Personal Finance Working Textbook

Income and Expenses

Lesson 1 - Income - Revenue

The term income is often used interchangeably with the term revenue; however, the two terms mean different things.  Revenue is typically used by companies on their financial statements.  In general terms, revenues are the cash earned for goods and services before expenses are paid.  Money earned by companies through investments is not considered to be revenue because it isn’t part of the main operations.  For companies, income is the money left after all expenses have been paid and other income has been added and it is generally called “net income”, or sometimes, “net profit.”   

Lesson 1 - Income - Personal Income

People call the money they receive income and not revenue.  Personal income is money that is received for performing work, providing services, money received from investments, or through other types of
incidences, such as child support.  Income is referred to either earned income or unearned income.  All income is taxable by the Internal Revenue Service (IRS).  The exception to this is income received from others living in the same house for doing things such as babysitting siblings, mowing the lawn, or
receiving allowance for completing chores.  While this is a form of income, the IRS doesn’t require taxes to be paid on it. 

Lesson 1 - Income - IRS

The IRS is the revenue service for the federal government of the United States.  The IRS is a bureau of the Department of Treasury.  The IRS collects revenue by collecting taxes from income earned and unearned by people and businesses.  The IRS is also responsible for enforcing tax law. 

Lesson 1 - Income - Earned Income

Earned income is money received from performing work or providing services.  Money can be in the form of cash or an in-kind object.  An in-kind payment is when a person receives an item in exchange for work performed such as receiving room and board for providing cleaning and childcare services. 
In-kind payments are considered to be of equal value for the work performed.  In-kind payments are taxable in states where income is taxable and as federal income taxes.

Lesson 1 - Income - Unearned Income

Unearned income, sometimes referred to as passive income, is income that is received when work isn’t performed and services are not provided.  Some examples of unearned income are a cash gift by extended family or friends, retirement benefits, dividends and interest from investments, and child
support.  Another example of unearned income would be when a person owns a house and rents it out.  If they do not actively participate in caring for the property and hire others to provide maintenance, the rent payment received after paying all expenses is considered unearned, or passive, income.

Exercise 1.1

Complete the following exercise by indicating if the example on the left is either earned income (E),
unearned income (U), or income that is not taxable (N).  

Exercise 1.1 - Question 1

Remember, earned income is money received for performing work or providing services, unearned income is received when work isn't performed or services or not provided, and money received as a gift is income that isn't taxable.

  • E - Earned income
  • U - Unearned income
  • N - Income that is not taxable

Complete the following exercise by indicating if the example on the left is either earned income (E),
unearned income (U), or income that is not taxable (N).  The first one is completed for you as an example.

Money received from working at a fast-food restaurant.      __E___

1.  Wages received for helping a neighbor clean their house.  

 

Exercise 1.1 - Question 2

Remember, earned income is money received for performing work or providing services, unearned income is received when work isn't performed or services or not provided, and money received as a gift is income that isn't taxable.

  • E - Earned income
  • U - Unearned income
  • N - Income that is not taxable

Receiving a video game for mowing and raking the lawn of a friend.

Exercise 1.1 - Question 3

Remember, earned income is money received for performing work or providing services, unearned income is received when work isn't performed or services or not provided, and money received as a gift is income that isn't taxable.

  • E - Earned income
  • U - Unearned income
  • N - income that is not taxable

Interest earned by a bank for money in a savings account.

Exercise 1.1 - Question 4

Remember, earned income is money received for performing work or providing services, unearned income is received when work isn't performed or services or not provided, and money received as a gift is income that isn't taxable.

  • E - Earned income
  • U - Unearned Income
  • N - Income that is not taxable

Birthday money received from a parent living in the same house.

Exercise 1.1 - Question 5

Remember, earned income is money received for performing work or providing services, unearned income is received when work isn't performed or services or not provided, and money received as a gift is income that isn't taxable.

  • E - Earned income
  • U - Unearned income
  • N - Income that is not taxable

Child support money received.

Exercise 1.1 - Question 6

Remember, earned income is money received for performing work or providing services, unearned income is received when work isn't performed or services or not provided, and money received as a gift is income that isn't taxable.

  • E - Earned income
  • U - Unearned income
  • N - Income that is not taxable

Cash received from a person in your neighborhood for walking their dogs.

Exercise 1.1 - Question 7

Remember, earned income is money received for performing work or providing services, unearned income is received when work isn't performed or services or not provided, and money received as a gift is income that isn't taxable.

  • E - Earned income
  • U - Unearned income
  • N - Income that is not taxable

Cash received for babysitting younger siblings.

Exercise 1.1 - Question 8

Remember, earned income is money received for performing work or providing services, unearned income is received when work isn't performed or services or not provided, and money received as a gift is income that isn't taxable.

  • E - Earned income
  • U - Unearned income
  • N - Income tax is not taxable

A gift card received for helping a person move.

Exercise 1.1 - Question 9

Remember, earned income is money received for performing work or providing services, unearned income is received when work isn't performed or services or not provided, and money received as a gift is income that isn't taxable.

  • E - Earned income
  • U - Unearned income
  • N - Income that is not taxable

Grant money received to go to college.

Exercise 1.1 - Question 10

Remember, earned income is money received for performing work or providing services, unearned income is received when work isn't performed or services or not provided, and money received as a gift is income that isn't taxable.

  • E - Earned income
  • U - Unearned income
  • N - Income that is not taxable

A bag of oranges received for a bag of avocados. 

Exercise 1.2

Matching terms with definitions:

  • Earned Income
    Money received for performing work or providing services.
  • In-Kind
    An item received in exchange for work performed or services provided.
  • Net Income
    The money that remains after expenses are subtracted from revenues.
  • IRS
    The governmental agency that receives revenue through the collection of taxes.
  • Revenue
    Cash generated from the sales of goods and services by companies.
  • Unearned Income
    Money received when work isn’t performed or services are not provided. It is sometimes called passive income.

Lesson 2 - Expenses - Fixed Expenses

Expenses are costs spent on goods and services.  Expenses are either fixed, variable, or discretionary.  Fixed expenses are costs that do not change from month-to-month.  These are costs that must be paid even if a person doesn’t have the money to pay for them or their income decreases.  Several examples of fixed expenses are payments for rent or mortgage, an auto loan, or an auto insurance bill.  A mortgage could be refinanced for a lower monthly, a person could move to place with a lower rent payment, and the terms for auto insurance could be changed, but changes to these items is not easily done. 

 

Lesson 2 - Expenses - Variable Expenses

Variable expenses are those items that do not have to be purchased and typically varies with a person’s income and/or activity.  Variable expenses increase and decrease according to a person’s wants and desires, but they are still needed.  For example, a person may spend $50 a week for groceries, but the cost of groceries varies on a person’s preference.  Additionally, while a person can’t go without eating, and therefore they must spend money on groceries, a person can adjust their food costs according to their income. 

Variable expenses can also fluctuate with activity.  For instance, most cell phone bills have a set cost each month, however, that cost can increase according to usage outside of the stated plan.  If a person travels internationally and adds the international plan for a month, their cell phone bill can increase from $30 to $120 depending on the option they choose.   

Lesson 2 - Expenses - Discredtionary Expenses

What about costs for eating out, going to the movie theater, or trendy clothes?  These costs are called discretionary expenses.  Discretionary expenses are for things you don’t have to spend money on to live.  Clothes are necessary, but a person who has a tight budget can shop for less expensive clothes than the trendy ones.  Going to the movie theater and eating out are optional activities.  They are fun, but not necessary to live. 

Lesson 2 - Expenses - Fixed, Variable, Discredtionary Expenses

The terms “fixed” and variable” are commonly used with business expenses.  When talking about personal finances, most books and financial institutions use the terms “expenses and discretionary spending.”  In these instances, expenses are those that must be paid such as an auto or college loan. 
Discretionary spending are those expenses that are considered optional, such as a cell phone.  A cell phone may not seem optional, but from a financial institution’s perspective, a person could choose not to have a cell phone if their income didn’t support that expense.   

Exercise 2 - Crossword Puzzle

Match the definitions below with the terms using the crossword puzzle as a guide.  Drag and drop the answers into the correct spot below the crossword.

Across Definitions:

1.  An expense that is the same cost each month and must be paid.
2.  Another word for expenses and identifies the price of an item.
3.  An expense that doesn’t have to be incurred.  It’s another word for discretionary.
4.  The governmental agency that receives revenue through the collection of taxes.
5.  Money received when work isn’t performed or services are not provided.  It is sometimes called
      passive income.
6.  An expense that is still necessary, but can change from month to month.
7.  The money that remains after expenses are subtracted from revenues.
8.  Money received for performing work or providing services.

Down Definitions:

9.  Expenses that are optional, such as eating out.
10.  What a financial institutional calls the money a customer borrows.
11.  Wages and money earned from working.
12.  An item received in exchange for work performed or services provided.
13.  The cost or money spent on a something.
14. Cash generated from the sales of goods and services by companies.

Note:  When the answer is “net income,” only the word “net” is used in the puzzle.

 

  • Fixed
  • Costs
  • Optional
  • IRS
  • Unearned
  • Variable
  • Net
  • Earned
  • Discretionary
  • Loans
  • Income
  • In-kind
  • Expenses
  • Revenue

Lesson 3 - Savings

Savings is putting money aside for use at some point in the future.  Savings is beneficial for many reasons.  It opens up purchase and/or investment opportunities in the future, meets financial goals, allows for payment of expenses when income is decreased or stopped for a period of time, earns money while not being used, and provides a source of income for retirement. 

Lesson 3 - Savings - Shareholders

The most common way of saving money is using a savings account at a financial institution, which comes in different forms.  Savings accounts are also called deposit accounts.  It’s important to note that credit unions refer to savings accounts as “share” accounts.  To open an account in a credit union, a person has to qualify for membership of the credit union.  Different credit unions have different membership qualifications.  This membership means each account holders at their credit union owns a “share” in the credit union.  Members are also considered shareholders of that credit union because they own shares in the credit union.  Every financial institution has a variety of savings products, which typically includes a regular savings account, money market deposit accounts, certificate of deposits (CD), automatic or club savings accounts, and, IRA savings accounts.  Each type of savings account requires a minimum balance and pays varying interest rates.  Banks call the rate used to earn money in deposit accounts “interest rates”; whereas, credit unions call the rate for deposit accounts a “dividend rate”.  A dividend is the money paid by a company to their shareholders.

Lesson 3 - Savings - Regular Savings Accounts

Regular savings accounts usually have the smallest required minimum balance and pays the smallest interest.  Money market deposit accounts require a larger minimum balance and pay more interest.  As long as the minimum balance is maintained in these two type of savings accounts, a person can
withdraw and deposit freely.  However, it’s important to note that Federal law requires financial institutions to charge a fee once a savings account exceeds six (6) withdrawals in a given month. 

Lesson 3 - Savings - CDs and Maturity Dates

CDs function differently than regular savings and money market deposit accounts.  Deposits are a lump sum, deposited once, and held in the CD savings account for the agreed upon term.  The deposited money must remain in the account until it matures in order to receive all of the earned interest.  The
maturity date is the date at the end of the term.  If any or all of the money in the CD is withdrawn early, all of the interest earned is forfeited.  CD terms range from 3 to 60 months, or longer.  Interest rates tend to be higher for CD accounts.  The interest rate varies according to how much a person deposits for a set term.  The illustration on the next slide shows what a CD product chart looks like:

Lesson 3 - Savings - CD Product Chart

As you can see from Illustration 3.1, if a person deposits $1,000 into 3 Month CD, the interest rate would be .30%; whereas, if they deposit $1,000 into a 3 Year CD, the interest rate would be 1.05%.  Depositing a larger sum of money for a longer period of time earns more money. 

Lesson 3 - Savings - Club Accounts

Another type of savings account that some institutions pay higher interest rates are club accounts, which are basically automatic savings accounts.  These accounts either withdraw a predetermined amount of money from a checking account or an automatic paycheck deposit.  The amount withdrawn is set by the account holder; however, there is sometimes a minimum and/or maximum monthly deposit amount required.  These accounts also require the account holder to leave all deposited funds in the account for the agreed upon term, which is normally a year.  There are a whole variety of club accounts to meet the wide variety of needs of consumers; Christmas/Holiday, Vacation, and Wedding to name a few.

 

Lesson 3 - Savings - Early Withdrawal Penalty

The last savings account discussed for this Chapter is an IRA account,  which will be brief as more information is shared in the Investments Section.  An IRA savings account requires a lump sum deposit and it is used for retirement.  Once money is deposited into an IRA account, it cannot be withdrawn early without losing the interest earned and  paying penalties, called an “early withdrawal penalty.” 

 

Lesson 3 - Savings - Financial Institutions Pay for Deposits

Why do financial institutions pay people for their deposits?  Why do the rates vary among institutions?  In simple terms, financial institutions use the money deposited into savings accounts in their institution to fund the loans they give to people for houses, autos, credit cards, etc.  Financial institutions go through cycles of needing more or less deposit funds.  They use interest rates to attract and dissuade people from depositing money.  They will offer higher interest rates when they need more deposits and lower interest rates when they need fewer deposits.  

Lesson 3 - Savings - Liquid and Laddering

An astute investor will use a variety of savings accounts.  Sometimes money is needed quickly.  When that is the case, it’s good to have money in a savings product that is liquid, or easy to get rather quickly such as within a week.  Since money that is in a regular savings account doesn’t earn much, it is a good idea to also have money in savings accounts that earn a higher interest rate, but require a longer commitment.  One way to have multiple CDs without having maturity dates at the same time is to ladder the CDs accounts.  Laddering means opening several CDs with staggered maturity dates.  For example, if a person had $8,000 to invest in CDs, but didn’t want to tie up all of the money for an extended period of time, they open four CDs for a $2,000 each.  They would open a 6-month, 12-month, 18-month, and a 24-month CD.  Since CDs are not considered liquid, the investor would have to be okay with waiting six months for a CD to mature.  In this example, if the 6-month CD matures and the money isn’t needed, the CD could be allowed to automatically renew for another 6-months.  This would keep the CD maturity dates laddered and the money available in a fairly reasonable time frame.

 

Exercise 3.1

Fill in the blanks.

1.  Putting money aside for the future events is called .

2.  Name three benefits to having a savings account: , , .

3.  A  is used to save money at a financial institution.

4.  Credit unions refer to savings accounts as  account.

5.  Members at credit unions are known as .

6.  Most financial institutions pay  for deposits into savings accounts using an   to determine how much they will pay.

7.  Money paid to a shareholder of a company is called .

8.  A person would pay a penalty called    for withdrawing money before the specified time on an IRA.

9.  Financial institutions need deposits in order to fund  to consumers.

10.  Quick access to money means it is .

11.  In order to have multiple CDs maturity dates, a person would  the CDs.

12.  Determining the upcoming worth of an investment is called the  .

13. Determining the future value of an investment can be done by using an online .

14.  Savings should be  in order to be prepare for all circumstances.

Exercise 3.2

Using the following CD product chart, fill in the blanks below.

1.  The interest rate for a 3-month CD with a $10,000 deposit would be  %.

2.  What CD term would a person need to select to get a rate of 2.20%? 

3.  How much money would a person need to invest to get a rate of 2.05% for a 4-year term? 

4.  Susie chose a 3-year CD that has an interest rate of 1.75%.  Upon maturity of the CD, she has a balance of $52,671.21.  How much was her initial deposit?   How much interest did she make?    

Lesson 4 - Giving

Giving is freely giving something to someone else without the expectation of anything in return.  This can be done through giving money to a non-profit organization such as a church or the United Way, giving something of material value to a person in need or to a charitable organization such as a thrift store, or giving time to help others.

The decision to give is an individual decision and cannot be determined by looking at what others give because incomes, expenses, and available personal time vary.  How much should a person give?  Many live by the Biblical example of a 10% tithe while others gauge how much to give through personal preference.  Sometimes giving money isn’t possible due to very low income or no job, but during those times, a person may still be able to give their time. If one were to go to five different people and ask the best way or how much to give, they would most likely get five very different answers.  Regardless how much a person gives, giving has positive emotional benefits.  There is a sense of accomplishment when a person in need can be helped.

This lesson, however, focuses on the monetary aspect of giving.  Giving money or material items of value can have a tax benefit for those who are able to claim deductions, which isn’t usually the case for those who haven’t purchased a house and had kids.  However, understanding the benefit of deductions for charitable donations is part of personal finance. 

Lesson 4 - Giving - Itemizing

Claiming personal deductions on a tax return means itemizing those deductions.  Itemizing deductions is listing all allowable deductions in order to lower one’s taxable income.  Lowering taxable income means lowering how much is owed in taxes, or lowering a person’s tax liability.  A tax liability is how much tax is owed.  Personal deductions, such as donations to non-profit organizations can reduce a person’s tax liability. 

Each year, when tax forms are completed, people can choose from a 1040EZ or a 1040.  Basically, the 1040EZ is for those who are not itemizing their deductions and the 1040 is for those who are itemizing their deductions. Once a person is no longer a dependent of someone else such as their parents, they can begin to claim the standard deduction, which can change from year to year.  In simple terms, a standard deduction is the amount of money that can be deducted from the taxes owed by a person or married couple.  For 2015, the standard deduction for a single taxpayer was $6,300. 

Many people do not know when to begin itemizing their deductions. Itemizing deductions would begin when there are more itemized deductions than the standard deduction.  Itemized deductions include home mortgage expenses, charitable donations, property taxes, state income taxes, medical expenses, etc.  For charitable donations, it not only includes money given but items of value donated to a non-profit such as clothing and toys.

Lesson 4 - Giving - Example 4.1

Suppose:  Susie is a freshman in college and has a job making $10,000 a year.  It’s February and she is sitting down to do her taxes.  Last year she gave $500 to a non-profit and some old clothes to a local charity worth $100.  She doesn’t have any other deductions.  Her parents are claiming her as a dependent on their taxes.  Which tax form would Susie use?  If the single taxpayer deduction for the year is $6,300, can she deduct her charitable expenses?

Answer:  Susie would use the 1040EZ form.  Since her parents claim her as a dependent, Susie cannot claim the single taxpayer deduction.  Additionally, if Susie was able to claim herself, her $600 in charitable deduction does not exceed the single taxpayer deduction of $6,300.

Lesson 4 - Giving - Example 4.2

Suppose:  Susie lives on her own, claims herself as a dependent, purchased a house, and makes $40,000 a year.  It’s March and she is sitting down to do her taxes.  Last year she gave $4,000 to a non-profit and some personal items to a local charity worth $700.  She volunteered 100 hours at a non-profit animal shelter, which she thinks is worth $10 an hour, or $1,000.  She paid $1,500 on home mortgage insurance and $1,100 in property taxes.  She doesn’t have any other deductions.  How much are her deductions?  Is it enough to itemized if the single taxpayer deduction for the year is $6,300?  Which tax form would she use if she claims her itemized deductions?

Answer: Susie’s deductions total $7,300 ($4,000+$700+$1,500+$1,100).  Susie cannot claim time that is volunteered to a non-profit, only money and items of value.  Since single taxpayer deduction for the year is $6,300 and her itemized deductions total $7,300, she does have enough to itemize and claim her deductions.  She would use the 1040 if she decides to use her itemized deductions.

Lesson 4 - Giving - Non-profits

Giving money to a non-profit, for the purposes of tax deductions, is only deductible if given without receiving anything in return.  For example, if a person gives $25 to the Girls Scouts as a donation and doesn’t receive anything in return, it can be used as a tax deduction.

However, if a person gives $25 to the Girl’s Scouts and receives cookies in exchange, that $25 is not deductible.

Giving money to non-profits such a church or charitable organization is an important aspect of life and the IRS has sought to allow an economic benefit for those who do.  It’s important to remember there is more than an economic benefit. 

Exercise 4 - True or False Questions 1 - 7

  • Itemizing deductions is listing all non-allowable deductions in order to lower one’s taxable income.
  • A tax liability is the amount of tax a person or company owes.
  • When itemizing deductions for taxes, a person would use the 1040 tax form.
  • A person can use volunteer hours at a charitable organization as tax deduction.
  • There are many different attitudes towards how much to give.
  • There are positive emotional benefits to the giver when they give to others.
  • Volunteering one’s time to help others is a form of giving.

Exercise 4 - Question 8

  • Giving money to a person out of force.
  • Paying a bill that is due.
  • Walking a neighbor’s dog in exchange for a bag of oranges.
  • Freely giving something to someone without expecting anything in return.Freely giving something to someone without expecting anything in return.
  • All of these.

