Personal finance 4
Personal finance 4 AAEC 2104
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This 6 page Class Notes was uploaded by Savah Notetaker on Friday September 23, 2016. The Class Notes belongs to AAEC 2104 at Virginia Polytechnic Institute and State University taught by Dr. White in Fall 2016. Since its upload, it has received 3 views. For similar materials see Personal Financial Planning in AAEC at Virginia Polytechnic Institute and State University.
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Date Created: 09/23/16
Personal finance Cash management: Liquidity vs savings o liquidity = rapid cash needs regular bills and expenses enough to meet usual needs o Savings = emergency needs Unexpected expenses and situations 36 months living expenses This is your “financial net” Build a checking account o Enough money for needs o Know your monthly budget o Direct deposit of paycheck Building emergency funds net o Automatic savings From checking to saving Take home pay Checking Saving Normal expenses Pay debt Invest Gifts and donations Where to keep cash Not recommended to keep in cash Checking account (demand deposit) o Noninterest bearing o Interest bearing Savings account (time deposit) Money market deposit accounts o Similar to savings account Variable rate of return, usually slightly higher May have higher minimum balances and limits on withdrawal Certificate of deposit (CDs) o “Loan” to the bank at stated interest rate and maturity o Early withdrawal penalties o Good place to “park” your money until you decide o “Laddering” your CDs Nice way to manage emergency funds Invest in series of different maturities Renew cash CD for longest maturity Simple CD ladder $4,000 1,000 in 3 month 1,000 in 6 month 1,000 in 9 month 1,000 in 1 year Every 3 months you have a CD maturing Renew them all after 1year maturity In theory, higher returns for longer maturities Laddering provides higher average returns Money market mutual fund (MMMF) Mutual fund investing in very safe debt instruments May have limited check writing abilities Fees involved Asset management accounts AKA “sweeps account” Comprehensive financial account o Checking, credit card, money market More aggressive account Savings bond Very safe, low return, low liquidity Various denominations (2510,000) Electronic version pay face value Get face value Comparing accounts Rate of return o Annual percentage yield (APY) Always compare after tax APY After tax APY = pretax APY * (1MTH) In emergencies cash is king! US series EE bonds (AKA Savings Bonds) Very safe, low return, low liquidity Various denominations (2510,000) Electronic version – pay full price Comparing Safety o FDIC or FSLIC up to 250,000 per depositor May take a while to get your money MMMFs not insured, but fairly safe Also look at convenience, fees, customer service, etc Institutions Commercial banks o Full service, many locations o Online banking Convenience vs fees Savings and loans (S&L) and savings banks o Primarily home loans (70%) and savings account Credit unions o Member owned o “Not for profit” = profits go to shareholders o Usually higher rate of return, lower interest rate Online deposit accounts o Look for reliable companies Brokerage firms Why do we pay income taxes? Help fund national, state, local efforts o Cost of running the government o Roads, bridges, schools, libraries, etc. o National defense armed forces o Police/ fire protection o Government programs Welfare (transfer programs: transfers money to those who are struggling), farm programs, social interest (also transfer), etc. Your goal should be to MAXIMIZE your aftertax income Marginal vs Average tax system Us uses progressive tax system o Tax rate (%) increases as your income increases o High income households pay a higher percentage Everyone starts out paying the same rate o Bill Gates pays same rate as you of the first portion of income Marginal tax rate taxes owed on next dollar you earn Average tax rate total taxes/taxable income Take home pay Gross income minus: o Federal income taxes withheld o State taxes withheld o FICA (social security and Medicare) &.65% Exemptions Claim 0 = withheld max o Less take home pay o Large tax refund check Claim more = withheld less o More take home pay o Small tax return/write a check to government Al’s tax tips You can easily do your own taxes Get instruction book READ instructions Use www.IRS. gov for specific questions Some tax software is okay o But would compare to the “byhand” results Round off to nearest $1 Document you numbers Check math When in doubt, read instructions! Keep copies of your calculations General info Determine if you have to file o Single, not dependent Gross income >~$10,300 As dependent o Unearned income>$1,050 (didn’t actually work for ex: interest or renting a bedroom out) o Or earned income >6,300 Determine which form to use o 1040 EZ o 1040 A o 1040
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