 Textbook Notes
Report this Material
What is Karma?
Karma is the currency of StudySoup.
Date Created: 08/26/16
Module 2 I. Produce More than You Spend Income – Expenses = Surplus (or Deficit) Savings Rate Ratio: Percent of monthly income that is used for savings Savings o Savings rate = Income o Under age 30, target ratio is 12% each year o Target Savings Rates keep you on track when saving for long-term goals o The longer you wait to save, the higher the target savings rate will be (age 40= 20%) o Target savings rate also increases the earlier you want to become financial independent o Helpful: commit to putting half of every future raise toward wealth building Allows you to increase your take home pay and increase savings o Average millionaire saves over 20% of their income Debt-to-Income Ratio: Percent of income required for debt payments o Debt-to-Income ratio = Total Required DebtPayments x100 GrossIncome o Monthly debt payments should not exceed 36% of gross income o Example: You graduate college and make $57,252. Your savings rate is 20%, your Debt-to-Income ratio is 35%, and you pay 15% of your income in taxes. This leaves 30% of your total pay ($1431) to live off of each month II. Wages, Salaries, and Commissions Spending Plan: Estimates of how much money you will bring in to your household, how much you’ll spend, and how much you’ll save o Begin with estimate of current income o Three aspects of income: wages, salaries, commissions Wage: What employer pays an employee for completing a task; usually based on hourly rate o Regular work week is 40 hours o Minimum wage: $7.25 an hour o Those under the Fair Labor Standards Act must be paid at least 1.5x their regular wage when they work overtime o Minimum wage is $2.13 an hour for people who receive more than $30 tips each month Salary: Payment for a set period of time o Don’t usually get overtime pay o “White collar” workers Commission: Payment based on the sale of a product or service o Most salespeople paid by commission o Ex. Department store pays you minimum wage plus 10% of all sales made. You work 8 hours and sold $1000 of clothes. You would earn (7.25x8)+(1000x10%)= $158.00 in 8 hours Few people earn all three forms of income; most Americans paid on hourly basis Risk takers tend to earn more than others: people who choose to rely on commissions often earn more Some state have lower minimum wages than others o Never plan to live on minimum wage alone o Best way to earn more income is to complete college degree; graduate earn 2.5x more III. Income from Self-Employment Self Employed: You work in your own business or you work as subcontractor to another business Independent Contractor: One who contacts with other business or individuals to perform specific tasks If your employer withholds FICA taxes from your pay, you are an employee; if not you’re an independent contractor/ self-employed Sole Proprietorship: Type of business entity o You make all decisions o You are completely liable o Capital comes from your own savings/ money you borrow o Unlimited liability: If your business has financial difficulties and can’t pay its obligations, your personal assets will be taken by creditors to pay it off Partnership: you own a business with 1+ partners o Decisions/ profits/ losses shared between you o General Partnership: decisions made by consensus of majority Capital raised through collective assets and borrowing of partners Tax for each partner’s share is included on their own tax returns Each has unlimited liability for entire partnership (liable for other partners’ mistakes) o Limited Partnerships, Limited Liability Partnerships, Family Limited Partnerships Corporation: Separate legal entity o Separate form the owners o Liability limited to amount you invested in the company o Easier to raise capital o More complex governance and taxation Limited Liability Company combines partnership and corporation aspects Self-employed are 10% of working population o Account for 2/3 of the working millionaire population o Misleading; many who are also losing money Half of small business start-ups still exist after 5 years; 1/3 after 10 years US Small Business administration (SBA): Federal agency that provides resources to small business owners o “How-to” guides o One-on-one counseling and training o Loan programs o www.spa.gov Most important first question when starting own business: what is the legal structure of my business? o Liability as the owner o How easily can you raise money o How will decisions be made o How will income be taxed IV. Unearned Income: Interest and Dividends Earned Income: money you received from work Total Income: made up of earned and unearned income (money received not from employment) Sources for unearned income: gifts, government benefits, unemployment insurance, Social Security benefits, lottery winnings, inheritance, proceeds from EE and I Savings bonds, etc. Interest and Dividends are unearned income V. Interest as Income As a lender you loan money to a borrower (someone who needs money) o Can loan your money to someone who will pay you to use the money (in interest) o Interest: earnings you get from lending your money Easiest and safest way to lend money is at a bank or credit union o Putting money in a bank account is lending the bank your savings VI. Dividends as Income Three types of people in finance word: works, lenders, investors Workers generate earned income Lenders produce unearned income with interest Investors receive unearned income as dividends Investors: people who put their money at risk through the ownership of assets and businesses o Become shareholders of a company when they buy into it o Profitable companies distribute earnings to their shareholders in return for the shareholders’ investment o These distributions are called dividends VII. Capital Gains Capitals gains are a third source of unearned income Gross Domestic Product (GDP): value of all final goods and services produced as the wealth and income of a country o Top 10 wealthiest US citizens have a higher net worth and many countries’ GDPs o These people got rich from creating or buying businesses, managing the investments, and benefitting the increased value of their investments Capital asset: almost everything you own or use for personal or investment purposes o Includes home, stocks, bonds, mutual funds, etc. o Basis = the price paid for a capital asset When you resell the asset, you get a capital gain, capital loss, or a break even o Capital gain = Sales Price – Basis – Selling Cost Not necessary to sell an asset to reap the rewards of owning a capital asset o Own property and investments where an active marketplace exists o If market exists, you can theoretically cash in at any time VIII. Other Income- Government Benefits Government benefits help you survive difficult times (unemployment, disability, sickness, death of breadwinner) until you can improve your financial situation Unemployment Benefits: cash payments made to those who have recently lost their jobs due to no fault of their own o Amount and duration influenced by how much heyou earned before losing job o Benefits last for less than 26 weeks o Sustain life but not lifestyle Fringe benefits: benefits provided to employees as part of overall compensation package o Health insurance, retirement savings, sick/ vacation pay o If you lose your job, you lose these Medicaid: health insurance program for low-income individuals Supplemental Nutrition Program: provides low-income homes money to buy food (food stamps) Temporary Assistance for Needy Families: supplemental income to very-low-income unemployed households, usually with kids United Way crated 2-1-1 hotline to help people learn what resources are available to them Earnings history: record of how much taxable income you earned for each year of your life since adulthood o Some government benefits influenced by this o Higher earnings history = greater government benefits Social Security: benefits for retirement, disabled, or if someone with young kids dies o Dependent on earnings history o Pay-as-you-go program: collect current taxes to pay current benefits o Currently, 3 workers support 1 beneficiary o By 2030, only 2 workers will support 1 beneficiary o Program will only survive if taxes increase, benefits decrease, or demographic trends reverse (i.e. higher birthrates, lower life expectancies) Medicare: federally run health insurance program for those age 65+ o Does not take into account your earnings history