Which of the following describes giving:

Exercise 4 - Question 9

  • 1040
  • 1004EZ
  • 1040EZ
  • 1014EZ

The simple tax form used when a person isn’t itemizing their deductions is  called:

Exercise 4 - Question 10

  • $4,400
  • $4,450
  • $4,475
  • $3,900

A person has the following itemized deductions:  $500 for mortgage interest; $900 for property taxes; $3,000 donations to a church; and $50 for buying popcorn from the Boy Scouts.  How much is their allowable tax deductions:

 

Quiz - Section 1 - True or False Questions 1 - 10

  • The term ‘revenue’ is typically used to describe personal income.
  • Variable expenses are those that are the same each month.
  • Savings is putting money aside to use the future.
  • Itemizing deductions for tax purposes is listing all allowable deductions.
  • The IRS is a charitable organization for homeless people.
  • Discretionary expenses are not the same as variable expenses
  • Dividends are paid by a company to their employees as wages.
  • Giving is being forced to give something to someone without an expectation of anything in return.
  • An in-kind payment is when a person receives something of value in exchange for work performed.
  • The maturity date on a loan is when the loan begins.

Quiz - Section 1 - Question 11

  • Wages received from working at the local fast-food restaurant.
  • Interest earned from money in a CD.
  • Cash received for raking a neighbor’s lawn.
  • Money received for helping a friend move.

Which of the following is NOT an example of earned income:

Quiz - Section 1 - Question12

  • Costs that change from month-to-month.
  • Buying an expense cost.
  • Costs that do not change from month-to-month.
  • a and b above
  • None of the above.

Which of the following is the definition of fixed expenses:

Quiz - Section 1 - Question 13

  • Money due for stopping piano lessons.
  • Money due for withdrawing money from a regular savings account.
  • Money due for not paying taxes on time.
  • Money due for withdrawing money out of an IRA before the specified time.

What is an early withdrawal penalty:

Quiz - Section 1 - Question 14

  • Buying a book from a non-profit organization.
  • Giving money to a local church.
  • Volunteering time at a local library.
  • Paying for a meal for a friend who is hungry.

Which of the following in NOT an example of giving:

Quiz - Section 1 - Question 15

  • Produced
  • Created
  • Passive
  • Generated

What is another word for unearned income:

Quiz - Section 1 - Question 16

  • Gift account
  • Share account
  • Club account
  • Reserves account

What is another name for a savings account at a credit union:

Quiz - Section 1 - Question 17

  • Utility bills
  • Eating at a fancy restaurant
  • Rent payment
  • Groceries

Which of the following is an example of a discretionary expenses:

Quiz - Section 1 - Question 18

  • 1014EZ
  • 1040EZ
  • 1014
  • 1040

If a person wants to claim their charitable donations on their taxes, which form would they use:

Quiz - Section 1 - Question 19

  • Earned income
  • In-kind income
  • Unearned income
  • Passive income

19. A person received a baseball mitt in exchange for cleaning a neighbor’s pool.  What type of income would this be:

 

Quiz - Section 1 - Question 20

  • Fixed expenses
  • Variety expenses
  • Variable expenses
  • Future expenses

Expenses that vary in cost, but are needed each month are called:

Quiz - Section 1 - Question 21

  • A regular savings account where money can be withdrawn in a day.
  • A CD where money can be withdrawn in a day, but all interest is lost.
  • An IRA account for retirement.
  • A club account where money can be withdrawn in a day, but all interest is lost.

Which of the following describes a savings account that is liquid:

Quiz - Section 1 - Question 22

  • Internal Routing Service
  • Installment Revenue Service
  • Income Revenue Service
  • Internal Revenue Service

What does IRS represent:

Quiz - Section 1 - Question 23

  • To use a variety of products for savings.
  • To only use one savings account.
  • To open five CD accounts.
  • To open more than one checking account.

What does it mean to diversify with savings:

Quiz - Section 1 - Question 24

  • Opening four 6-month CDs on the day.
  • Opening a 24-month CD.
  • Opening a 6-month, 12-month, 18-month, and 24-month CD on the same day.
  • None of these represent laddering CD accounts.

Which of the following represents laddering CD accounts:

Quiz - Section 1 - Question 25

  • Knowing others in need have been helped.
  • Possibly lowering one’s tax liability.
  • Feeling a sense of gratitude.
  • All of these are benefits of giving.

Which is the best benefit of giving:

Assets ~ What is Owned

Lesson 5 - Assets

An asset is something of value.  It can be a talent, a friend, a material possession, etc.  Think about something or someone who is of value.  Assets, in general, are different for different people. 

In the world of personal finance, an asset is an item of value that is owned by an individual; however, not all assets are not the same.  There are fixed, tangible, short-term, and long-term assets.

Lesson 5 - Assets - Personal Net Worth

Assets are part of a person’s personal net worth.  Understanding what is owned (assets) is one of part of the equation for a person to understand their net worth.  Measuring the personal net worth indicates the financial health of a person.  To determine the personal net worth of a person, total liabilities are subtracted from total assets.  Why is this important?  Because if a person’s net worth is a negative, then it shows they have too many debt obligations.  In other words, they wouldn’t have enough assets to sell off in order to pay all of their liabilities.  Liabilities are debts that are owed.  Liabilities are discussed in further detail in Section 3.  To get started, let’s go over the definition of a fixed asset.  What are fixed assets? 

Lesson 5 - Assets - Fixed Assets

Fixed assets are tangible items that are held for a long period of time and are not expected to be sold, or converted, to cash.  Examples of fixed assets would be a house, automobile, personal property, etc.  Personal property is something that can be moved from one place to another.  Instances of personal property are jewelry, computers, furniture, stocks, bonds, clothing, antiques, retirement funds, CDs, books, video games, musical instruments, etc. 

Some fixed assets may increase in value over time such as a house, while some decrease in value over time such as a car.  The value of other fixed assets can fluctuate, such as assets tied to the price of commodities.  For example, the value of jewelry made of gold or silver will increase or decrease with the price of gold or silver in the commodities market. 

Lesson 5 - Appraisal

It is important to determine an accurate value for each an asset.  Appraisals determine the value of an item and can be used to determine the value of a house, jewelry, antiques, paintings, etc.  An appraisal is when an expert gives an estimated value of property or goods.  A car’s value can be determined through using online websites such as the National Automobile Dealers Association (NADA) website.  Personal property value is a bit tricky as most personal property decreases, or depreciates, in value over time.  While some personal property items can be appraised, it is difficult to give a value to everyday items such as clothing.  After determining the value of items through an appraisal, the remaining cash value of all personal property for one person is roughly $5,000 or $10,000 for a two-adult household. 

Exercise 5.1

List the assets you own.  

Exercise 5.2

  • Asset
    Something of value.
  • Fixed Asset
    A tangible item typically held for longer than one year.
  • Personal Property
    An item that can be moved from one place to another place.
  • Liability
    That which is owed.
  • Appraisal
    An estimated value of property or a good by a expert.
  • NADA
    National Automobile Dealers Association
  • Personal Net Worth
    That which indicates a person’s financial health.

Lesson 6 - Short~Term Assets

A short-term asset is an asset that will be sold, or converted to cash, within a year.  Examples of short-term assets are cash, a CD with a maturity date that is due within a year, marketable securities that can be sold within a year, prepaid rent or insurance, etc.  Short-term assets are also known as current assets.

Lesson 6 - Short~Term Assets - Prepaids

A prepaid is when something is paid for before it becomes due.  For example, some people will pay for their auto insurance for six months or a year at a time in order to get a significant decrease in their insurance rates.  The prepaid insurance then becomes a short-term asset.  The value of the prepaid decreases each month the asset is used.  If a person were to cancel their insurance three months into their policy term, they would receive the difference between the time they used the insurance and the time that remains.

 

Lesson 6 - Short~Term Assets - Example 6.1

Suppose:  On January 1, 2017, Jennifer paid $1,200 for a 12-month auto insurance policy that goes from January 1, 2017, to December 31, 2017.  If Jennifer cancels the policy on June 30, 2017, how much would she get back from the insurance company?

Answer:  $600.  Jennifer’s prepaid insurance is valued at $1,200 for 12 months, or $100 per month ($1,200 / 12 = $100).  If Jennifer cancels her policy effective June 30, 2017, she would have six remaining months that were prepaid.

 

Lesson 6 - Short~Term Assets

An asset that isn’t originally a short-term asset can become a short-term asset as time passes.  For instance, a 3-year CD would not be a short-term asset when initially started; however, once the maturity of the 3-year CD is within a year, it becomes a short-term asset.

Lesson 6 - Short~Term Assets - Example 6.2

Suppose:  On January 1, 2017, Jennifer paid $1,200 for a 12-month auto insurance policy that goes from January 1, 2017, to December 31, 2017.  What is the value of Jennifer’s prepaid insurance policy on April 1, 2017?

Answer:  $900; As shown in Example 6-1, Jennifer’s prepaid insurance is valued at $100 per month.  As of the end of March, Jennifer used three months of insurance and has nine months remaining.  $1,200 - $300 = $900.

 

Exercise 6 - True or False Questions 1 and 2

  • A short-term asset is an asset that can be sold, or convert to cash, within 24 months.
  • A prepaid asset is when a bill is paid before it becomes due.

Exercise 6 - Question 3

  • Existing asset
  • Prepaid asset
  • Current asset
  • Present asset

A short-term asset is also known as:

Exercise 6 - Question 4

  • Prepaid asset
  • Long-term asset
  • Fixed asset
  • Appraised asset

George makes a deal with his landlord to pay for all of his rent for the next year for a reduce monthly rate.  His landlord agrees to accept $500 per month.  George pays for 12 months of rent on June 1, 2013, with $500 going towards June’s rent. 

What type of asset does George have with paying his rent ahead:

Exercise 6 - Question 5

  • $500
  • $3,000
  • $6,000
  • $8,000

George makes a deal with his landlord to pay for all of his rent for the next year for a reduce monthly rate.  His landlord agrees to accept $500 per month.  George pays for 12 months of rent on June 1, 2013, with $500 going towards June’s rent. 

How much rent did George pay to his landlord:

Exercise 6 - Question 6

  • $6,000
  • $500
  • $3,000
  • $2,500

George makes a deal with his landlord to pay for all of his rent for the next year for a reduce monthly rate.  His landlord agrees to accept $500 per month.  George pays for 12 months of rent on June 1, 2013, with $500 going towards June’s rent. 

On December 31, 2013, what is the value of George’s prepaid asset:

Exercise 6 - Question 7

  • December 31, 2013
  • July 1, 2014
  • April 1, 2014
  • July 1, 2013

Rick started a 2-year CD on July 1, 2013.  When does the CD become a short-term asset:

Lesson 7 - Long~Term Assets

Long-term assets, also known as fixed assets, have been briefly discussed in Lesson 5.  Long-term assets are also known as noncurrent assets.  In business, long-term, tangible assets are classified as property, plant, and equipment (PP&E).   Some long-term assets are intangible assets. 

Lesson 7 - Long~Term Assets - Tangible and Intangible Assets

Tangible assets have a physical state; they can be identified by touch.  An intangible asset is something that cannot be seen or touched as it doesn’t have a physical state.  Examples of intangible assets are patents, copyrights, brand name, intellectual property, and reputation.

Lesson 7 - Long~Term Assets - Long~Term Assets

Long-term assets are permanent in nature and will not be turned into cash within a year.  For example, long-term investments, a house, land, and a car are all long-term assets as they are not likely to be sold to obtain cash within the next year.  However, things happen and while a person may have a long-term asset they weren’t planning on selling within the next year, sometimes they do sell earlier than expected.

Another type of long-term asset is “accounts & notes receivable.”  This is when a person loans money to another person or company.  If the loan will be paid back in full within a year, it would be a short-term notes receivable and, conversely, if it will take longer than a year for the loan to be fully repaid, it is considered a long-term accounts receivable.

 

Lesson 7 - Long~Term Assets - Example 7.1

Suppose:  Henry and Susan own a farm.  What would some of their short and long-term assets be?

Answer:  Short-term assets may include cash, harvested crops, feed for animals, prepaid expenses, and cattle to be sold within the next year.  Long-term assets may include buildings, land, machinery, breeding stock, and cattle held for more than a year.

 

Lesson 7 - Long~Term Assets - Example 7.2

Suppose:  Mike and Rebecca own a house and sold a car to a friend, Bill, who is paying monthly payments to them.  The personal car loan will be paid in full in 24 months.  What would be some of their short and long-term assets be?

Answer:  Short-term assets may include cash, clothing, prepaid expenses, and a vehicle if it’s going to be sold within a year.  Long-term assets may include the house, jewelry, lawn equipment, car, paintings, furniture, and the car loan to Bill.

 

Exercise 7 - True or False Questions 1 - 4

  • Long-term assets are also known as fixed, tangible, and noncurrent assets.
  • A person can suddenly decide to sell a long-term asset.
  • Short and long-term assets mean the same thing.
  • Rent pre-paid for three years is a long-term asset.

Exercise 7 - Question 5

  • Property, plant, and equipment
  • Trademark
  • Reputation
  • Copyright

Which of the following are examples of tangible assets for a business:

Exercise 7 - Question 6

  • List of friends
  • Number of friends on Facebook
  • Patent
  • Land

Which of the following is an example of a personal tangible asset:

Exercise 7 - Question 7

  • 2014 Chevy Truck
  • Motorcycle
  • Copyright for a book
  • House

Which of the following is an example of an intangible asset:

Exercise 7 - Question 8

  • An item that will likely be sold, or converted to cash, within a year.
  • An item permanent in nature that will not be turned to cash within a year.
  • An item that can be used for a really long time.
  • A 6-month CD.

Which of the following is the definition of a long-term asset:

Exercise 7 - Question 9

  • Cattle held for more than one year
  • Machinery
  • Buildings and land
  • All of these answers are long-term assets on a farm

Which of the following would be a long-term asset on a farm:

Exercise 7 - Question 10

  • House
  • Marketable securities
  • Lawnmower
  • Retirement account

Which of the following would be a short-term asset of a homeowner:

Lesson 8 - Asset Section on a Personal Financial Statement

Personal Financial Statements (PFS) come in several formats with some being more detailed than others.  The first, or top, section is for personal information such as name, address, contact information, and social security numbers.  The second section is for listing all assets.  Some PFS’s separate current assets from noncurrent assets and then total them for total assets.  The third section is for listing all liabilities.  There may also be a section to list income and contingent liabilities (to be explained in Section 3).  Many PFS’s have a second page where assets and liabilities are explained by listing them separately and the totals are put on the first page.

The following illustration is an example of the asset section on a personal financial statement.

Each line is explained as follows:

Cash on hand at Financial Institutions – any money a person has in cash or in their checking and savings accounts.

Savings Accounts – any money in any type of savings account, which would include CDs.

IRA or Other Retirement Accounts – money in an IRA or any other type of retirement account such as a 401K.

Accounts & Notes Receivable – money that has been loaned to a person or company and is expected to be paid back.

Life Insurance – Cash Surrender Value Only – Some life insurance policies have a cash value that has been built into the policy. 

Stocks and Bonds – the value of stocks and bonds owned by a person.

Real Estate – the value of buildings and land.

Automobile Present Value – value of all owned vehicles (autos, motorcycles, trucks, etc.), this includes those with loans.

Other – Personal Property – value of all personal property such as jewelry, clothing, antiques, appliances, etc.

Other Assets – value of goods not listed such as recreational vehicles and boats.

Exercise 8

Using the following information, fill in the list of assets below and total them.

ASSETS

DOLLARS

Round to the nearest whole dollar

Cash on hand at Financial Institutions
Savings Accounts
IRA or Other Retirement Accounts
Accounts & Notes Receivable
Life Insurance - Cash Surrender Value Only
Stocks and Bonds
Real Estate
Automobile
Other - Personal Property
Other Assets
Total

 

Quiz - Section 2 - True or False Questions 1 - 10

  • Accounts receivable is a noncurrent asset.
  • Notes receivable is a current asset.
  • A trademark is an intangible asset.
  • Land is considered a long-term asset.
  • Another term for long-term asset is long-standing asset.
  • Paying for February’s rent on February 1st is considered a prepaid asset.
  • NADA is one of many companies that offer values for vehicles.
  • A short-term asset is sold or converted to cash within a year.
  • A long-term asset is permanent in nature.
  • PFS stands for Professional Finance Status.

Quiz - Section 2 - Question 11

  • Prepaid asset
  • Long-term asset
  • Fixed asset
  • Appraised asset

On December 31, 2012, Caleb obtained a discount for his auto insurance and paid upfront for an entire year of coverage that begins January 1, 2013, and ends December 31, 2013.  His insurance cost is $200 per month. 

What type of asset does Caleb have with paying a year of auto insurance before it is due:

Quiz - Section 2 - Question 12

  • $200
  • $1,200
  • $2,400
  • $1,800

On December 31, 2012, Caleb obtained a discount for his auto insurance and paid upfront for an entire year of coverage that begins January 1, 2013, and ends December 31, 2013.  His insurance cost is $200 per month. 

How much did Caleb pay to his insurance agent:

Quiz - Section 2 - Question 13

  • $2,400
  • $1,200
  • $200
  • $1,400

On December 31, 2012, Caleb obtained a discount for his auto insurance and paid upfront for an entire year of coverage that begins January 1, 2013, and ends December 31, 2013.  His insurance cost is $200 per month. 

On June 30, 2013, what is the value of Caleb’s prepaid asset:

Quiz - Section 2 - Question 14

  • $1,200
  • $200
  • $0
  • $1,800

On December 31, 2012, Caleb obtained a discount for his auto insurance and paid upfront for an entire year of coverage that begins January 1, 2013, and ends December 31, 2013.  His insurance cost is $200 per month. 

If Caleb were to cancel his insurance effective April 1, 2013, how much money would the insurance company return to him for unused insurance premiums:

Quiz - Section 2 - Questions 15 - 25

Using the following information, fill in the list of assets below and total them.

ASSETS

DOLLARS

Round to nearest whole dollar

Cash on hand at Financial Institutions  
Savings Accounts  
IRA or Other Reitrment Accounts  
Accounts & Notes Receivable  
Life Insurance - Cash Surrender Value Only  
Stocks and Bonds  
Real Estate  
Automobile Present Value  
Other - Personal Property  
Other Assets  
Total  

 

Liabilities ~ What is Owed

Lesson 9 - Liabilities

A liability is being responsible for something.  A liability can also be a hindrance such as a negative attitude or not having a skill.  In finance and accounting, a liability is a debt or money that is owed.  As was stated earlier, an asset is what is owned.  Liabilities are broken into short and long-term
liabilities.

 

Lesson 9 - Liabilities - Equity

A person can have an item that is both an asset and a liability.  For instance, if a person has a house loan, the value of the house would be an asset because it is owned; however, the loan for the house would be a liability because it is owed.  The equity in the house would be the difference how much is owed and the value of the house.  In other words, equity is the value in a property after all debts attached to the property have been subtracted.

Lesson 9 - Liabilities - Example 9.1

Suppose:  Rebecca has a house loan for $100,000 and her house has a value of $150,000.  What is the value of her asset and liability for the house?  How much equity does she have in the house?

Answer:  The house would be listed as an asset for $150,000 and the loan on the house would be listed as a liability for $150,000.  The equity in the house would be $50,000.

One goal with finances is to make sure total assets is greater than total liabilities.  There are several personal finance ratios to help people determine the health of their financial situation.  One ratio is the debt ratio.  To calculate debt ratio, total debt is divided by total assets.  A debt ratio of more than 100% means a person owes more debt than they have assets to sell for cash to pay off all of their debt.  A debt ratio of 50% or less is good, but 30% or less is much better.

Lesson 9 - Liabilities - Example 9.2

Suppose:  Rebecca has total debt of an auto loan for $15,000 and a house loan for $100,000.  Her assets total $160,000.  What is her debt ratio?  Is her debt ratio good or high?

Answer:  Rebecca’s debt ratio would be 72% ($115,000 / $160,000 = 0.71875).   debt ratio is a bit high.  Rebecca would want to lower her debt ratio to below 50%.  The best way to do that would be to pay down her loans. 

Exercise 9 - True or False Questions 1 - 5

  • A liability in finance or accounting is that which is owned.
  • Having more total debt than total assets is good.
  • Total assets divided by total debt is the debt ratio formula.
  • The goal with finances is to have more total assets than total liabilities.
  • A debt ratio is only one of many ratios to determine the health of a person’s finances.

