Annuity- a series of equal payments made at fixed time intervals for a specified number of periods Future value The value your invested money will grow to, earning a specific rate of interest over a given time period – compounding. Present Value The amount needed today to invest at a specific rate of interest over a given time period to accumulate the desired future amount Balance sheet equation- assets= liabilities + net worth Assets (Fair market loans and debts) Liabilities Net Worth (Payoff amount of value of assets) NET WORTH (Your equity position) **Your net worth right now is probably negative**
Solvency If your net worth is positive, you are solvent and have enough asset to cover your financial obligations. If you’re insolvent, you don’t have enough assets to cover your financial obligations. It’s normal for a 20 year old to be insolvent, but not a 40 year old Income and Expense statement Total income- Total expenses= cash surplus or cash deficit Income: Cash IN WAges and salaries Bonuses Interest and dividends Child support Expenses: Cash OUT Fixed Rent or mortgage payment cable TV Insurance Variable Dry cleaning Recreation 2 Eating out Debt Service Ratio
Indicates ability to repay loan obligations promptly with before-tax income. Affects PICO score Total monthly loan payments divided by monthly income The Budgeting Process Estimate income Estimate expenses Finalize the cash budget Deal with deficits Economics of Income Taxes Federal income taxes are assessed according to a progressive tax structure the larger the taxable income, the higher the tax rate The next higher rate applies only to the additional income in that bracket and not to the entire income Tax brackets, standard deductions, and personal exemptions are indexed to inflation.
Tax rate for each bracket is called marginal tax rate Filing status- a factor in determining amount of taxes paid TAxes are due on a pay-as-you-go basis Employer withholds taxes all year Self employed deduct and pay taxes Taxable income- is the amount of our income on which we calculate taxes owed Tax credits- directly reduce the amount of taxes owed Deductions- subtracted from GAG and reduce taxable income Earning Interest on Your Money Simple interest- interest paid only on initial deposit– no compounding Compound interest- interest paid at set intervals and added back to principal.
Compounding occurs semiannually. Nominal rate- named or stated interest rate If interest is compounded more frequently than once a year, the effective rate will be greater than the nominal rate of interest. Interest= principle x rate x time I. E: xx . 05 x 1 -$50 Semi annual compounding +1/2) ‘non How much interest will be earned? Amount of interest earned depends on: Frequency of compounding Balance on which interest is paid Interest rate paid A Variety of Ways to Save Certificates of Deposit (CDC)- Funds remain on account for a given time period. Early withdrawal incur an interest penalty.
Treasury bills sell at increments of 1,000; but there is a discount for buying them. Leasing a car Lower monthly payments More expensive car for same payments Lower down payment When leasing a car, you pay for it’s use during a period of time. At the end of the lease, you have nothing. Lease payment calculation based on: Calculated price of Forecasted residual value at the end of the lease Money factor (finance rate) on lease (money factor * 2400= interest rate) Lease term PIT- Principal, interest = goes to the lender; taxes, insurance= goes to an escrow account