Exercise 9 - Question 6

  • Negative attitude
  • Lacking a necessary skill
  • Both a and b
  • Neither a and b

Which of the following would be a personal liability:

Exercise 9 - Question 7

  • The difference between a car loan and a house loan.
  • The difference between the value of an item and what is owed on the same item.
  • Debt owed.
  • None of these defines equity.

Which of the following defines equity:

Exercise 9 - Question 8

  • 40%
  • 52%
  • 2.08%
  • 48%

If total debts equal $120,000 and total assets equal $250,000, what is the debt ratio:

Exercise 9 - Question 9

  • 50%
  • 75%
  • 100%
  • 125%

What is the best debt ratio of the four possibilities below:

Exervise 9 - Question 10

  • $225,000
  • $50,000
  • $175,000
  • $75,000

How much equity does a person have in a property if it valued at $225,000 and they have a loan for $175,000:

Lesson 10 - Short~Term Liabilities

Short-term liabilities are also known as current liabilities.  They are debts or obligations due within one year.  Examples of short-term liabilities are payday loans and personal loans due within a year. 

Lesson 10 - Short~Term Liabilities - Payday & Personal Loans

Payday loans is an extremely short-term loan for a small amount of money.  A person will borrow money, usually at the highest interest rate allowed by law, until they receive a paycheck to pay the loan back.  Every state has their own payday loan regulations.  It is best to avoid these type of loans due to the extremely high interest and fees incurred.   

Credit cards and other types of loans can be a short-term liability if it is required to be paid in full within a year.  As was the case with short-term assets, a long-term liability can become a short-term liability once the paid-off date of the loan comes due within a year. 

Lesson 10 - Short~Term Liabilities - Example 10

Suppose:  Thomas obtained a five-year auto loan on March 15, 2010.  If today were April 1, 2015, would his auto loan be a short-term or long-term liability?  Explain. 

Answer:  Thomas’ auto loan would be considered a short-term liability as of April 1, 2015, because his loan will mature, or be paid in full, within a year. 

Lesson 10 - Short~Term Liabilities - Personal Financial Statement (PFS)

There are other short-term liabilities a person has, but they are not listed on a Personal Financial Statement (PFS).  These would be utility bills, cell phone bill, groceries, clothing, etc.  Why aren’t they included?  A PFS is a personal balance sheet.  It shows an overview of a person’s overall financial health and it deals exclusively with what is owned (assets), what is owed (liabilities), and the resulting net worth.  While everyday expenses are owed, they can be changed by changing one’s circumstances such as moving to a less expensive place or discontinuing or lessening the usage of an item.  Additionally, if a
person stops paying a utility bill or cell phone bill, the company will stop allowing the use until the person begins to pay and no additional charges will be incurred except for late fees and possibly penalties.  This is different than a loan, which must be paid back regardless of use, non-use, or lack of payment. 

Lesson 10 - Short~Term Liabilities - Personal Cash Flow Statement (PCFS)

Expenses, such as utility bills, cell phone bill, groceries, household items, etc., would be shown on a Personal Cash Flow Statement (PCFS).  A PCFS measures all of a person’s inflows (income) and outflows (expenses), which shows the net cash flow for a period of time, usually a month.  It’s useful is creating a budget and tracking a person’s spending history.

Exercise 10 - True or False Questions 1 - 6

  • Payday loans are a wise choice.
  • A short-term liability is a debt due within two years.
  • Living expenses are included Personal Financial Statements.
  • What is owed and owned is list on a PFS.
  • A PCFS measures all of the cash inflows and outflows for a given period of time, usually a month.
  • Short-term liabilities are also known as current liabilities.

Exercise 10 - Question 7

  • Personal Financial Statement
  • Monthly Financial Statement
  • Personal Cash Flow Statement
  • Monthly Cash Flow Statement

If a person would like to know their net cash flow for a particular month, which one of the following would they use:

Exercise 10 - Question 8

  • Auto loan due in nine months.
  • A house loan due in ten years.
  • A personal loan due in six months.
  • A payday loan

Which of the following is NOT a short-term liability:

Exercise 10 - Question 9

  • Personal Cash Flow Statement
  • Professional Cash Flow Statement
  • Personal Current Flow Statement
  • Proficient Cash Flow Statement

PCFS stands for:

Exercise 10 - Question 10

  • A payday loan is usually a long-term loan.
  • A person can take their time paying a payday back.
  • A payday loan offers a great deal on interest rates.
  • A payday loan must be paid back when a person receives their next paycheck.

Which of the following is true about a payday loan:

Lesson 11 - Long~Term Liabilities

Long-term liabilities, also called noncurrent liabilities, is a debt obligation that is due after a year or more.  There are many types of long-term liabilities.  Credit cards, personal loans for longer than a year, home equity line of credit, house loan, auto loan, student loans, and loans on life insurance policies are all examples of long-term liabilities.  Unpaid taxes can also be a long-term liability.  Additionally, a medical bill that will not be paid within a year could be classified as a noncurrent liability. 

Lesson 11 - Long~Term Liabilities - Installment Loans

Credit card debt, personal loans, and personal lines of credit are usually classified as Notes Payable to Banks and Others on a PFS.  Loans with regular payments such as every month are known as Installment loans.  Installment loans include loans for recreational vehicles, boats, autos, airplanes, school, etc.  Installment loans are usually split between “auto” and “other.”  Installment loans for autos also include lease agreements for cars.  Even though a mortgage has a regular monthly payment, it falls under Mortgages on Real Estate.  Many people have insurance policies that allow for the insured person to take out a loan and these are called Loans on Life Insurance.  It is best to talk with a licensed insurance agent about life insurance.

Lesson 11 - Long~Term Liabilities - Outstanding Balance

When completing a PFS, the amount only includes the remaining debt, not the amount of the original loan.  For example, a person may have taken out a loan three years ago for $5,000, but today the remaining balance on that loan is $500.  The remaining obligation of the loan is known as the outstanding balance and is the sum entered onto a PFS for the debt obligation.

Lesson 11 - Long~Term Liabilities - Overextended

When a person’s income cannot meet, or pay for, their debt obligations, it is referred to as being overextended.  Income should always be larger than debt obligations.  The larger the margin between the two, the easier it is to pay for the debt obligations and the less stress a person endures.  While expenses are not included on a PFS, they should always be accounted for when determining how much debt to incur. 

When completing a PCFS, the outstanding balance of a debt isn’t recorded, but rather the monthly debt payment along with the expenses.  For example, if a person originally obtained an auto loan for $5,000 with a monthly payment of $125 and it currently has an outstanding balance of $1,000, the monthly payment would be recorded as $125 on the PCFS and the outstanding balance of $1,000 would be listed in the Installment (Auto) section. 

 

Lesson 11 - Long~Term Liabilities - Contingent Liabilities

There are also liabilities known as contingent liabilities.  Contingent liabilities are obligations that may occur in the future.  In other words, a liability may or may not occur because it is contingent upon something happening.  A contingent liability should not be listed unless it’s highly probable it will happen.  Additionally, if the contingent liability has any value, it would not be listed until the contingency is removed.

 

Exercise 11 - True of False Questions 1 - 6

  • An outstanding balance is the original amount of the loan.
  • Unpaid taxes can be a long-term liability.
  • A house loan is classified as an installment loan.
  • Being overextended is a sign of good financial health.
  • Installment loans have regular payments.
  • A loan can be taken against certain types of insurance policies.

Exercise 11 - Question 7

  • Installment Account (Other)
  • Notes Payable to Banks and Others
  • Accounts Payable
  • Other Liabilities

A person has a $3,000 personal loan with an outstanding balance of $700 and a monthly payment of $75.  Which section is the debt recorded in on a PFS: 

Exercise 11 - Question 8

  • Forever liabilities
  • Longstanding liabilities
  • Noncurrent liabilities
  • None of the above

Long-Term liabilities are also known as:

Exercise 11 - Question 9

  • A 15-year mortgage
  • A 5-year auto loan
  • A 24-month personal loan
  • A payday loan

Which of the following is not a long-term liability:

Exercise 11 - Question 10

  • Total assets minus total liabilities
  • Total liabilities minus total assets
  • Current assets minus current liabilities
  • Current assets divided by current liabilities

How is a person’s net worth determined:

Lesson 12 - Net Worth & Liabilities Section on a Personal Finance Statement

As stated in previous lessons, personal net worth is calculated by taking total assets and subtracting total liabilities.  Once a person’s net worth is figured, other ratios can be completed to determine a person’s financial health.  Of course, if a person’s net worth is negative, their financial health is not good and they need some help.  It is obvious that if total assets are greater than total liabilities, a person has enough assets they could sell to pay all of their debt obligations. 

Now it is time to learn how to complete the liability section of a PFS.  The illustration below is the liability section of a PFS.

Each line in the table above is explained below and in Lesson 11.

Notes Payable to Banks and Others – Credit cards, personal loans, and personal lines of credit are listed here.

Installment Account (Auto) – includes all outstanding balances for all auto loans, which would include loans for boats, recreational vehicles, airplanes, etc.

Installment Account (Other) – includes student loans or other personal loans.

Mortgages on Real Estates – outstanding balance for all mortgages are included here.

Unpaid Taxes – contains unpaid taxes that will not be paid within a year.

Other Liabilities – this category is for any debt obligations that do not all into any of the other categories.

Exercise 12

Using the list of liabilities below, complete the liability table.

LIABILITIES

DOLLARS

Round to the nearest whole dollar

Notes Payable to Financial Institutions and Others
Installment Account (Auto)
Installment Account (Other)
Loan on Life Insurance
Mortgages on Real Estate
Unpaid Taxes
Other Liabilities
Total

 

Quiz - Section 3 - Question 1

  • 35%
  • 38%
  • 36%
  • 34%

Rebecca has an outstanding balance of $35,250 for all of her debt obligations and her total assets are $98,570.  What is her debt ratio:  (Round to nearest whole number with no decimals.)

Quiz - Section 3 - Question 2

  • Current Liability
  • Contingent Liability
  • Noncurrent Liability
  • It isn’t a liability since their teen isn’t sure they will attend college

Bill and Heather promised their 15-year-old teen they would pay for his/her college tuition; however, their teen doesn’t know if he/she wants to attend college.  What type of liability would Bill and Heather have:

Quiz - Section 3 - Question 3

  • $4,365
  • $8,250
  • $12,615
  • $3,885

Brian’s original auto loan was $8,250 and today he owes $4,365.  What is his outstanding balance:

Quiz - Section 3 - Question 4

  • $126,358
  • $76,406
  • $49,952
  • $202,764

If Henry’s total assets are $126,358 and his total liabilities are $76,406, what is his net worth:

Quiz - Section 3 - Question 5

  • Short-term liabilities are due after a year or more.
  • Short-term liabilities are due within a year.
  • Short-term liabilities are due when the person feels like paying them.
  • Short-term liabilities are due within 18 months.

When are short-term liabilities due:

Quiz - Section 3 - Questions 6 - 25

Using the list of assets and liabilities on the left, answer questions 6 through 25 in the Assets and
Liabilities Table.

Caleb has the following assets and liabilities.  He didn’t have time to sort them into categories, so the they are intermingled.

ASSETS

DOLLARS

Round to the nearest whole dollar

6.  Cash on hand in Financial Institutions  
7.  Savings Accounts  
8.  IRA or Other Retirement Accounts  
9.  Accounts & Notes Receivable  
10.  Life Insurance - Cash   
11.  Stocks and Bonds  
12.  Real Estate  
13.  Automobile Present Value  
14.  Other - Personal Property  
15.  Other Assets  
16.                                                                               Total  
LIABILITIES

DOLLARS

Round to the nearest whole dollar

17.  Notes Payable to Financial Institutions and Others  
18.  Installment Account (Auto)  
19.  Installment Account (Other)  
20.  Loan on Life Insurance  
21.  Mortgages on Real Estate  
22.  Unpaid Taxes  
23.  Other Liabilities  
24.                                                                              Total  
25.                                                                    Net Worth  

Wages

Lesson 13 - Gross Wages

A gross wage is the monetary funds earned by an employee in exchange for work completed.  Wages can be earned as a fixed wage per hour, tips, pay per job such as mowing a neighbor’s lawn or babysitting, base pay or salary, overtime, bonuses, commissions, profit sharing, merit pay, and stock options. 

A person earns overtime pay once they have worked more than 40 hours in a workweek.  This means a person can work four 10 hour days or three 12-hour days in a given workweek and still not earn overtime pay.  In other words, the 40-hour guideline is based on hours worked in a workweek not the number of hours worked in a day.  Overtime pay is 1 ½ times a person’s hourly wage.  For example, if a person earns $10 an hour as their regular pay, their overtime pay would be $15 an hour, which is (10/2) + 10 = $15

Lesson 13 - Gross Wages - United States Department of Labor

The United States Department of Labor (DOL) has a minimum wage per hour that all states have to follow; however, many states enact their own minimum wage that either meets or exceeds the DOL’s minimum wage requirement.  The Department of Labor uses the Fair Labor Standards Act (FLSA) to enforce the minimum wage and overtime pay standards. 

Lesson 13 - Exempt Wages

There is one type of pay where an employer does not have to pay overtime and that is when a person receives a salary.  Salary pay is considered exempt.  Exempt wages means the employee is exempt from receiving overtime pay.  It is assumed the employer is paying a higher wage in exchange for hours worked that exceeds 40 hours in a workweek.  Employees who receive a salary usually have significant experience and/or education in the given field.

Lesson 13 - Gross Wages - Commissions

Commissions are earned either earned in addition to a base pay or without a base pay.  Commissions are either a percentage or flat fee paid to an employee for each good or service sold.  A commission scale is determined before the employee begins work.  For example, an employee who works for an auto dealer may earn a 10% commissions for each car they sell.  If the company makes a net profit of $5,000 for the sold car, the employee would then earn $500 as their commission.  If the employee earns a flat fee for each car sold, they would then receive their flat fee regardless of how much the company earns.

Lesson 13 - Gross Wages - Benefits

Benefits from an employer are considered part of the person’s pay package.  Benefits are not typically paid to part-time employees; however, many employers do offer a condensed benefit package to their part-time employees.  The monetary value of the benefits package cannot be calculated into the minimum wage, but many employers use the total of wages and benefits as the real cost of hiring an employee.  Benefits can include medical and dental insurance, life insurance, vacation pay, severance pay, retirement, taxes, jury duty pay, and much more.  Many employers help keep the cost of medical and dental insurance lower to employees by paying a portion for the employee through group insurance rates.

Exercise 13 - Question 1

  • United States Department of Wages
  • United States Department of Salaries
  • United States Department of Labor
  • United States Department of Income

Which department of the United States sets the minimum wage:

Exercise 13 - Question 2

  • Fair Labor Standards Act
  • Fair Working Standards Act
  • Sarbanes-Oxley Act of 2002
  • Fair Labor Ethics Act

Which of the following Act enforces the minimum wage:

Exercise 13 - Question 3

  • Bonuses
  • Hourly
  • Salary
  • Merit

Which of the following types of pay is considered exempt from overtime pay:

Exercise 13 - Question 4

  • All employees are entitled to receiving commissions for their work.
  • Commissions are paid either as a percentage or a flat fee for a good or product sold.
  • Commissions are the sum of money earned for overtime work.
  • Commissions are not allowed in some states.

Which of the following is true about commissions:

Exercise 13 - Question 5

  • Gross wages are the monetary funds earned by an employer for work assigned.
  • Gross wages are the benefits given to an employee by an employer.
  • Gross wages are the monetary funds paid to employee after all deductions are subtracted.
  • Gross wages are the monetary funds earned by an employee in exchange for work completed.

Which of the following defines gross wages:

Exercise 13 - Question 6

  • Overtime pay is when an employee works more than 8 hours in a day.
  • Overtime pay is when an employee works more than 40 hours in a workweek.
  • Overtime pay is paid as a percentage of an employee’s sales.
  • Overtime pay is based on the total number of hours worked in a given day.

Which of the following describes overtime pay:

Exercise 13 - Question 7

  • Benefits are considered part of employee’s complete pay package.
  • Most employers don’t give any benefits to employees.
  • All part-time employees receive benefits.
  • Salaried employees don’t get benefits.

Which of the following is true about benefits:

Exercise 13 - Question 8

  • Medical and dental insurance
  • Vacation pay
  • Retirement
  • All of the above are examples of benefits paid by an employer.

Which of the following is an example of a benefit paid by an employer:

Exercise 13 - Question 9

  • States can choose to pay less than the federally mandated minimum.
  • The Department of Labor does not set a minimum wage.
  • States can choose to pay a minimum that meets or exceeds the federally mandated minimum wage.
  • All states have to pay the same minimum wage to their employees.

Which of the following statements is true:

Exercise 13 - Question 10

  • $25
  • $30
  • $20
  • $35

If Charlie earns $20 per hour as his regular pay, how much would he earn per hour for overtime hours:

Lesson 14 - Deductions ~ Part I (Taxes, Insurance)

Once an employee has earned gross wages, and before the employer can give the employee those earned wages, deductions have to be applied.  Deductions can contain many items, but this textbook will focus on taxes, insurance, retirement, and garnishments.  This lesson will discuss taxes and insurance.

Deductions are considered either mandatory or voluntary.  Taxes are mandatory and insurance deductions is voluntary.  Payroll taxes consist of Federal Tax (withholding), State and Local Tax (withholding), Social Security Tax (also known as FICA), and Medicare Tax.  Insurance deductions can include health; dental; vision; accident, dismemberment, and disability insurance (AD&D); and, life insurance. 

Lesson 14 - Deductions ~ Part I (Taxes, Insurance)

There are various things that affect an individual’s Federal Withholding include wage rate, number of dependents, marital status, pay frequency, and timing of deductions.  The higher the wage rate, the more Federal withholding.  The IRS has tables that show the percentage of gross wages deducted.  Since this changes, it’s best to look at the tables rather than list the current rates here. 

Dependents are qualifying children or relatives as defined by the IRS.  There is a test for both a child and a relative to determine if they can be a dependent.  Two important factors of claiming a dependent are:  no one else is claiming them as their dependent and they rely on the person claiming them for their support for more than half of a given year.  Marital status impacts the Federal Withholding rate and is part of the tables provided by the IRS.

Lesson 14 - Deductions ~ Part I (Taxes, Insurance)

Pay Frequency has an impact on Federal Withholding due to the dollar amount at the time a person is being paid.  If a paycheck is paid on a monthly basis they could potentially jump to the next, higher tax bracket; whereas, if they are paid once a week they might be in a lower tax bracket due to a lower amount being paid.  Due to the Federal withholding potentially changing based on the gross wages for a particular paycheck, many companies will pay bonuses in a separate paycheck to lessen the impact of the Federal Withholding on bonus pay.

The timing of certain deductions can also have an impact on gross wages.  There are several deductions, such as certain types of retirement plans, that are deducted from gross wages before the Federal Withholding is calculated. 

 

Lesson 14 - Deductions ~ Part I (Taxes, Insurance)

Other tax withholdings are Social Security and Medicare Tax.  Both the employer and employee pay these taxes.  The Social Security tax rate has been 6.2% for both the employee and the employer since 1990.  However, once an employee and employer has paid on wages (earnings) up to a particular dollar amount (it changes each year), the tax is no longer applied for the remainder of the year.  For 2016, the earnings cap was $118,500.  The Medicare tax rate for both employer and employees in 2016 is 1.45%; however, high-income earners (as defined by the IRS each year) pay an additional 0.9%.  If a person is self-employed they would pay both the employer and employee rates.  For example, a self-employed person would be 12.4% (6.2% employee + 6.2% employer) for the Social Security tax (FICA) and 2.9% (1.45% employee + 1.45% employer) for the Medicare tax.  

Lesson 14 - Deductions ~ Part I (Taxes, Insurance)

Suppose:   Clarence’s reached the $118,500 limit for Social Security tax for 2016.  Would he pay Social Security tax in his next paycheck?  Explain.  When would he begin to pay Social Security tax again? 

Answer:  No, once Clarence reaches the $118,500 limit for Social Security tax for 2016, he would no longer pay Social Security tax for 2016.  Clarence would begin to pay Social Security tax at the beginning of the next calendar year, which would be 2017 in this example.

Lesson 14 - Deductions ~ Part I (Taxes, Insurance)

State and Local (city and/or county) taxes vary by state, city, and county.  In fact, in some states, cities, and counties, employees do not have to pay any state or local taxes.  Worker’s Compensation (WC) is insurance is paid by employers, which pays wages and medical benefits to employees when they have been injured on the job.  Employees can obtain specific details about Worker’s Compensation from the Human Resource Department or supervisor at their company.  If a person is interested in knowing if they pay state and local taxes, they can look on their paycheck stub as all deductions are itemized.

Lesson 14 - Deductions ~ Part I (Taxes, Insurance)

As mentioned earlier, various types of insurance are another type of deduction and it’s voluntary.  If a person is covered by their parents, spouse, or another individual, for their health insurance, then they can waive the health insurance offered by their employer; however, with the new Affordable Care Act, it’s
important to ask the employer the new rules when deciding on medical insurance options.  While health insurance is offered by most companies, dental and vision insurance is not.  Some companies offer these two types of add-on insurances and others don’t. 

 

Lesson 14 - Deductions ~ Part I (Taxes, Insurance)

Many companies pay a portion of the health insurance (and dental and vision when offered) monthly premiums for employees.  For example, if the monthly premium for a single person is $150, the company would pay $75 and the employee would pay the other half.  Other types of insurance policies offered are AD&D and life insurance.  These are usually at very low rates. 

Insurance rates are usually less expensive through an employer due to group rates than they are if a person obtains it on their own.  Insurance premiums are deducted from an employee’s gross wages before taxes, which means less taxes are paid.

Exercise 14 - Question 1

  • Federal Tax
  • State Tax
  • Property Tax
  • Medicare Tax

Which of the following is not an example of a tax withheld from gross wages:

Exercise 14 - Question 2

  • Federal Tax
  • State Tax
  • Social Security Tax
  • Medicare Tax

Which of the following is not an example of a Federal Tax:

Exercise 14 - Question 3

  • $118,000
  • $117,500
  • $117,000
  • $118,500

Social Security tax is paid on gross wages up to which of the following dollar amounts for 2016:

Exercise 14 - Question 4

  • The employer pays the same Social Security and Medicare tax rate on an employee’s gross wages.
  • The employer pays a ¼ of what the employee pays for social security and Medicare tax.
  • The employer only pays the Social Security tax and the employee only pays the Medicare tax.
  • The employer only pays the Medicare tax and the employee only pays the Social Security tax.

Which of the following is true:

Exercise 14 - Question 5

  • 6.2%
  • 12.4%
  • 1.45%
  • 2.9%

The tax rate for each the employer and the employee for Social Security taxes is: 

Exercise 14 - Question 6

  • 6.2%
  • 12.4%
  • 1.45%
  • 2.9%

The tax rate for each the employer and the employee for Medicare taxes is: 

Exercise 14 - Question 7

  • 0.10%
  • 0.95%
  • 2.9%
  • 0.9%

High-income earners, as defined by the IRS, pay an additional:

Exercise 14 - Question 8

  • Companies do not contribute any money toward health insurance premiums.
  • Many companies contribute money towards health insurance premiums.
  • All companies must pay for all health insurance premiums.
  • All employees must accept health insurance from their employers even if they already have health insurance.

Which of the following is true:

Exercise 14 - Question 9

  • Only some people pay Federal Withholdings.
  • Only some employers pay Federal Withholdings.
  • The timing of certain deductions can have an effect the Federal tax deduction.
  • The timing of certain deductions never has an effect on the Federal tax deduction.

Which of the following is a true statement:

Exercise 14 - Question 10

  • Some states do not have income taxes.
  • Every state has income taxes.
  • Some years the government doesn’t charge any Federal taxes.
  • Employees only begin to pay Federal taxes once they hit a certain gross wage.

Which of the following is a true statement:

Lesson 15 - Deductions ~ Part II (Retirement, Garnishments)

The next two types of deductions being discussed are retirement and garnishments.  Retirement plans can be government sponsored, personal, or employer sponsored.  The most well-known government sponsored retirement plan is Social Security.  Aside from Social Security, other government sponsored retirement plans are typically for government employees. 

The most well-known employer sponsored retirement plan is the 401K.  Many employers will make a matching contribution to the plan up to a certain percentage of the employee’s salary.  Other popular employer sponsored retirement plans are profit-sharing, defined benefit pension plans, and Roth 401(k).  These plans can be researched online for detailed information.

Lesson 15 - Deductions ~ Part II (Retirement, Garnishments)

Personal retirement plans are simply having money deducted from a paycheck and deposited directly into the plan.  These are usually IRAs, annuities, or an interest bearing savings account.

Garnishments occur when a court orders money to be deducted from the wages of an employee for unpaid debts.  Garnishments, however, are not the same as income deduction orders.  Garnishments have limits.  First, a creditor has to get a judgment against the person with delinquent debt.  Then, there are federal limits to how much can be garnished, which is the lesser of 25% of disposable income (gross wages minus deductions) or the amount of wages that exceeds 30 times the federal minimum wage.  Some states apply wage garnishment laws that are stricter than the federal wage garnishment laws.

Lesson 15 - Deductions ~ Part II (Retirement, Garnishments)

An income deduction order is issued by the court and is like a garnishment in that it is used to deduct money from an employee’s wages for debt obligations; however, an income deduction order is mainly used for Chapter 13 bankruptcies and child support.  Other differences with an income deduction order from a garnishment is that they are not always limited in how much can be deducted and they may be issued when a person isn’t behind on payments.  For example, if a person has filed a Chapter 13 bankruptcy, also known as a wage earner plan, they have created a repayment plan to pay all or some of their outstanding debt to their creditors.  Once this plan is approved by the court, an order for the agreed upon monthly payment may be issued to a person’s employer for a mandatory deduction.  This ensures the person follows the plan.  An income deduction order is sometimes put in place for child support for the same reasons. 

Exercise 15 - Question 1

  • 401(k)
  • Profit-sharing
  • Child support
  • IRA

Which of the following is not an example of a retirement deduction:

Exercise 15 - Question 2

  • Government sponsored
  • Employer sponsored
  • Personal
  • All of the above are correct

Retirement plans can be all of the following except:

Exercise 15 - Question 3

  • Issued by the court.
  • Issued by the employer.
  • Issued by the employee.
  • None of the above are correct.

An income deduction order is:

Exercise 15 - Question 4

  • The lesser of 25% of disposal income or the amount of wages that exceeds 30 times the federal minimum wage.
  • The lesser of 25% of wages that exceeds 30 times the federal minimum wage and 30 times of disposal income.
  • There is no limit for wage garnishments.
  • Companies decide how much to garnish employee wages.

4. Which of the following is an example of a wage garnishment limit:

Exercise 15 - Question 5

  • Chapter 7
  • Chapter 11
  • Chapter 8
  • Chapter 13

Which of the following types of bankruptcies is used to create a payment plan to payback creditors:

Exercise 15 - Question 6

  • 401(k)
  • Social Security
  • Annuity deposits
  • Income deduction plan

Which of the following is one of the most popular types of government sponsored retirement plans?

Exercise 15 - Question 7

  • Income deduction plan
  • A garnishment plan
  • A delinquent debt plan
  • A wage earner plan

A Chapter 13 bankruptcy is also known as:

Exercise 15 - Question 8

  • Outstanding mortgage loan
  • Any and all loans in default
  • Chapter 13 bankruptcies and child support payments
  • Credit card debt.

An income deduction order is typically used for:

Exercise 15 - Question 9

  • States can set stricter wage garnishment limits than the federal government.
  • States cannot set any wage garnishment limits.
  • States can remove federal government wage garnishment limits.
  • States can set less strict wage garnishment limits than the federal government.

Which of the following is true:

Exercise 15 - Question 10

  • can garnish wages without a judgment from the courts
  • must obtain a judgment from the courts to garnish wages.
  • never garnish wages for unpaid debt.
  • set the wage garnishment limits.

Creditors (which is true):

Lesson 16 - Net Wages

Once an employer subtracts all deductions from an employee’s gross wages, the resulting amount is the net wages paid to the employee.  Net wages is also known as net pay and take home pay.  Wages are usually paid either by a check or direct deposit into a savings or checking account.  Most employers prefer paying through direct deposit; however, a person 17 years old or younger cannot open a savings or checking account at a financial institution without an adult on the account.  Opening an account with a financial institution requires the account holder to sign a contract and minors cannot legally enter into a contract. 

Lesson 16 - Net Wages

Having savings or checking accounts helps a person manage their money, however, if finding an adult to sign onto an account is not possible, a minor employee can request a paper check as direct deposit is not mandatory and cannot be forced.

There are many sites a person can use to calculate their net pay.  It most likely will not be exact, but it will be a good estimate.  Companies vary their pay frequency.  Pay frequencies can be daily, weekly, bi-weekly, semi-monthly, monthly, quarterly, semi-annually, and annually.  The most popular pay frequencies are weekly, bi-weekly, semi-monthly, and monthly. 

 

Lesson 16 - Net Wages - Example 16-1

Suppose:   Joy works full-time.  Her hourly wage is $10 per hour and she lives in Missouri.  She is single and does not claim any federal allowances/deductions and has no exemptions.  She gets paid bi-weekly.  Her taxes are as follows: Federal - $89.18, FICA (Social Security) - $49.60, Medicare - $11.60, and State - $19.00.  She has no other deductions.  What are her gross wages, total deductions, and net pay?

Answer:  Her gross wages are $800.00, her total deductions are $169.38, and her net pay is $630.62 (800.00 – 169.38).

Lesson 16 - Net Wages - Example 16-2

Suppose:   Amber works full-time.  Her hourly wage is $12 per hour and she lives in Texas.  She is single and does not claim any federal allowances/deductions and has no exemptions.  She gets paid bi-weekly.  Her taxes are as follows: Federal - $113.18, FICA (Social Security) - $59.52, Medicare - $13.92, and State - $0.00.  She also has a health insurance deduction of $48.00.  What are her gross wages, total deductions, and net pay?

Answer:  Her gross wages are $960.00, her total deductions are $234.62, and her net pay is $725.38 (960.00 – 234.62).

Exercise 16

Questions 1 – 5 are based on the following information.  Sherri is single and works full-time at ZYX
Company in New Mexico.  The following is information to calculate her next paycheck:

Enter the letter into the box that corresponds to the answer in each question.  Use lowercase letters.  

1.  What is Sherri's gross pay? (Don't forget about overtime pay).   

a. $1,440            b. $1,560            c. $1,400             d. $1,500

2.  How much are Sherri’s total deductions?   

a. $440.77          b.  $400.00          c.  $390.77          d.  $172.80

3.  How much is Sherri’s Worker’s Compensation deduction?   

a.  $22.62           b.  $51.52             c.  $22.93            d.  $0.31

4.  How much is Sherri’s Social Security deduction?   

a.  $0.31             b.  $22.62             c.  $96.72             d.  $172.80

5.  How much is Sherri’s take home pay?   

a.  $1,119.54     b.  $1,119.23        c.  $1,116.03      d.  $1,166.34

Quiz - Section 4 - Questions 1 - 10

  • Gross wages are the same as take home pay.
  • WC stands for Worker’s Compensation.
  • Garnishments can occur without a court order.
  • Net pay is what the employee is given after all deductions are subtracted from gross wages.
  • Overtime pay is based on the number of hours worked in a given day.
  • Deductions are considered either mandatory or voluntary.
  • An income deduction order is for delinquent payments for medical bills.
  • All employees must agree to direct deposit in order to receive their net pay.
  • States can set a higher minimum wage than the federal minimum wage.
  • Social Security is a government sponsored retirement plan.

Quiz - Section 4 - Question 11

  • Department of Labor
  • Internal Revenue Service
  • Fair Labor Standards Act
  • Department of Wage & Labor

Which of the following governmental entities sets the federal minimum Wage:

Quiz - Section 4 - Question 12

  • at the Security of State’s office.
  • at the unemployment office.
  • at the IRS website.
  • at the City Clerk’s office.

The federal withholding rate can be found:

Quiz - Section 4 - Question 13

  • Garnishments are the same as income deduction orders.
  • Garnishments must be ordered by a court.
  • Garnishments do not need to be ordered by a court.
  • Garnishments are decided by the employer.

Which of the following is true about garnishments:

Quiz - Section 4 - Question 14

  • the monetary funds earned by an employee before deductions.
  • half of the gross wages.
  • the same as gross wages.
  • the take home pay after all deductions are subtracted from gross wages.

Net pay is (pick the statement that is correct):

Quiz - Section 4 - Question 15

  • are always paid to part-time employees.
  • must include a free lunch every day.
  • must include a retirement plan.
  • are considered part of a person’s pay package.

Benefits to employees (pick the statement that is correct):

Quiz - Section 4 - Question 16

  • It is how often an employee is paid.
  • It is how often an employee works to earn pay.
  • It has not impact on the federal withholding amount.
  • It includes employees who get paid every two years.

Which of the following is true about pay frequency:

Quiz - Section 4 - Question 17

  • Issued by the court typically for all outstanding loans.
  • Issued by the court typically for Chapter 13 Bankruptcies and child support.
  • Issued by the employer typically for all outstanding loans.
  • Issued by the employer typically for Chapter 13 Bankruptcies and child support.

An income deduction is which of the following:

Quiz - Section 4 - Question 18

  • All employers offer a retirement plan to their employees.
  • Only the government offers a retirement plan to workers.
  • Employees have to be 25 years of age to start a retirement plan.
  • A personal retirement plan can be start by an employee.

Which of the following is true about retirement plans?

Quiz - Section 4 - Question 19

  • Department of Labor
  • Internal Revenue Service
  • Fair Labor Standards Act
  • Department of Wage & Labor

Which federal governmental entity enforces the minimum wage?

Quiz - Section 4 - Question 20

  • FICA
  • State and local taxes
  • Medicare tax
  • All of the above

Deductions can include which of the following?

Quiz - Section 4 - Questions 21 - 25

Questions 21 – 25 are based on the following information.  Chuck is single and works full-time at ABC Company in California.  The following is information to calculate his next paycheck:

Enter the letter into the box that corresponds to the answer in each question.  Use lowercase letters.

21.  What is Chuck’s gross pay? (Don’t forget about overtime pay).  
a.  $2,200           b.  $2,000          c.  $2,500          d.  $1,600

22.  How much are Chuck’s total deductions?  
a.  $310.28         b.  $779.86        c.  $710.06       d.  $736.40

23.  How much is Chuck’s Disability Insurance deduction?  
a.  $31.90            b.  $19.80          c.  $51.70         d.  $66.00

24.  How much is Chuck’s Social Security deduction?  
a.  $19.80            b.  $136.40        c.  $95.68         d.  $31.90

25.  How much is Chuck’s take home pay?  
a.  $1,490.94       b.  $1,489.50    c.  $1,490.94   d.  $1,489.94

Personal Financial Statement

Lesson 17 - Introduction to Personal Financial Statement

People go through financial phases in their lives.  When a person is starting off adult life in their early 20’s, they don’t usually have as much in assets or liabilities as they do when they hit their 40’s.  Then as a person nears retirement, they tend to have less liabilities and more assets.  Now, it’s time to take all of the information learned in Sections 1 through 4 and apply it to three case studies.  The case studies will show where people, some not all, tend to be along their financial path in their mid-20’s, 40’s, and 60’s.  The case studies will pull all of the learned information together and apply it to completing Personal Financial Statements (PFS). 

PFS’s are generally required by financial institutions for loans and they are two to four pages in length.  Basically, they are a longer version of a personal asset and liability table.  The additional pages provide areas for a person to list their assets and liabilities individually. 

Lesson 17 - Introduction to Personal Financial Statement

The first page has contact information and the financial area for assets, liabilities, contingent liabilities, and net worth.  As seen in previous lessons, assets and liabilities are combined into several different categories.  The contingent liabilities are listed in a separate area; whereas, in a basic net worth calculation, those aren’t usually listed.  In the sources of income section on a PFS, the income is listed as the annual income since the rest of the PFS is based on annual figures.  It’s important to remain consistent when completely financial information.  All of the information should contain the same time period (e.g. monthly, quarterly, or annually).  PFS’s typically look at the finances of an individual on an annual basis.

Lesson 17 - Introduction to Personal Financial Statement

In the longer PFS’s a person would itemized the information from the first page on the remaining pages.  For example, if a person had two vehicle loans, they would combine the outstanding loan balance for the first page in the liability section, but the vehicles would be listed individually on the second page in the designated area.  When listing the vehicles individually, additional information about the loans will be requested, such as monthly loan payment, term of the loan (number of months for the loan), beginning loan amount, the outstanding balance, and the start and maturity dates.  For our purposes, we will only be working with a typical first page of a PFS. 

Lesson 17 - Introduction to Personal Financial Statement

The case studies will follow one fictitious person’s financial path throughout their life.  We will start with their life when they are 25 years old, then revisit them on their financial path when they are 45 years old, and finish up by visiting their financial path when they are 65-year olds.  Life continues well beyond 65 years of age; however, these case studies are demonstrating the natural progression of a person’s financial path throughout life and allowing for some hands-on practice.

Lesson 17 - Introduction to Personal Financial Statement - Case Study I - 25 Years' Old

Let’s begin with David Jones.  Beginning at 25 years old, David graduated from college a couple of years ago.  Upon graduation, he had $30,000 in student loan debt.  Since his graduation, he purchased a vehicle.  David traded in the car he used throughout his college days, but he also has a motorcycle he owns.  He also incurred a little bit of credit card debt for furniture he purchased.

He isn’t married, yet, but he’s engaged and will be getting married soon to Becky.  He has some pending obligations for the wedding:  the wedding photographer and their honeymoon.  David and Becky have already paid for many of the other wedding expenses and Becky’s family is paying for the rest of the wedding.  David already leases an apartment that will accommodate both Becky and him upon their
nuptials.  They are going to wait to buy a house. 

Exercise 17

Take a look at all of the David’s income, assets, liabilities, and personal information.  Then complete the Personal Financial Statement for David.  David lives at 1234 Path Lane, Charleston, SC 29401.  His home phone is 555-123-4567 and his cell phone is 843-555-1234.  He works at ABC Company and makes $28,000 a year. 

Use the information above and complete a PFS below for David.  Use January 15, 2011 (exactly as seen here) for the date.  Fill in the blanks below for each corresponding number on the PFS.  Remember, do not use dollar signs as those are provided for you when needed.

1.    2.    3.   
4.    5.    6.   
7.  $  8.  $  9.  $ 
10.  $  11.  $  12.  $ 
13.  $  14.  $  15.  $ 
16.  $  17.  $  18.  $ 
19.  $  20.  $  21.  $ 
22.  $  23.  $  24.  $ 
25.  $  26.  $  27.  $ 
28.  $  29.  $  30.  $ 
31.  $  32.  $  33.  $ 

Lesson 18 - Case Study II ~ 45 Years' Old

We continue with David Jones financial path story in this lesson.  He married Becky.  They have two kids.  One of their kids, John, will be graduating this year and is looking at colleges, but there is a chance he might change his mind to take advantage of a job that has been offered to him.  Their other kid, Lizzie, has a few years until she graduates high school. 

David’s life and financial path has changed significantly since he was 25 years old.  Also, his assets and liabilities have seen major fluctuations.  This is quite normal.  David and Becky have worked hard to save money and they have endured many obstacles along their financial path.  Many adults come upon financial situations where they have to decide which course of action to take and David, Becky, and their son, John, are in one of those situations. 

Lesson 18 - Case Study II ~ 45 Years' Old

John is considering attending Clemson University in the fall to work towards a degree in forestry; however, he has spent his high school summers working for his uncle’s logging company and loves it.  He’s been offered a job at the logging company upon high school graduation.  David and Becky want to help John with his college tuition, but they are not paying all of it.  Clemson’s estimated cost for college in 2016 for one year is $27,890.  John has been awarded $10,000 in scholarships and grants, bringing the costs down $17,890.  After the summer, John will have $10,000 saved up from working with the logging
company.  David and Becky are deciding if they can help John with the other $7,890 should he decide to attend Clemson.

It’s currently February.  In order to decide where they might obtain the $7,890 to help John, they have decided to sit down and look at their financial picture by creating a Personal Financial Statement.  Take a look at all of the David and Becky’s income, assets, liabilities, and personal information in Exercise 18.1 and see what they might decide to do.  They will consider using their money in savings, taking a loan against David’s Life Insurance, cashing in their stocks or CDs, or possibly get a loan. 

Exercise 18.1

David and Becky now live at 5678 Holler Lane, Charleston, SC 29401.  Their home phone is 555-123-4567 and their contact cell phone is 843-555-7777.  David works at MNO Company and makes $78,000 a year and Becky works part-time and makes $20,000 annually.  

Use the information above and complete a PFS for David and Becky.  Use February 27, 2016, as the date.  Do not use dollar signs as they are already there for you.

1.   2.   3.   
4.   5.   6.  
7.  $ 8.  $ 9.  $
10.  $ 11.  $ 12.  $
13.  $ 14.  $ 15.  $
16.  $ 17.  $ 18.  $
19.  $ 20.  $ 21.  $
22.  $ 23.  $ 24.  $
25.  $ 26.  $ 27.  $
28.  $ 29.  $ 30.  $
31.  $ 32.  $ 33.  $

 

Exercise 18.2

Where might David and Becky obtain the $7,890 to help John if he decides to go to Clemson?

Lesson 19 - Case Study III ~ 65 Years' Old

This is the final case study for David and Becky Jones.  David is now 65 years old.  David and Becky are looking forward to retirement in a few years.  They have been working hard along their financial path to make it possible to retire without any debt. 

They are considering downsizing their house, but they do have grandchildren who visit often.  For now, though, they will remain at the current residence until they both retire.  Many folks have debt they are paying off in their mid-60s; whereas, others don’t.  Each person has a different financial path and it varies according to the circumstances in their lives.

While David and Becky have paid off most of their debt, they took out a medical loan to pay for medical bills from medical procedures both David and Becky have had in the past year. 

Lesson 19 - Case Study III ~ 65 Years' Old

David and Becky love to go on trips with their RV and use their vacation time to go see their kids and grandkids.  They are considering traveling full-time with their RV when they retire in a couple of years.  They traded in the RV they used when John and Lizzie were teenagers and have a new RV. 

David and Becky inherited some jewelry and antiques from their families.  They plan to pass these items along to their kids someday. 

David and Becky invested in a small business venture several years back and receive monthly income.  The business is still going strong and they plan to keep their partnership interest in the business.

Continue onto the exercise and complete a PFS for David and Becky.

Exercise 19

David and Becky still live at 5678 Holler Lane, Charleston, SC 29401.  Their home phone is 555-123-4567 and their contact cell phone is 843-555-7777.  David works is still at MNO Company and he now makes $125,000 a year and Becky has been working full-time and makes $45,000 annually.  They also receive $1,500 from their business venture each month.

Use the information above and complete a PFS for David and Becky.  Use January 30, 2036 as the date.  Remember, do not enter dollar signs as they are given already.

1.   2.   3.  
4.   5.   6.  
7.  $ 8.  $ 9.  $
10.  $ 11.  $ 12.  $
13.  $ 14.  $ 15.  $
16.  $ 17.  $ 18.  $
19.  $ 20.  $ 21.  $
22.  $ 23.  $ 24.  $
25.  $ 26.  $ 27.  $
28.  $ 29.  $ 30.  $
31.  $ 32.  $ 33.  $

 

Quiz - Section 5

  • Each person’s financial situation remains stagnant over time.
  • People in their forties then to have more debt than people in their 60s.
  • A Personal Financial Statements allows a person to see their financial health.
  • Personal Financial Statements are often requested by financial institutions for small business loans.
  • There are many different types of Personal Financial Statements.
  • Personal Financial Statements only list current assets.
  • Contingent liabilities are never listed on a PFS.
  • A PFS requires a list of monthly expenses.
  • A PFS should be completed on an annual basis at a minimum.
  • A person really doesn’t need to start creating an annual PFS until they are in their 40s.

Unit I Test

Unit I Test - Question 1

  • Income
  • Revenues
  • Proceeds
  • Takings

Which of the following is typically used by companies to identify the money made on their financial statements:

Unit I Test - Question 2

  • It is money received from performing work or providing services.
  • It is money received when work isn’t performed or services provided.
  • It is money received as a gift for a birthday.
  • It is money received in exchange for a personal item.

Which of the following explains earned income:

Unit I Test - Question 3

  • It is money received from performing work or providing services.
  • It is money received when work isn’t performed or services provided.
  • It is money received as a gift for a birthday.
  • It is money received in exchange for a personal item.

Unearned income is defined as:

Unit I Test - Question 4

  • Variable expenses
  • Discretionary expenses
  • Fixed expenses
  • None of these

Costs that do not change from month-to-month are:

Unit I Test - Question 5

  • Eating out
  • Utility expense
  • Auto loan payment
  • Rent payment

Which of the following costs is an example of a discretionary expense:

Unit I Test - Question 6

  • Fixed expense
  • Discretionary expense
  • Monthly expense
  • Variable expense

An expense that changes with a person income and/or activity is called a:

Unit I Test - Question 7

  • Savings isn’t really necessary.
  • Savings is started later in life.
  • Savings is putting money aside for use at some point in the future.
  • None of the above are true.

Which of the following is true about savings:

Unit I Test - Question 8

  • Dividend
  • Interest
  • Earned income
  • Revenues

The money paid by a company to their shareholders is called a:

Unit I Test - Question 9

  • Ending date
  • Final date
  • Maturity date
  • Late date

The date at the end of a term is referred to as a:

Unit I Test - Question 10

  • Opening several loans with staggered maturity dates.
  • Opening several CDs with staggered maturity dates.
  • Opening three savings accounts on different days.
  • Having accounts at multiple financial institutions.

Which of the following is an example of laddering:

Unit I Test - Question 11

  • freely giving something to someone with an expectation of something in return.
  • giving something to someone by force.
  • loaning something to someone for a period of time.
  • freely giving something to someone without an expectation of something in return.

Giving is:

Unit I Test - Question 12

  • listing all allowable deductions in order to lower one’s taxable income.
  • listing all allowable deductions in order to have for insurance.
  • listing all allowable deductions is not necessary.
  • None of these.

Itemizing deductions is:

Unit I Test - Question 13

  • Subtracting total assets from total liabilities.
  • Subtracting current liabilities from current assets.
  • Subtracting total liabilities from total assets.
  • Subtracting current assets from current liabilities.

Personal net worth is calculated by:

Unit I Test - Question 14

  • Owed
  • Owned
  • Borrowed
  • All of these

Assets are item that are:

Unit I Test - Question 15

  • Current asset
  • Liability
  • Appraisal
  • Personal property

An item that can be moved from place to place is which of the following:

Unit I Test - Question 16

  • Estimated guess
  • Conjecture
  • Appraisal
  • Speculation

A(n) ______________ is when an expert gives an estimated value to property or goods.

 

Unit I Test - Question 17

  • Current assets
  • Existing assets
  • Present assets
  • Remaining assets

Short-term assets are also known as:

Unit I Test - Question 18

  • Prepaid asset
  • Liability
  • Future asset
  • Impending asset

When something is paid for before it becomes due it is known as a:

Unit I Test - Question 19

  • Tangible and intangible is the same thing.
  • Tangible assets cannot be seen or identified by touch.
  • Intangible assets cannot be seen or identified by touch.
  • There is no such thing as an intangible asset.

Which of the following is true:

Unit I Test - Question 20

  • Bicycle
  • Copyright
  • Automobile
  • Jewelry

Which of the following is an example of an intangible asset:

Unit I Test - Question 21

  • not permanent in nature and will be turned into cash within a year.
  • permanent in nature and will be turned into cash within a year.
  • not permanent in nature and will not be turned into cash within a year.
  • permanent in nature and will not be turned into cash within a year.

Long-term assets are:

Unit I Test - Question 22

  • Owed
  • Owned
  • Borrowed
  • All of these

A liability is something that is:

Unit I Test - Question 23

  • Liability
  • Equity
  • Asset
  • Extra money

The value in property after all attached debts to the property have been subtracted is called:

Unit I Test - Question 24

  • Current asset
  • Long-term liability
  • Short-term liability
  • Equity

A current liability is also known as a:

Unit I Test - Question 25

  • A six-month loan
  • A two-year loan
  • A five-year loan
  • A fifteen-day loan

Which of the following is an example of a payday loan:

Unit I Test - Question 26

  • List monthly expenses and income.
  • List all assets and liabilities
  • List all debts coming due with a year
  • None of these

A Personal Cash Flow Statement is used to:

Unit I Test - Question 27

  • List monthly expenses and income
  • Measure the financial health for a person
  • Isn’t necessary to do
  • All of the above

A Personal Financial Statement is used to:

Unit I Test - Question 28

  • Money that is due to a person within a year or more.
  • Debt obligation that is due within a year or more.
  • Debt obligation that is due after a year or more.
  • Money that is due to a person after a year or more.

Long-term liabilities is a:

Unit I Test - Questino 29

  • Monthly loans
  • Long-term loans
  • Regular payment loans
  • Installment loans

Loans with payments at regular intervals are known as:

Unit I Test - Question 30

  • A balance that is incredible.
  • The remaining obligation on a loan.
  • Both a and b.
  • Neither a or b.

Which of the following defines an outstanding balance on a loan:

Unit I Test - Question 31

  • Overextended
  • Down on one’s luck
  • Overstretched
  • Overreached

When a person’s income cannot meet their debt obligation it is known as being:

Unit I Test - Question 32

  • Long-term liabilities
  • Current liabilities
  • Contingent liabilities
  • Short-term liabilities

Obligations that are probably to occur in the future are called:

Unit I Test - Question 33

  • Monetary funds earned by an employee in exchange for work completed.
  • Monetary funds after all deductions.
  • Monetary funds received a gift.
  • Monetary funds received from an investment in stocks.

Gross wages are:

Unit I Test - Question 34

  • Rewards
  • Deductions
  • Awards
  • Net wages

Monetary funds received from an investment in stocks.

Unit I Test - Question 35

  • Money earned from commissions.
  • The money earned before any deductions.
  • Money received as a bonus.
  • The take home pay after all deductions.

Net wages is:

Basic Theories

Lesson 20 - Opportunity Costs

An opportunity cost is that which is lost when one opportunity is chosen over an alternative opportunity.   Many think of opportunity cost as being related to money, but it can also be related to time, benefits, land, anything of value to the person.  In other words, a person can have two or more opportunities.  When a person chooses one opportunity over another, they have to determine what benefits they will give up with the opportunity that is not chosen.

For example, a person has an opportunity to work a five-hour shift and make $10 per hour.  He also has the opportunity to spend time hiking and eating lunch with friends during those same five hours.  The hike and lunch will cost $25.  If he chooses to go hiking, he will lose the opportunity to make $50.  In other words, his opportunity cost was $50 for hiking and lunch with friends.  He could choose to work and make $50 and spend time hiking and having lunch with those same friends on another day.

Lesson 20 - Opportunity Costs

Other examples of opportunity costs:

· Buying trendy clothes instead of buying less expensive ones.  The opportunity cost of buying expensive clothes is the money not saved when buying those clothes over buying the less expensive ones.

· Going to college instead working a full-time job.  The opportunity cost in going to college is the money not earned by working full-time instead.

· Spending time with friends instead of studying for a test.  The opportunity cost in spending time with friends is the knowledge not learned and/or retained for the test.

· Starting a business rather than working for a company.  The opportunity cost in starting a business are the wages and benefits given up that could be earned from working for a company.

· Sleeping in one morning instead of getting chores completed.  The opportunity cost of sleeping in may be the time forfeited spending time with friends later.

Lesson 20 - Opportunity Costs

Opportunity costs exists in many decisions since most decisions mean a person is giving up something in order to do something else.  Decision making isn’t always easy because there are often advantages and disadvantages regardless of which opportunity is chosen.  For example, while a person gives up the opportunity to make money if they attend college, they may make more income with an earned degree.  Or, they may not.  It will depend on job availability, pay scale in the chosen industry, etc.  Each person has to decide which opportunity will be most beneficial for them. 

Exercise 20 - Question 1

  • Tools that could have been used.
  • Water that was used.
  • Other vegetables that could have been planted.
  • None of these.

Name the opportunity cost:

Planting bush beans in a garden.

Exercise 20 - Question 2

  • A good night’s sleep.
  • Energy to complete the test.
  • Alertness to remember the information.
  • All of these.

Name the opportunity cost:

Staying up late to study for a test.

Exercise 20 - Question 3

  • Benefits and regular income from working for a company.
  • Access to a soda machine.
  • Not having a regular paycheck.
  • All of these.

Name the opportunity cost:

Starting a small business.

Exercise 20 - Question 4

  • Full-time income lost from working.
  • Buying books.
  • Not having to take classes and tests.
  • None of these.

Name the opportunity cost:

Going to college full-time.

Exercise 20 - Question 5

  • Less sleep.
  • College degree to potentially increase income.
  • Having more time with friends.
  • None of these.

Name the opportunity cost:

Working full-time instead of going to college.

Lesson 21 - Time Value of Money

The time value of money (TVM) states that money available today (present value) has more value than the same amount of money in the future (future value) due to its earning potential.  TVM affects personal, business, and
government finance. 

When money is invested rather than spent or saved without earning interest it doesn’t hold the same value in the future.  For example, if a person has $1,000 and puts it in their dresser today and takes it out of the dresser in ten years, it would still be $1,000.  However, if a person takes the same $1,000 and puts it in an interest-bearing account today earning 5% per year, it would be worth $1,647.01 in ten years. The TVM for the $1,000 in that situation is $647.01.  Earning $647.01 in ten years isn’t a whole lot, but what if a person starts with $10,000 and earns 5% for 35 years?   They would have $57,337.18.  This shows how time increases the value of money.

Lesson 21 - Time Value of Money

When using simple or compound interest to allow money to grow over time, the money is then working by itself.  In other words, a person isn’t doing anything extra to earn additional income.  The interest earned over time is called investment income.

The difference between simple and compound interest is how the interest is earned.  Simple interest is earned by calculating it against the principal amount on the loan.  For example, the interest rate to be earned or paid is multiplied by the principal amount of the loan and the number of periods in a loan.  The formula for calculating simple interest is:  principal amount (PV) x interest rate (r) x number of periods (usually years) in the investment or loan (Y).

Lesson 21 - Time Value of Money - Example 21.1

Suppose:   Jennifer invests $15,000 at an interest rate of 6.5% for 10 years.  What is the future value of her investment if she earns simple interest?

Answer:  $24,750

                 Interest Earned = 15,000 x .065 x 10
                 Interest Earned = 9,750
                 FV = $24,750 (15,000 + 9,750)

Lesson 21 - Time Value of Money

To increase the earning potential of a simple interest investment, a person can make monthly additions to the investment to increase the principal amount; therefore, increasing the interest that can be earned on the investment.  For the purposes of this working textbook, we will be looking at investments without monthly additional deposits, which is in more advanced textbooks. Compound interest accrues on both the principal and interest earned from previous periods.  Basically, compound interest investments pay interest on the interest earned along with the principal amount.  Investments using compound interest typically have higher earning potential than a simple interest investment.  Look at the illustration on the next slide.  It demonstrates how earning potential between an investment earning simple interest versus compound interest.

Lesson 21 - Time Value of Money - Simple Interest Verses Compound Interest Investment Table

 

As can be seen, when investing $15,000 for 10 years at an interest rate of 6.5%, an investment using compound interest earns the investor $3,407.06 more than an investment using simple interest.  The simple interest earned for the period is added to the original investment of $15,000.  The compound interest earned is added to the principal amount.  This becomes the new principal balance (accrued interest + principal balance from the previous period).  Then the interest earned in the next period is based on the principal balance of the previous period.  The interest earned is earning money along with the initial deposit of $15,000.

Lesson 21 - Time Value of Money - "Rule of 72"

There are several ways to see the effects of compound interest in an investment.  The first way is using the “Rule of 72.”  The Rule of 72 is easy to use and it shows how long it will take to double an investment at a particular interest rate.  For example, if a person invests $100 at 10%, how long will it take the $100 investment to double?  The answer is 7.2 years.  To calculate the Rule of 72, a person takes 72 and divides it by the interest rate (as a whole number).  Therefore, in the example above when 72 is divided by 10 (representing 10%), the outcome is 7.2 or 7.2 years.  Below is an illustration of the Rule of 72 at various interest rates.

It is also beneficial to look at how an investment will grow over time.  What happens if a person puts $5,000 into an investment earning 8% when they are 20 years old, adds to that investment each month, and lets it grow until they are 70 years old?  How much would the investment grow over time?  On the next page, a similar scenario will answer these questions.

Lesson 21 - Time Value of Money - Example 21.2

Suppose:   Henry, who is 20 years old, invests $5,000 at an interest rate of 8% for 50 years compounding monthly.  At the beginning of his investment he contributes $100 each month.  His deposits increase with inflation, which is set at 1.5%.  What is the future value of his investment when he turns 70 years old?

Answer:  Take a look at the illustration below.  The future value of his investment is $1,223,634.03.  That isn’t a typo or a calculation error.  Compounding interest helps investments grow at a fast rate, especially if deposits are made toward the investment on a monthly basis.

Lesson 21 - Time Value of Money

To determine the earning potential of an investment using compound interest an online calculator can be used, it can be calculated by hand using the formula, or it can be figured using Excel or a financial calculator.
www. Investor.gov/tools/calculators/compound-interest-calculator is a good online calculator. 

The formula is FV = P(1+r/n)^{Yn}FV is the future value
P is the present value or principal
r is the annual interest rate
n equals the number of compounding periods each year
Y is the number of years of the investment. 

It’s important to note that different investment products use compounding interest at different intervals such as monthly or annually.  It is important to know the compounding periods when choosing an investment product.

Lesson 21 - Time Value of Money

Let’s try using the formula to determine the future value (FV) with the following information:  $5,000 present value, 8%, 10 years, and compounding monthly. 



 

 

 

 

When using the compound interest calculator on the investor.gov website, the answer is $11,098.20 and is more accurate than using a scientific calculator.  This is due to rounding issues when dividing the rate by the number of compounding periods.  Rounding issues only occur when dividing the rate by the number of compounding terms results in an uneven number. 

When calculating by hand, a scientific calculator is necessary.  These are available as apps or from a store.  When making the last calculation on a scientific calculator using the 5,000 (1.007)120 in the example, the following entry on the calculator would be made 5,000 x 1.007 xy 120 (xy is a key on the calculator that must be used).

Lesson 21 - Time Value of Money - Example 21.3

Lesson 21 - Time Value of Money - Example 21-4

Exercise 21 - Question 1

  • Money available in the future has more value than the same amount of money in that is available to day due to its earning potential.
  • Money available today has more value than the same amount of money in the future due to its earning potential.
  • Money available today has less value than the same amount of money in the future due to its earning potential.
  • None of the above

Which of the following best describes the time value of money:

Exercise 21 - Question 2

  • Present value
  • Current value
  • Forthcoming value
  • Future value

The value of money that a person has today is called:

Exercise 21 - Question 3

  • Present value
  • Current value
  • Forthcoming value
  • Future value

The value of money that a person will have in the future is called:

Exercise 21 - Question 4

  • PV = P(1 + r/n)Yn
  • PV = FV(1 + r/n)Yn
  • FV = P(1 + r/n)Yn
  • P = FV (1 + r/n)Yn

The Compound Interest formula is (assume in each answer option, that Yn is raised):

Exercise 21 - Question 5

  • $17,500
  • $18,250
  • $15,500
  • $18,000

Sally invests $10,000 at an interest rate of 5.5% for 15 years.  What is the future value of her investment if she earns simple interest:

Exercise 21 - Question 6

  • $15,478.74
  • $21,709.73
  • $17,167.48
  • $22,901.67

The answer to this question is based on using a compound interest calculator online at www.investor.gov/tools/calculators/compound-interest-calculator.  

A person invests $4,000 for 25 years at an interest rate of 7% compounded annually.  Which answer is the closest  to the future value of their investment:

Exercise 21 - Question 7

  • $15,478.74
  • $21,709.73
  • $17,167.48
  • $22,901.67

The answer to this question is based on using a compound interest calculator online at www.investor.gov/tools/calculators/compound-interest-calculator.  

A person invests $4,000 for 25 years at an interest rate of 7% compounded monthly.  Which answer is the closest  to the future value of their investment:

Exercise 21 - Question 8

  • $61,025.85
  • $73,764.12
  • $62,390.73
  • $76,134.70

The answer to this question is based on using a compound interest calculator online at www.investor.gov/tools/calculators/compound-interest-calculator.  

A person invests $23,000 for 20 years at an interest rate of 5% compounded annually.  Which answer is the closest  to the future value of their investment:

Exercise 21 - Question 9

  • $59,025.85
  • $73.764.12
  • $63,390.73
  • $76,134.70

The answer to this question is based on using a compound interest calculator online at www.investor.gov/tools/calculators/compound-interest-calculator

A person invests $23,000 for 20 years at an interest rate of 5% compounded monthly.  Which answer is the closest  to the future value of their investment:

Exercise 21 - Question 10

  • $70,000.03
  • $76,702.18
  • $104,821.20
  • $114,179.88

The answer to this question is based on using a compound interest calculator online at www.investor.gov/tools/calculators/compound-interest-calculator

A person invests $7,000 for 40 years at an interest rate of 6% compounded monthly.  Which answer is the closest  to the future value of their investment:

Lesson 22 - Cash

As many people know, bartering was the first form of monetary exchange for goods and services.  Doctors were paid with goods in exchange for medical care, people exchanged sugar for flour, a bag of apples for a bag of oranges, and so on.  Bartering soon leant way for coins, then paper money entered the market, then checks were introduced, and lastly, plastic cards. 

When a person thinks of cash, they think of paper money and coins.  Cash in the world of finance, banking, and accounting also includes money in checking and savings accounts, marketable securities, and government bonds.  Checks are also considered a form of cash.  All of these items are considered to be cash because they can be turned into cash quickly or within a year.  In business, a company’s current assets are considered a form of cash.

Lesson 22 - Cash

Today, many people do not use paper money or coins and use a debit card instead.  Debit cards look like credit cards and can be used as such when making purchases for goods and services such as at a grocery or department store.  Debit cards can also be used as automatic teller machine (ATM) cards at ATMs to withdraw and deposit money into checking and savings accounts.  When a person only has a savings account, they are given an ATM card, which cannot be used as a debit card.  When a debit card is used for a purchase, it debits the money for the purchase from the checking account for which it is attached. 

Lesson 22 - Cash

It is important to retain all debit card receipts, whether from an ATM or purchase, to input into a check register.  Receipts are important to keep in case an item needs to be return or exchanged at the store and to keep track of expenses.  A person could receive back less money than what they spent on a product when they do not have their receipt when they return an item.  For example, if a person purchased a product for $25 on a Monday and the store put that same product on sale for $20 on Wednesday, the store will only refund $20 to that same person if they try to return that product on Wednesday without a receipt.  Consumers must show proof of how much they paid for the product they wish to return.  Additionally, some companies will only offer store credit for returned items that do not have a receipt.  It is important to retain all receipts if it is possible that a product may be returned to the store.

Lesson 22 - Cash

Interestingly, even with all of the advances of technology, bartering still remains between people.  Also, cash and checks are stilled used.  Many small businesses will only accept checks or paper money as a form of payment.  They do this in order to defer the costs associated with debit and credit card purchases.  Each time a person uses their debit card, the merchant has to pay transaction fee.  Since checks are still necessary today, it is important to learn how to write checks, which will be covered in the Checking Accounts section of this working textbook. 

Exercise 22

  • Plastic cards were the first form on money.
  • Marketable securities are a form of cash.
  • Checks are considered to be cash.
  • Debit card receipts for purchases can be thrown away immediately.
  • It is necessary to know how to write a check in today’s society.
  • Current assets are not considered a form of cash.
  • An ATM card that is tied to a savings account can be used for purchases.
  • Debit cards are tied to checking accounts, can be used to make purchases at retail stores, and to withdraw and deposit money in checking and savings accounts at ATMs.
  • Many small businesses only accept paper money and checks as a form of payment.
  • Receipts are never necessary for a full refund of a purchase product.

Lesson 23 - Debt

As was discussed in the Labilities Section, debt is money that is owed.  There is short-term and long-term debt.  Debt is also a financial tool that must be used wisely. 

In today’s society, it is almost impossible to avoid debt once a person becomes an adult.  If a person signs an annual lease to rent an apartment, they have incurred a short-term debt or liability.  Signing up for a two-year cell phone contract causes a long-term liability to occur.  When a person purchases a house using a loan, they have incurred a long-term debt or liability.  It is not a bad thing to have an apartment lease or a mortgage as people need a place to live. 

Lesson 23 - Debt

The problem with debt arises when a person doesn’t choose debt that fits within their income level.  For example, if a person’s net wages for a month is $1,000 and they have a mortgage payment that is $800 a month, they will have issues with paying all of their expenses such as utilities bills, property taxes, house maintenance, groceries, auto fuel, etc.  This situation is called being “house poor.”  This can also happen when a person leases a place to live that leaves little discretionary income.

Additional issues with debt is when it is used as a source of income.  This happens mainly with credit cards.  When monthly expenses, or wants, become greater than net income. 

Viewing debt as a tool rather than some elusive, untouchable thing, helps people put their spending into perspective.  Asking the question, “How will incurring this debt affect me in the future?” helps when making financial decisions.  For example, if taking on more debt now will prevent a person from opportunities in the future, then that person should avoid that debt.

Lesson 23 - Debt - Example 23.1

Suppose:   Erin wants to be a culinary expert.  After graduating culinary school, she plans to travel the world to enhance her culinary skills.  She’ll make money working at various restaurants in other countries.  Between saving up money, working, and assistance from her parents, she will not have any school debt upon graduating. Recently, Erin saw a really nice car and is thinking of getting a loan in order to buy the car.  What should she do? 

Answer:  Avoid the loan.  Obtaining a loan for the car will mean a monthly payment, which may be difficult to pay if she doesn’t get steady work or make enough money while traveling the world for her culinary experience pursuits.  In this situation, the debt of an auto loan could mean Erin will no longer have the opportunity to pursue her culinary dreams.

This example shows how taking on a loan is not a good use of debt and can thwart opportunities.  However, in some situations, debt can be used to open the door to opportunities, which is shown in Example 23-2 on the page.

Lesson 23 - Debt - Example 23.2

Suppose:   Zach would like to attend college after graduating high school.  He will turn 18 years old in April.  He realizes he will have to work fulltime to support himself and attend college.  He currently makes minimum wage working at a fast food restaurant, which he has discovered will not be enough to live on and pay for college.  A friend of his, Mike, graduated high school two years earlier and works as an EMT while attending online college.  He has suggested that Zach look into becoming an EMT.  The problem is that the EMT courses costs $700 and the exams cost another $300.  Zach is able to get a loan for $1,000 to pay for both the course and exams.  He will have several options for employment once his completes the EMT schooling.  While researching information about becoming an EMT, Zach calculated that average wages for EMTs and realizes he would earn enough to pay for living expenses, college, and pay off the $1,000 loan within a few months of starting work.   Would this be a wise use of debt?  

Answer:  Yes, it would be.  Zach would incur $1,000 in debt; however, he currently makes enough money to make the monthly loan payment in addition to his other expenses.  Once Zach passes the course and exams, he will begin working fulltime.  Also, he will earn a higher wage for his newly acquired skill as an EMT than he currently earns working at fast food restaurant.  His increase in pay will allow him to make enough money to quickly pay off the debt.  

Lesson 23 - Debt

While it’s good to avoid debt if possible, it can be used as a tool to open up opportunities for increased income.  It’s important to learn how to use debt appropriately.  Many people incur debt without considering what may happen in the future such as decrease wages or loss of income. 

Many think that incurring debt will increase their chances of becoming rich.  In most cases, that simply isn’t true.   Two questions that should be asked when looking at taking on debt.  One being, “What opportunities will be available, either now or in the future, by incurring this debt?”  And, the other being, “Are there sufficient monetary resources to pay back the debt in a timely manner?” 

While some debt can open up opportunities, as is seen in Example 23-2 or with many college degrees, it rarely leads to increased wealth.  In Example 23-2, Zach could just as easily wait to get his EMT license once he saved up enough money to pay for the courses and exams without a loan; however, that isn’t always feasible. 

Exercise 23 - True or False Questions 1 - 5

  • Debt never has to be incurred by anyone.
  • Incurring debt always leads to wealth.
  • Debt can sometimes open opportunities.
  • It is okay to use credit card as a source of cash.
  • Debt is a financial tool that should be used wisely.

Exercise 23 - Question 6

  • Money that is owned.
  • Money that is owed.
  • Money that is received as a gift.
  • Money that is given as a gift.

Debt is defined as:

Exercise 23 - Question 7

  • Debt poor
  • Mortgage poor
  • House poor
  • Always poor

When a person’s mortgage payment, property taxes, and utility costs are a large percentage of their total income, it is called:

Exercise 23 - Question 8

  • Incurring debt will make a person rich.
  • Incurring debt will make life easier.
  • Incurring debt is always necessary.
  • Incurring debt should be used wisely as a financial tool.

Which of the following is true:

Exercise 23 - Question 9

  • A one-year apartment lease.
  • A two-year cell contract phone contract.
  • Weekly grocery receipt.
  • Utility bill.

Which of the following is considered a short-term debt:

Exercise 23 - Question 10

  • A one-year apartment lease.
  • A 15-year mortgage.
  • Money spent at the movies.
  • A six-month loan.

Which of the following is considered long-term debt:

Quiz - Section 6 - True or False Question 1 - 10

  • An opportunity cost is that which is lost when one opportunity is chose over an alternative opportunity.
  • The time value of money states that money available today has more value than the same amount of money in the future.
  • Bartering no longer exists.
  • Debt is money owned.
  • An opportunity cost can be associated with time.
  • Interest earned over time is called investment income.
  • Cash does not include marketable securities.
  • Debt can be used as a financial tool.
  • The time value of money affects personal, business, and governmental finance.
  • It is okay to throw away receipts immediately.

Quiz - Section 6 - Question 11

  • Using tools.
  • Using water.
  • Planting other vegetables.
  • None of these.

Name the opportunity cost:

Planting carrots in the garden.

Quiz - Section 6 - Question 12

  • Studying for test.
  • Being alert the next day.
  • A good night’s sleep.
  • All of these.

Name the opportunity cost:

Staying up late completing a term paper.

Quiz - Section 6 - Question 13

  • Sleeping in every day.
  • Benefits and regular wages from working for a company.
  • Not having regular income.
  • None of these.

Name the opportunity cost.

Starting a personal business.

Quiz - Section 6 - Question 14

  • Money saved.
  • Popularity with friends.
  • Both a and b.
  • Neither a or b.

Name the opportunity cost.

Buying trendy clothes.

Quiz - Section 6 - Question 15

  • $87,485.84
  • $80,501.26
  • $60,898.04
  • $64,931.98

The answer to this question is based on using a compound interest calculator online at www.investor.gov/tools/calculators/compound-interest-calculator

A person invests $8,000 for 30 years at an interest rate of 8% compounded annually.  What is the future value of their investment:

Quiz - Section 6 - Question 16

  • $51,691.42
  • $46,686.49
  • $60,898.04
  • $54,203.18

The answer to this question is based on using a compound interest calculator online at www.investor.gov/tools/calculators/compound-interest-calculator

A person invests $9,000 for 30 years at an interest rate of 6% compounded monthly.  What is the future value of their investment:

Quiz - Section 6 - Question 17

  • $5,595.42
  • $6,826.49
  • $6,620.41
  • $5,903.36

The answer to this question is based on using a compound interest calculator online at www.investor.gov/tools/calculators/compound-interest-calculator

A person invests $2,000 for 20 years at an interest rate of 6% compounded monthly.  What is the future value of their investment:

Quiz - Section 6 - Question 18

  • $110,376.26
  • $105,599.83
  • $113,951.71
  • $119,528.70

The answer to this question is based on using a compound interest calculator online at www.investor.gov/tools/calculators/compound-interest-calculator

A person invests $15,000 for 40 years at an interest rate of 5% compounded annually.  What is the future value of their investment:

Quiz - Section 6 - Question 19

  • The value of money today.
  • The value of money in the future.
  • Yesterday’s value of money.
  • All of these.

Which of the following defines present value:

Quiz - Section 6 - Question 20

  • Savings account
  • CD account
  • Checking account
  • Credit card account

What type of account is a debit card attached to:

Checking Accounts

Lesson 24 - Types of Financial Institutions - For Profit

There are several different types of financial institutions.  There are commercial banks, credit unions, savings and loans, investment banks, insurance companies, finance companies, building societies, and asset management companies.  This lesson will focus on the first three:  commercial banks, credit unions, and savings and loans.

When the word “bank” is mentioned, most people think of commercial banks.  Commercial banks have a variety of products for consumers, which include checking accounts, savings accounts, personal and business loans, and deposit accounts such as IRAs and CDs.  Banks are “for-profit” corporations.  For-profit organizations are focused on their operations making a profit.  Banks pay their declared earnings to the stockholders/shareholders of the bank.  There are no membership qualifications to meet to open an account at a bank.

Lesson 24 - Types of Financial Institutions - Not-for-Profit

Credit unions are much like banks in that they offer the same services and products.  Credit unions offer checking accounts, savings accounts, personal and business loans, and deposit accounts to consumers.  However, credit unions are not-for-profit cooperation’s.  Not-for-profit organizations earn profits, but not for their owners/members, but to put back into their organizations to meet their goals.  Their declared earnings are paid back to their members through lower fees and loan rates.  In order to have any accounts with a credit union, a person must become a member and open a savings account, which is called a share account.  Generally, credit unions have “field of membership” qualifications that each person must meet in order to become a member of their credit union.  Typical qualifications are based on where a person lives, the industry in which they work such as the medical field, or family that is already a member.  The field of membership qualifications are different at every credit union.  If a person meets the field of membership qualifications for a particular credit union, they usually have to pay a nominal membership fee.  This fee is usually returned to the account holder when the account is closed six or more months after opening the account.  Savings accounts are called share accounts because each member has one equal share in the credit union; they are a shareholder of that credit union. 

Lesson 24 - Types of Financial Institutions - Non-Profit

Not-for-profit is different than non-profit.  Not-for-profit organizations earn revenues through selling products and services and they must reinvest a percentage of their annual net profit or declared earnings into the organization.  Non-profit organizations earn revenues solely through charitable donations and/or grants and they are limited in how much net profit they can earn each year.

Lesson 24 - Types of Financial Institutions - Mutual Ownership Model

Savings and Loans offer the same services as banks and credit unions.  Savings and loans can have two different types of ownership.  They can be owned by its depositors and borrowers, which is called a mutual ownership model.  Or, they can be owned by shareholders.  There are no field of membership qualifications for savings and loans that are mutually owned by their members.

Exercise 24

Fill in the blanks:

1.    are not-for-profit organizations.

2.  Financial institutions that have two different types of ownership are called  and
      .

3.  For-profit financial institutions are called  .

4.  Credit unions have  of   qualifications.

5.  Banks pay their declared earnings to .

6.  A financial institution that has mutual owners, but not field of membership qualifications are called
      and .

7.  Credit unions pay their declared earnings back to their  through lower  and      .

8.  For-profit organizations focus on making a  through .

9.     is where depositors and borrowers own a savings and loan.

10.  Companies earn revenues through contributions and/or grants are called -  organizations.

Lesson 25 - Checking Accounts

Many people have checking accounts, but there are many that do not.  According to the Federal Deposit Insurance Corporation (FDIC) in their “2013 FDIC National Survey of Unbanked and Underbanked Households, “7.7 percent (1 in 13) of households in the United States were unbanked in 2013.  This proportion represented nearly 9.6 million households.”  That is a lot of households.  The report doesn’t state if it included those who have accounts with other types of financial institutions such as credit unions. 

Having checking and savings accounts are not mandatory, but they are very useful financial tools.  Many people are concerned about losing their money at a bank or credit union; however, unlike the run on the banks in the movie “It’s a Wonderful Life,” money in financial institutions are insured up to certain dollar amounts.  The FDIC provides insurance up to $250,000 for each depositor at each insured bank.  The National Credit Union Association (NCUA) also provides insurance up to $250,000 for each share owner (member) for each insured credit union. 

Lesson 25 - Checking Accounts

Remember from the Lesson 24, in order to open up any account at a credit union, a share (savings) account must be opened first.  Banks do not have this same requirement; although, it’s a good idea to open a savings and checking account at the same time if a person has no savings accounts at any other financial institutions.

When opening up new accounts, most financial institutions require photo identification, proof of residence, social security number, and date of birth.  A driver’s license or a state identification card will usually satisfy the photo identification, proof of residence, and date of birth if the person’s current residence matches the address.  Financial institutions will run a person’s information through an online verification program.  If all of their information matches, then the process moves forward.  If any of the information, such as social security number or date of birth, do not match, the financial will most likely request to see the original document for the item in question, such as a social security card or birth certificate. 

Lesson 25 - Checking Accounts

The verification process is required by law.  Once it is complete, the financial institution will obtain a credit report.  Most young adults do not have any sort of credit history, and therefore, no credit score, also known as a FICO score.  If a person does have a credit history, the financial institution will decide if they qualify for a checking account.  Most people can open a savings account regardless of their credit history and score.

When opening a checking account for the first time, it’s a good idea to have the institution order checks and a debit card.  The debit card gives access to a person’s checking and savings account even when the institution is closed by using the ATM.  It’s important to note that financial institutions charge fees when you use a foreign (ATM not owned by the financial institution where the account is held) ATM.  Both your financial institution and the institution where you used the ATM will charge a transaction fee of $1 to $5.  Debit cards can also be used for purchases at most merchants; however, there are still companies that don’t accept debit cards.  Checks become necessary when a person doesn’t have any cash with them and a merchant doesn’t accept debit cards, but will accept a check.  The problem with checks is that most people do not know how to fill out a check.  Let’s learn how right now! 

Lesson 25 - Checking Accounts

The illustration below is a sample blank check: 

1. Name and address of the account holder(s).

2.  Number the check.  Checks are printed in sequential numerical order.

3.  Date check is written.

4. Name of payee (e.g. person or company being paid).

5.  Dollar amount being paid written in words.

6.  Dollar amount being paid written in numeric form.

 

7.  Name of the financial institution where the account is held.

8.  Optional field to state the purpose of the check (i.e. shoes for work).

9.  Signature of the account holder.

10.  Routing number of the financial institution where the account is held.

11. Account number of the checking account that funds are drawn on.

12.  The payee of the check endorses (sign) the back of the check to either deposit or cash the check.  When cashing a check, the payee obtains the amount being paid in cash.

Lesson 25 - Checking Accounts

The following illustration is an example of a completed check.

The written dollar amount has a form to it.  The dollar part is written out while the cents part is written in a fraction.  It is always written with the cents on top and “100” written on the bottom as shown in the illustration.  Compound numbers, such as the “25” in the illustration, are always hyphenated. 

Examples of written numbers for checks are as follows:

· $5.73 – Five and 73/100 -------—--------------------------------------------------------------------------

· $11.67 – Eleven and 67/100 -------------------------------------------------------------------------------

· $463.78 – Four hundred, sixty-three and 78/100 --------------------------------------------------------

· $1,689.45 – One thousand, six hundred, eighty-nine and 45/100 --------------------------------------

· $23,953.84 – Twenty-three thousand, nine hundred, fifty-three and 84/100 --------------------------

· $487,279.30 – Four hundred, eighty-seven thousand, two hundred, seventy-nine and 30/100 ------

Lesson 25 - Checking Accounts

Another important aspect of checking accounts is the fees associated with them.  Every financial institution has their own schedule of fees, so it is important to compare fees before selecting a financial institution.  Fees that may be incurred with a financial institution can be for checking account, going under a required minimum balance, per check used, foreign ATM fees, etc.  Check with the institution and ask for a copy of their schedule of fees.

Lesson 25 - Checking Accounts

In a checking account, the ‘account balance’ doesn’t always match the ‘available balance.’  This is due to the timing of when a merchant puts a hold on funds and when they push through a batch of transactions for the day.  For example, John has a checking account balance of $500.  He purchases a fishing rod from the store, GO Fishing, at 10:00 a.m. for $50 using his debit card.  When he checks his account at 2:00 p.m., it states he has an account balance of $500 and available balance of $450.  GO Fishing put a hold on the $50 purchase, but they won’t run the batch of transaction through their system until later that night, or possibly the next day.  Once GO Fishing runs their batch of transactions through their financial institution, and John doesn’t make any more purchases, his account, and available balance will match.

Exercise 25 - Questions 1 - 6

When entering the written dollar amount, make sure there is one space and five dashes at the end.  The dashes represent the line you would draw when writing a check.

For questions 1 – 6, fill out the following check with the following information:

Jessica Smith purchased a swimsuit for a vacation trip for $38.56 from Swimsuits R Us on May 11, 2013.

1.   

2.   

3.   

4.   

5.   

6.   

Exercise 25 - Question 7

  • Three hundred, eightsix and 46/100 ------
  • Three hundred and eighty-six and 46/100 -------
  • Three hundred, eighty-six and 46/100 -------
  • Three hundred, eight-six and forty-six/100 ------

$386.46 would be written as follows:

Exercise 25 - Question 8

  • a Schedule of Fees
  • a Schedule of Accounts
  • a Schedule of Charges
  • None of these

Financial institution charge various fees for their checking accounts using

Exercise 25 - Question 9

  • up to $300,000 for each depositor even if the institution isn’t insured.
  • up to $300,000 for each depositor per insured institution.
  • up to $250,000 for each depositor even if the institution isn’t insured.
  • up to $250,000 for each depositor per insured institution.

Money in accounts in banks and credit unions are insured

Exercise 25 - Question 10

  • accessible balance
  • manageable balance
  • available balance
  • convenient balance

Each checking account has an account balance and a(n)

Lesson 26 - Savings Accounts

The process of opening a savings account is relatively the same as a checking, except running a credit report usually isn’t necessary.  Every savings/share account and checking account has its own unique account number. 

Savings accounts typically don’t have a difference between the account balance and the available balance since funds are deposited or withdrawn immediately rather than by using a debit card for purchases or writing checks.  The exception to this is with credit unions.  The membership amount that was required at the time of opening a share account is not available for use to the account holder(s).  For example, if a credit union requires $25 to open a share account, that $25 is shown in the account balance, but because the $25 is part of the membership, it is available for use.  The $25 is usually returned to the account holder upon closing the account.  One a person opens a share account with a credit union, they can open other accounts without any other required deposit amount. 

Lesson 26 - Savings Accounts

Banks, on the other hand, do not memberships or required membership deposit amounts.  However, many banks require a minimum deposit amount for some their savings account products.  Many banks have monthly fees for checking accounts; however, many banks will waive the monthly fee if the account holder sets up an automatic deposit into savings account each month and maintains a minimum balance.  This encourages the account holder to save money.  

Lesson 26 - Savings Accounts

The insured amount by the FDIC and NCUA also applies to savings accounts.  The insured amount of $250,000 covers each depositor.  Therefore, a married couple could have up to $500,000 insured, $250,000 each, in one account at an insured institution.      

Lesson 26 - Savings Accounts

If a person doesn’t qualify for a checking account due to a low credit score and poor credit history, opening a savings account is the next best step.  Financial institutions will work with people with poor credit histories in order to assist them in working toward opening a checking account in the future.  Many financial institutions will require a savings account to be in good standing for period of time, such as six months.  They may also require the new account holder to meet other goals, such as improving their credit history with no new debt, paying down of debt, and/or an improve FICO score by a certain amount or percentage. 

Lesson 26 - Savings Accounts

If a person has to wait to open a checking account, it will mean they will need to manage their money using their savings account.  The one disadvantage to using a savings account, which was stated in Lesson 3, is the minimum withdrawal limits for savings accounts set by law. 

A savings account is permitted six withdrawals per month.  Those withdrawals include outgoing transfers.  Once a person has reached six withdrawals or outgoing transfers in a given month, they will most likely be charged a fee by the financial institution.  Each institution charges a different amount. 

Exercise 26 - True or False Questions 1 - 10

  • Savings usually don’t have a different between the account balance and available balance.
  • A person can never open a savings account if they have a low FICO score.
  • The law has a minimum withdrawal limit for savings accounts.
  • The FDIC is the agency that insures deposits for banks.
  • The FDIC is the agency that insures deposits for credit unions.
  • Opening a savings account is relatively the same process as opening a checking account.
  • The insurable about for each deposit with an insured institution is $275,000.
  • If a person doesn’t qualify for a checking they can work toward getting a checking account by doing a good job maintaining a savings account.
  • Banks require a membership in order to open any accounts.
  • The minimum withdrawal amount for savings account is six per month.

Lesson 27 - Managing Your Accounts - Reconciliation Part I

Reconciling checking accounts each month is extremely important.  Not doing so can result in shortages in the account and fees for insufficient funds, which add up quickly.  Reconciliation of a checking account is making adjustments of the differences between a Statement of Account balance and an account holder’s balance in their checkbook register.  A checkbook register is used to keep track of the debits and credits in an account.  It is also used for savings accounts.  To reconcile an account, the account holder matches the debits and credits on the Statement of Account to their checkbook records.  Various tools are used to record the debit and credit transactions in a person’s checking account, such as a paper checkbook register booklet, an Excel spreadsheet, Quicken, etc.

Lesson 27 - Managing Your Accounts - Reconciliation Part I

The format may be slightly different in various checkbook registers.  Below is an illustration of a checkbook register.

1.  The date is the date of the transaction or the date on a check.

2.  The TYPE is for the type of transaction:  enter the check number for a check, DEP for a deposit, WD for a withdrawal, DEBIT when a debit card is used for a transaction, or EFT for payments automatically withdrawn from the account.

3.  Description of transaction is the name of the Payee and what was purchased or paid.

4.  Payment/Debit (-) is the amount debited or paid.  This would include any fees assessed on the account and posted to the account by the financial institution.

5. R and c stand for “reconciled” and “cleared”.  The c box next to the transaction is checked when an item has gone through checking account at the financial institution.  This can be seen by logging into the checking account online or using an app.  The R box next the transaction is checked once the checking account has been reconciled. 

6.  Deposit/Credit (+) is the amount deposited or credited to an account.  This would include any interest earned on the account and posted to the account by the financial institution.

7. Balance is the remaining or available balance in the account once all transactions have been entered into the register.

Lesson 27 - Managing Your Accounts - Reconciliation Part I

The following illustration shows what a checkbook register looks like when transactions have been entered into it.  The following are the list of transactions that have occurred for this example.

  • · Beginning balance of 150.00 on August 10, 2014.
  • · Check number 236 written on August 12, 2014, for $8.56 at Arby’s.
  • · Direct deposit of $536.29 paycheck on August 15, 2014.
  • · ATM withdrawal of $20 on August 16, 2014, to go to the movies.

As can be seen in the above illustration, the balance reflects the running total of debits and credits being subtracted from the balance.  Once a person checks their checking account online or through an app and sees the funds have been “cleared” or have been released by the financial institution, they would put a check mark in the c box.  The next illustration shows the first two items being cleared.

Lesson 27 - Managing Your Accounts - Reconciliation Part I

Exercise 27

The checkbook register illustration below shows the columns labeled A - H and the rows labeled 1 - 18.  Use this illustration to complete Lines 1 -18.  See below for more instructions.  

Complete Lines 1 – 18 below using the following scenario:  Samantha made the following transactions. Use the above illustration as your guide enter what would go in each cell in the above checkbook register. Problem 1 and 2 have been completed for you.  Enter NA (not applicable) for cells that do not have an entry. Tips:  Use the following format for dates - 10/3/13, do not use dollar signs, and use an X for cleared items.

As you work through these, remember that Samantha checked her account online on October 17, 2013, and saw that all of the transactions cleared her account except check 462.  Mark those items as cleared.

Lines 1 and 2.  Beginning balance of $200.00 on October 1, 2013.

a.  10/1/13     b.  NA     c.  Beginning Balance     d.  NA     e.  NA     f.  X     g.  NA     h.  200.00

a.  NA     b.  NA     c.  NA     d.  NA     e.  NA     f.  X     g.  NA     h.  200.00

Lines 3 and 4.  Purchase of groceries for $86.46 at Walmart on October 3, 2013, using a debit card.

a.    b.    c.    
d.
    e.    f.    
g.    h.  

and

a.    b.    c.  
d.    e.    f.  
g.    h.  

Lines 5 and 6.  Check #461 used to pay the water bill to Municipal Water Company for $43.98 on October 5, 2013.

a.    b.    c.  
d.    e.    f.  
g.    h.  

and

a.    b.    c.  
d.    e.    f.  
g.    h.  

Line 7 and 8.  Used debit card on October 8, 2013, at Qdoba to eat lunch with friends.  Spent $10.43.

a.    b.    c.  
d.    e.    f.  
g.    h.   

and

a.    b.    c.  
d.    e.    f.  
g.    h.   

Lines 9 and 10.  Cash withdrawal at an ATM on October 12, 2013, for $20 to have on hand.

a.    b.    c.  
d.    e.    f.  
g.    h.   

and

a.    b.    c.  
d.    e.    f.  
g.    h.   

Lines 11 and 12.  Direct deposit of paycheck for $764.26 on October 15, 2013.

a.    b.    c.  
d.    e.    f.  
g.    h.   

and

a.    b.    c.  
d.    e.    f.  
g.    h.   

Lines 13 and 14.  Rent of $400 was paid to Lakewood Apartments on October 15, 2013, using check number 462.

a.    b.    c.  
d.    e.    f.  
g.    h.   

and

a.    b.    c.  
d.    e.    f.  
g.    h.   

Lines 15 and 16.  Samantha uses her debit card to purchase gas at the Flying J for her car on August 18, 2013, for $29.13.

a.    b.    c.  
d.    e.    f.  
g.    h.   

and

a.    b.    c.  
d.    e.    f.  
g.    h.   

Lines 17 and 18.  On August 20, 2013, Samantha purchases clothes for work at J.C. Penney for $26.46 using her debit card.

a.    b.    c.  
d.    e.    f.  
g.    h.   

and

a.    b.    c.  
d.    e.    f.  
g.    h.   

Lesson 28 - Managing Your Accounts ~ Reconciliation Part II

At the end of every month, a financial institution either mails a Statement of Account to the account holder or makes it available online at their website.  Each financial institution’s Statement of Account is formatted differently.  On the next page, there is an illustration of an abbreviated Statement of Account by a financial institution. 

Lesson 28 - Managing Your Accounts ~ Reconciliation Part II

Below is a checkbook register for the same account represented in the Statement of Account on the next page.  Compare the Statement of Account against the checkbook register below.  Are there any problems?  Is there anything missing or entered incorrectly?

When comparing the above checkbook register against the Statement of Account, the discrepancies noted are the Walmart entry of 156.00 and the missing entry of 32.75 for the Flying J.  The Walmart entry should be 156.48.

Lesson 28 - Managing Your Accounts ~ Reconciliation Part II

If these had been an actual checkbook register and Statement of Account, the account holder would have discovered the errors and made the corrections in their checkbook register.  If a paper register is being used to record transactions an adjusting entry of 33.23 (32.75 – Flying J + 0.48 Walmart error) would be entered and subtracted from the balance.  This is done because it would be difficult to erase all of the transactions and reenter them. 

If a software program is being used to record transactions, missing transactions can be added to the register and transactions with errors can be corrected. 

Now, let’s practice in Exercise 28.1 on the next page.

Exercise 28

Below is the checkbook register and the transaction portion of Statement of Account for the same
checking account.  There are three errors.  Can you find them?

Quiz - Section 7

Complete Lines 1 – 10 below using the following scenario:  Josh made the following transactions.  Help he out by entering them into the checkbook register.  For cells that do not have an entry, enter NA.Josh checked his account online on July 15, 2013, and saw that transactions 1 through 5 cleared his account.  Mark those transactions as cleared.  Tips:  The date format is 06/20/15, use X for cleared entries, and do not use dollar signs.

Lines 1 and 2.  Beginning balance of $300.00 on June20, 2015.

a.    b.    c.  
d.    e.    f.  
g.    h.   

and

a.    b.    c.  
d.    e.    f.  
g.    h.   

Lines 3 and 4.  Direct deposit of paycheck for $1,263.89 on July 1, 2015.

a.    b.    c.  
d.    e.    f.  
g.    h.   

and

a.    b.    c.  
d.    e.    f.  
g.    h.   

Lines 5 and 6.  Rent of $600 was paid to Westlake Apartments on July 1, 2015, using check number 724.

a.    b.    c.  
d.    e.    f.  
g.    h.   

and

a.    b.    c.  
d.    e.    f.  
g.    h.   

Lines 7 and 8.  Purchase of groceries for $136.45 at Safeway on July 3, 2015, using a debit card.

a.    b.    c.  
d.    e.    f.  
g.    h.   

and

a.    b.    c.  
d.    e.    f.  
g.    h.   

Lines 9 and 10.  Cash withdrawal at an ATM on July 4, 2015, for $40 to celebrate 4th of July with family and friends.

a.    b.    c.  
d.    e.    f.  
g.    h.   

and

a.    b.    c.  
d.    e.    f.  
g.    h.   

Lines 11 and 12.  Josh received a check from his friend, Mark, for $50 on July 11, 2015, reimbursing him for money borrowed.

a.    b.    c.  
d.    e.    f.  
g.    h.   

and

a.    b.    c.  
d.    e.    f.  
g.    h.   

Lines 13 and 14.  Check #724 used to pay the cell phone bill to Verizon for $60.53 on July 15, 2015.

a.    b.    c.  
d.    e.    f.  
g.    h.   

and

a.    b.    c.  
d.    e.    f.  
g.    h.   

Lines 15 and 16. Josh used his debit card to purchase gas at the Conoco for his car on July 15, 2015, for $35.46.

a.    b.    c.  
d.    e.    f.  
g.    h.   

and

a.    b.    c.  
d.    e.    f.  
g.    h.   

Lines 17 and 18. On July 17, 2015, Josh has lunch with friends at McDonald’s for $9.27 using his debit card.

a.    b.    c.  
d.    e.    f.  
g.    h.   

and

a.    b.    c.  
d.    e.    f.  
g.    h.   

Quiz - Section 7 - Question 11

  • a for-profit company
  • a not-for-profit company
  • a non-profit company
  • a profit company

A company that earns revenues through selling products and services and reinvests their earned revenues back into the company to benefit its members is known as:

Quiz - Section 7 - Question 12

  • a for-profit company
  • a not-for-profit company
  • a non-profit company
  • a profit company

A company whose focus is making sure their operations make a profit is known as:

Quiz - Section 7 - Question 13

  • a for-profit company
  • a not-for-profit company
  • a non-profit company
  • a profit company

A company who revenues are solely earned through charitable donations and/or grants is known as:

Quiz - Section 7 - Question 14

  • FDIC and the NCUA
  • NDIC and the FCUA
  • FDUA and the NCIC
  • FDIA and the NCUC

The two companies that insured the funds deposited at banks and credit unions are the:

Quiz - Section 7 - Question 15

  • Two withdrawals per month
  • Four withdrawals per month
  • Six withdrawals per month
  • There are no Federal withdrawals limits for savings accounts

What is the Federal withdrawal limit for savings accounts:

Quiz - Section 7 - Question 16

  • It doesn’t matter when
  • Immediately
  • Never
  • Once a week

Transactions should be recorded into a register:

Quiz - Section 7 - Question 17

  • Quarterly
  • Weekly
  • Monthly
  • Annually

Reconciling an account should be completed on a ________________ basis:

Quiz - Section 7 - Question 18

  • Used to make purchases at stores
  • Only used to make withdrawals and deposits at ATMs
  • Both a and b
  • None of these

ATM cards tied to savings account can be:

Quiz - Section 7 - Question 19

  • One thousand, six hundred, eighty-three and forty-seven/100 -------
  • One thousand, six hundred, eightythree and 47/100 -------------------
  • One thousand, six-hundred, eighty-three and 47/100 ------------------
  • One thousand, six hundred, eighty-three and 47/100 ------------------

$1,683.47 should be written in long-form as follows on a check:

Quiz - Section 7 - Question 20

  • DEP
  • DEPOSIT
  • DEBIT
  • CREDIT

When recording a deposit, the following should be written in the type column:

Quiz - Section 7 - Question 21

  • Entering each transaction twice into a checkbook register.
  • Read the Statement of Account, but not making any corrections.
  • Not making adjustments of the differences between a Statement of Account balance and an account holder’s balance in their checkbook register.
  • Making adjustments of the differences between a Statement of Account balance and an account holder’s balance in their checkbook register.

Which of the following describes reconciliation of a checking account?

Quiz - Section 7 - Question 22

  • The financial institution making a payment.
  • The person making a payment.
  • The person or company being paid.
  • All of these are examples of a payee.

A payee is:

Quiz - Section 7 - Question 23

  • Recommended
  • Reconciled
  • Resolved
  • There are no Federal transaction limits for checking accounts

“R” on a checkbook register stands for:

Quiz - Section 7 - Question 24

  • It is when the financial institution has approved a deposit or payment on an account.
  • It is when the financial institution has denied a deposit or payment on an account.
  • It is when the financial institution has cleared an account of all funds.
  • It is when an account holder has withdrawn all funds from an account.

What does “cleared” mean when referring to checking accounts?

Quiz - Section 7 - Question 25

  • Two transactions per month.
  • Three transactions per month.
  • Six transactions per month.
  • There are no Federal transaction limits for checking accounts.

What is the Federal transaction limit for all checking accounts before fees are incurred?

Investments

Lesson 29 - Stocks

Securities are an investment instrument purchased and sold in the financial market in order to make money by those who buy them; known as investors.  Investors put money into a product or service in hopes they will receive money in return that is greater than the initial investment that they made.  Stocks are one type of security and investment.  Other types of securities are corporate, municipal, and government bonds; mutual funds; and, stock and future options.  Stocks represent ownership in a company.  Companies sell stocks to shareholders, who are a type of investor and they hold shares, or ownership, of a company with stocks that they purchase.  Companies sell stocks in order to raise money to operate their business.  The two main categories of stocks are common and preferred.

Lesson 29 - Stocks

Owners of common stocks have ownership and voting rights in a company.  They get to vote for those who are on the board of directors and on company policy issues.  However, they are the last to be paid when a company liquidates; goes out of business and sells all of its assets.   Owners of preferred stocks have ownership in a company, but they do not usually have any voting rights.  On the other hand, if a company liquidates, they get paid before the investors with common stocks.  They also receive dividends before owners of common stocks.

When a person has the right to buy (known as a call option) or sell (known as a put option) a stock for a set price for stated period of time, they have a stock option.  If they do not buy or sell the stock within the allocated time period, the option expires. 

Lesson 29 - Stocks

Remember from Lesson 3, dividends are funds that are paid to shareholders of a company.  Dividends are typically paid from the profits of a company.  The board of the directors of a company decide when dividends are paid to shareholders and how much they receive.  The board of directors can also decide to give different classes of stocks (e.g. common and preferred) different dividend amounts, usually calculated as a percentage of the profits. 

Investors purchase a stock in order to get a return on their money.  They do so when they receive a dividend or when there is capital appreciation.  This occurs when an investor sells a stock for a higher price than what he purchased it for.  The difference in the higher sale price less the lower purchase price represents a return to the investor.  But beware!  Stock prices can also go down in value. 

Lesson 29 - Stocks

Stocks are sold in the securities market.  The United States has its own securities markets and the three largest are the New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotation System (Nasdaq), and American Stock Exchange (AMEX).  Examples of commodities exchanges are the New York Mercantile Exchange, Inc., (NYMEX), Chicago Board of Trade (CBOT), and London Commodity Exchange (LCE).  Commodities exchanges trade contracts in agricultural and mineral products such as wheat, corn, cattle, pigs, gold, and silver. 

Exercise 29 - Crossword Puzzle

The following are clues for the crossword puzzle below.  Use the table below the crossword to enter in the correct word.

Across*

1.      Acronym for the New York Stock Exchange.
3.      A person has this when they have a right to buy a stock.
4.      A type of stock where the shareholder usually does not have voting rights.
5.      A person has this when they have a right to sell a stock.
6.      A type of stock where the shareholder has voting rights.  
8.      The money paid from profits to shareholders.

Down*

2.     When a person has the right to buy or sell a stock for a set period of time and at  a set price.
7.     When a company goes out of business and sells all of their assets.
9.     Instruments that are purchased by investors.
10.  Those that own stocks in a company.
11.  Those who pay for securities in order to get a higher return than what they invested.

*Answers 7, 8, 9, 10, and 11 are plural.

ACROSS DOWN
1.   2.  
3.   7.  
4.   9.  
5.   10.  
6.   11.  
8.    

 

Lessson 30 - Bonds

As mentioned in Lesson 29, bonds are a type of marketable security.  There are corporate, municipal, and government bonds.  A bond is when an investor loans money for an agreed upon period of time to a corporation or government entity.  The investor earns either a variable or fixed interest rate.  The owner of the bond is called a debtholder.  They are also known as creditors. 

A variable interest rate varies over the period of the loan; whereas, a fixed interest rate stays exactly the same for the entire loan period.  A loan can have a combination of a variable and fixed interest rate.  For example, a loan can have a fixed interest rate for the first 36 months and then switch to a variable interest rate.  Variable interest rates are tied to an index such as U.S. Treasuries.

Lesson 30 - Bonds

Just like stocks, corporate and government bonds are traded on the stock exchanges and some are traded over-the-counter (OTC).  OTC simply means the bond is traded using some other tool than one of the stock exchanges.  The major stock exchanges have a list of requirements that a security must meet in order to be traded.  For smaller companies, their stocks and bonds usually don’t meet the list of requirements, so they trade their marketable securities over-the-counter. 

Lesson 30 - Bonds

Bonds have a rating system that is a lot like grades.  Standard & Poor’s (S&P), Moody’s, and Fitch are the three most respected bond rating agencies.  Each agency has their own rating system, but their rating criteria's are similar.  The ratings gauge a company’s ability to pay back their debts using their rating system.  They also split their rating systems between long-term and short-term debt.  Their top rating is a strong indicator that a company can repay their debts and their bottom rating represents that a company already has debts in default.  Each agency has a significant number of ratings in their rating system.  A person can learn more about each agency’s rating system by visiting their website.

A bond is a debt instrument used by companies and governments.  These entities may issue bonds to fund their operations or expansion.  With most corporate bonds, investors will purchase the bond and then will receive interest payments, called a coupon, usually semi-annually until the maturity date of the bond.  At that time, the investor will receive their principal back as well as the final interest payment.  

Lesson 30 - Bonds

Another type of bond is a zero-coupon bond.  With this bond the investor purchases the bond at a discounted value from its face amount.  Interest builds up over the life of the bond until maturity.  At that time the value of a bond is equal to its face amount.  Government savings bonds are a form of a zero coupon bond.  For example, a zero-coupon bond has a value of $100 and a five-year maturity date.  The investor purchases the bond for $50 and cashes it in for $100 when it matures in five years.  The investor’s yield on the bond is $50.  

Lesson 30 - Bonds

A bond yield is the difference of how much the investor paid for a bond and how much they made at maturity.  The different types of bond yields are yield to maturity (YTM), yield to call (YTC), current yield, realized yield, and nominal yield.  The study of these bond yields is outside the scope of this working textbook.  It’s important to note, though, that there are many different kinds of bonds with a variety of yields. 

A bond’s par value is the value on the face of the bond.  So a $1,000 bond will have a par value of $1,000.  Bonds are sold into the market and may be priced at par, or they may be priced at a premium (a value over par) or a discount (a value under par).  Usually premiums and discounts are factors of the risk of the company and the relationship of the current interest rate environment and the rate on the bond.  As an example, if a corporate bond has an interest rate of 7% and a par value of $1,000.  If the current interest rate for a similar bond is 8%, an investor will not pay the full par value for that bond since they will earn less money.  They will want to purchase the bond at a discount. 

Exercise 30 - Question 1

  • stays the same, but changes 90 days into a loan period.
  • stays the same for the entire loan period.
  • stays the same for 30 days, but changes each month.
  • varies according to the index it is tied to.

A fixed interest rate:

Exercise 30 - Question 2

  • type of marketable security.
  • constraints on a checking account.
  • something investors should avoid.
  • None of the above.

Bonds are a:

Exercise 30 - Question 3

  • Standard & Moody’s, Poor’s, and Fitch
  • Standard & Poor’s, Moody’s, and Fitch
  • Standard & Poor’s, Moody’s, and Finch
  • Standard & Fitch, Poor’s, and Moody’s

The three most respected bond rating agencies are:

Exercise 30 - Question 4

  • only varies the last 60 days of a loan.
  • stays the same for the entire loan period.
  • varies according to the index it is tied to.
  • varies according to what the investor wants each month.

A variable interest rate:

Exercise 30 - Question 5

  • are traded at the counter at a pharmacy.
  • are traded at counters in the grocery stores.
  • use the major stock exchanges.
  • don’t use the major stock exchanges.

Over-the-counter bonds:

Exercise 30 - Question 6

  • debtholder.
  • bond holder.
  • credit holder.
  • bond issuer.

The owner of a bond is called a:

Exercise 30 - Question 7

  • measures how much investors like a particular bond issuer.
  • measures how much investors like a particular bond.
  • measures the ability that bond issuers can repay their debts.
  • measures the ability of how much an investor can invest.

A bond rating: 

Exercise 30 - Question 8

  • has the exact same rating system.
  • has their own rating system.
  • guesses what their ratings should be for each bond.
  • None of the above.

Each bond rating agency:

Exercise 30 - Question 9

  • doesn’t exist when purchasing bonds.
  • is the difference between how much an investor paid for a bond and how much the company receives from the same bond.
  • is the difference between how much a company issued on a bond and how much they receive at from an investor for the bond.
  • is the difference between how much an investor paid for a bond and how much they receive at maturity.

Bond yield:

Exercise 30 - Question 10

  • either corporate or municipal bonds.
  • either corporate or government bonds.
  • either corporate, municipal, or government bonds.
  • either municipal and government bonds.

Bonds are:

Lesson 31 - Mutual Funds

Another marketable security, a mutual fund, is comprised of a group of stocks, bonds, and other securities.  When an investor purchases a mutual fund, they receive interest in a portion of all the various securities that are held by that fund.  This helps obtain diversification or the action to spread out risk that would be associated with a single stock.  Each shareholder’s ownership percentage in the mutual fund is based on how many shares they own.  Mutual funds are managed by an investment firm or bank, called a money manager.  The job of a money manager is to take the capital of a mutual fund and invest it to make more money.  Capital is the money a person or company has invested to generate income. 

Lesson 31 - Mutual Funds

A mutual fund pays out dividends from the stocks and interest from the bonds that the funds hold.  Shareholders can wait until a mutual fund increases in price and then sell the fund in order to make a profit.  The fund will sometimes sell some of the securities it is comprised of when there has been an increase in price.  When the fund does sell any of the securities that increased in price, it has then incurred a capital gain.  The capital gain is pass to the investors who then have to pay taxes on it.  A capital gain is the increase in a capital asset.  Investors don’t realize the gain until the capital asset, such as securities, is sold.  It is when the capital gain is realized that taxes are incurred. 

Lesson 31 - Mutual Funds

The three main types of funds are fixed-income funds, money market funds, and equity funds.  Fixed-income funds are made up of corporate, municipal, and federal bonds.   Equity funds invest in both U.S. and global stocks.  Money market funds are typically comprised of short-term debt securities.  One type of short-term (less than one year) debt security is government treasury bills (T-bills).  Some funds are targeted to just one particular type of investment.  An example may be a mutual fund that invests in loans of high-grade commercial office space. 

Lesson 31 - Mutual Funds

The idea behind mutual funds is to allow investors who don’t have enough money to invest in a variety of securities to diversify their investments.  Sometimes there are higher costs associated with mutual funds due to the fees charged by the mutual fund manager.   Mutual funds may have various charges associated with them.  Some have fees, or a load, paid to the money manager.  Some funds are no-load funds but they may have trading fees to get out of the fund.  A fund’s performance should always be looked at after any fees are taken out.  There are some companies that monitor the performance of mutual funds.  This allows investors to judge the performance of various funds to see which one they want to purchase. 

Lesson 31 - Mutual Funds

Many investors use online trading companies that offer lower trading costs.  There are several sites, such as Investopedia, who have free virtual trading simulators that allow participants to practice trading with virtual (play) money. 

There isn’t an age limit to use Investopedia’s Stock Simulator*; however, a person has to be 18 years of age or older to invest real money in the securities market.  For those younger than 18 years, they can invest in securities with an adult as the account holder.

*There are public games on the Investor Stock Simulator; it is recommended anyone under the age of 18 get their parent’s or guardian’s permission to use the site’s simulator.

Exercise 31

Matching – Match the correct definition with the correct word.

  • Money manager
    Investment manager for mutual fund
  • Equity funds
    Funds made up of stocks
  • Capital gain
    Increase in a capital asset
  • Money market funds
    Funds of short-term debt securities
  • Diversification
    Spreading risk among several investments
  • Mutual funds
    Group of stocks, bonds, or other securities
  • Capital
    Investments in mutual funds
  • Fixed income funds
    Funds made up of bonds

Lesson 32 - Other Investments

There are many other types of investments, which include investing in the foreign exchange markets (FOREX), real estate, commodities, art, collectibles, future, and options (briefly discussed in Lesson 29.  Additionally, there are IRAs and CDs, which were discussed in Lesson 3.  Starting a business is also an investment.  FOREX, futures, and options are investments that are a bit more complex.  It takes an increased knowledge of the securities market to invest in these. 

Lesson 32 - Other Investments

Investing in real estate can be either a passive or non-passive investment.  Let’s take a moment to review passive and non-passive income from Lesson 2.  When the investment is passive, the investor puts very little, or none at all, time into the investment activity. For example, if an investor purchases a commercial or residential property to earn income from leasing the property, they may use a management company to manage the property.  The management company takes care of negotiating the lease with the tenants, maintenance of the property, and collecting rents.  Once rent is received, the management company takes their percentage and mails the rest of the received money to the investor.  This is called mailbox money.  Since the investor doesn’t activity participant in the management of the property, it’s passive income

Lesson 32 - Other Investments

On the other hand, some investors will manage the real estate property they purchase.  They are actively involved in managing the property.  The income earned in this situation is called non-passive income

It’s important to note investments come with different levels of risk.  Some investors are okay with risk, while others are “risk adverse.”  A risk adverse investor is one who doesn’t want to lose any money or only lose very little money in an investment.  They prefer to invest in products with a lower return on their investment for the assurance they will not lose any money.  Riskier investments tend to have higher returns on an investment, but there is a higher probability the investor will lose some of their money.  Sometimes, they lose  all of  their money in a particular investment. 

Lesson 32 - Other Investments

Those investors who are risk adverse will prefer CDs and money-market savings accounts.  Those investors who have a higher tolerance for investment risk will gravitate toward stocks, collectibles, commodities, FOREX, and timeshares. 

Lesson 32 - Other Investments

The following illustration demonstrates the difference between low and high risk.

Each investor has to determine for themselves their tolerance for investment risk and then chose the investment product that matches.  It’s recommended that investors have a diverse portfolio that has investments with varying levels of risk. 

Exercise 32 - True or False Questions 1 - 10

  • Passive income is earned by actively participating in the investment.
  • An example of an investment that has increased risk would be stocks.
  • An investor who is risk adverse is someone who has a low tolerance for losing money on investments.
  • Mailbox money is a type of non-passive income.
  • Examples of investments with low to no risk would be IRAs and CDs.
  • FOREX stands for Foreign Exchange Market.
  • An investor who manages their real estate investment earns non-passive income.
  • Investments should not be diversified with high and low risk Investment products.
  • Each investor has to determine their tolerance for investment risk.
  • Starting a business not a type of investment.

Quiz - Section 8 - Question 1

  • NYSE
  • NYSTE
  • NYMEX
  • FOREX

The acronym for the New York Stock Exchange is:

Quiz - Section 8 - Question 2

  • Common stock
  • Preferred stock
  • Mutual stock
  • Money market stock

A type of stock where the shareholder usually does not have the voting rights is:

Quiz - Section 8 - Question 3

  • Mutual stock
  • Preferred stock
  • Common stock
  • Money market stock

A type of stock where the shareholder usually does have voting rights:

Quiz - Section 8 - Question 4

  • Monthly payment
  • Dividend
  • Common stock
  • Surplus

The money paid from profits to shareholders is called a:

Quiz - Section 8 - Question 5

  • hawked
  • peddled
  • sold
  • liquated

When a company goes out of business and sells all of their assets they have _________________ their business:

Quiz - Section 8 - Question 6

  • owes stock in a business.
  • owes stock to a business.
  • owns stock in a business.
  • owns a business.

A shareholder is a person who:

Quiz - Section 8 - Question 7

  • investor
  • owner
  • wise person
  • dedicated

A person who pays for securities in order to get a higher return than what they originally invested is referred to as a(n):

Quiz - Section 8 - Question 8

  • New York Mercantile Exchange, Inc., and the New York Stock Exchange.
  • New York Stock Exchange and the Commodity Exchange, Inc.
  • New York Mercantile Exchange, Inc., and Chicago Board of Trade (CBOT)
  • New York Mercantile Exchange, Inc., and the American Stock Exchange.

Examples of commodities exchanges are the:

Quiz - Section 8 - Question 9

  • promise
  • call
  • put
  • option

When a person has the right to buy or sell a stock for a set period of time and at a set price they have a (n):

Quiz - Section 8 - Question 10

  • promise
  • call option
  • put option
  • dividend

When a person has a right to buy a stock they have a:

Quiz - Section 8 - Question 11

  • promise
  • call option
  • put option
  • dividend

When a person has a right to sell a stock they have a:

Quiz - Section 8 - Question 12

  • securities
  • investments
  • expenses
  • dividends

Financial instruments that are sold and purchased by investors in the financial markets are called:

Quiz - Section 8 - Question 13

  • corporate, municipal, and governmental.
  • corporate, state, and governmental.
  • corporate, municipal, and stock.
  • corporate, utility, and governmental.

The three types of bonds are:

Quiz - Section 8 - Question 14

  • bondholder
  • stockholder
  • shareholder
  • debtholder

The owner of a bond is called a:

Quiz - Section 8 - Question 15

  • score system.
  • rating system.
  • grade system.
  • evaluation system.

Bonds having a ______________ _______________ to measure a company’s ability to pay back their debts:

Quiz - Section 8 - Question 16

  • bond margin
  • bond spread
  • bond yield
  • bond range

A _____________ _____________ is the difference between how much an investor paid for a bond and how much they made at maturity:

Quiz - Section 8 - Question 17

  • Standard & Poor’s, Moody’s, and Finch.
  • Standard Bonds, Moody’s, and Fitch.
  • Standard & Moody’s, Poor’s, and Fitch.
  • Standard & Poor’s, Moody’s, and Fitch.

The three most respected bond rating agencies are:

Quiz - Section 8 - Question 18

  • over-the-exchange.
  • over-the-counter.
  • after-the-exchange.
  • beyond-the exchange.

Bonds traded using some other tool than the stock exchanges are called:

Quiz - Section 8 - Question 19

  • variable interest rate
  • fixed interest rate
  • moveable interest rate
  • adaptable interest rate

A _________________ __________________ _________________ changes over the period of a loan:

Quiz - Section 8 - Question 20

  • variable interest rate
  • fixed interest rate
  • moveable interest rate
  • adaptable interest rate

A _________________ __________________ _________________ remains the same over the period of a loan:

Quiz - Section 8 - Question 21

  • communal fund
  • mutual investment
  • mutual fund
  • communal investment

A __________________ __________________ is comprised of a group of stocks, bonds, and other securities owned by different shareholders:

Quiz - Section 8 - Question 22

  • increased income.
  • increased gain.
  • increased asset.
  • capital gain.

An increase in a capital asset is called a:

Quiz - Section 8 - Question 23

  • wealth.
  • principal.
  • capital.
  • resources.

The money a person or company has invested in order to generate income is called:

Quiz - Section 8 - Question 24

  • mailbox money.
  • easy money.
  • letterbox money.
  • mail-drop money.

Passive income that an investor receives when they do not participate in an investment is often called:

Quiz - Section 8 - Question 25

  • investment shy.
  • risk adverse.
  • risk tolerant.
  • risk forbearing.

An investor with a low tolerance for losing money in an investment is called:

Loans - Part I

Lesson 33 - Secured Loans

When a person obtains a secured loan they pledge an asset against the loan.  The person borrowing money is known as the borrower and the financial institution or person lending the money is known as the lender.  The pledged asset is known as collateral.  For example, if a person purchases a house or car, they pledge the house or car being purchased as collateral for the loan.  The most common types of secured loans are home loans, auto loans, recreational vehicle loans, and boat loans. 

Lesson 33 - Secured Loans

The purpose of collateral is to lessen the risk to the lender.  If a person defaults on their loan, the lender can decrease the money they will lose by selling the collateral and paying the monies received against the loan.  When a borrower defaults on a loan, they have stopped making their loan payments or become behind on their payments. 

Less common secured loans are when a person uses cash, CDs, or securities as collateral.  With those types of loans, the collateral pledged for the loan is locked and the borrower cannot obtain those funds until the loan is paid and the financial institution releases the collateral.

Lesson 33 - Secured Loans

Sometimes a borrower will be required to pledge several pieces of collateral for a loan.  This usually occurs when the borrower doesn’t have any or enough money to put toward the loan as a down payment.  Or, if the financial institution has concluded the borrower is a high risk due to being at their job for a short period of time, has a lower than desired credit score, or has late payments on other loans.

Some loans have co-borrowers, also known as obligors.  A co-borrower is another borrower on a loan and has an equal obligation to pay the loan along with the borrower.  Co-borrowers are needed when a borrower doesn’t qualify for the loan on their own.  Or, in the case with a minor person, when they cannot legally enter into a contract on their own.  Loans can have more than one co-borrower. 

Lesson 33 - Secured Loans

Other loans have a guarantor, also known as a signatory.  Guarantors are different than co-borrowers in that the guarantor signs on behalf of the borrower and isn’t liable for the loan until the borrower defaults.  A co-borrower is responsible for repayment of the loan from the start of the loan.  Also, the financial institution doesn’t request payment from them unless the borrower defaults on their loan.  At the time of the default, the financial institution will either request the guarantor makes payments or pay the loan in full, whichever was agreed upon at the time of the loan.  A difference between co-borrowers and guarantors is that co-borrowers have a right to use and enjoy the goods purchase with the loan and guarantors do not.  Additionally, guarantors are common with business loans and not as much with personal loans.  Co-borrowers are common on both business and personal loans.

Exercise 33 - Question 1

  • dodged their loan.
  • defaulted on their loan.
  • avoided their loan.
  • sidestepped their loan.

When a borrower stops making payments on their loan, they have:

Exercise 33 - Question 2

  • is not obligated to pay back the loan.
  • is equally responsible for a loan with the borrower from the start of the loan term.
  • can choose if they want to pay back the loan or not.
  • is only partially responsible for paying back the loan.

A co-borrower:

Exercise 33 - Question 3

  • backer.
  • co-borrower.
  • guarantor.
  • sponsor.

The person who signs on behalf of a borrower and is not obligated on the loan until the borrower defaults is known as a: 

Exercise 33 - Question 4

  • secured loan
  • unsecured loan
  • confident loan
  • None of these

A ________________ ________________ is one that has collateral:

Exercise 33 - Question 5

  • assurance.
  • a guarantee.
  • security.
  • collateral.

An asset that is used to secure a loan is known as:

Exercise 33 - Question 6

  • guarantor
  • family member
  • co-borrower
  • friend

A ________________ has full rights to the products purchased:

Exercise 33 - Question 7

  • lender.
  • borrower.
  • co-borrower.
  • guarantor.

The financial institution who is lending money to a borrower is known as the:

Exercise 33 - Question 8

  • 1
  • 0
  • 2
  • 3

A borrower can miss ____________ payments and not be in default:

Exercise 33 - Question 9

  • home loans.
  • auto loans.
  • boat loans.
  • All of the above.

Common secured loans are:

Exercise 33 - Question 10

  • 1
  • 4
  • 6
  • There is no limit to the number of co-borrowers.

A loan can have up to _________________ co-borrowers on a loan:

Lesson 34 - Unsecured Loans

Unsecured loans are the opposite of secured loans in that these types of loans do not have any collateral protection.  They are considered to be higher risk loans to lenders and usually have higher interest rates, higher monthly payments, or both.

Types of unsecured loans, or debt, are lines of credit, credit cards, payday loans, loans for medical bills, student loans, and signature loans, to name a few.  Student loans are an anomaly.  While they are a type of unsecured loan, many financial institutions view them as a secured loan when running debt ratios because they have a guarantee from the U.S. government.

Lesson 34 - Unsecured Loans

The most difficult type of unsecured debt for a consumer to pay off is credit cards.  Credit cards are an open-end loan from a financial institution.  An open-end loan is a revolving loan.  Revolving loans do not have a maturity date and the borrower can continue to borrow on the loan up to the credit limit.  The borrower can continue to borrow over and over as the loan is paid down.  They do this by using the available balance.  The available balance is the difference between the credit limit and the outstanding balance.  Without a maturity date, a borrower does not know when their open-end loan will be paid off.  Another type of open-end loan is a line of credit.  Closed-end loans, such as house or auto loans, have a maturity date and the paid down portion of the loan is not available to the borrower.

Lesson 34 - Unsecured Loans

The credit card payment structure is inherently designed to pay a large portion toward the interest and a minimal amount toward principal each month.  Principal is the amount borrowed or owed on a loan.  This makes it so the principal amount remains close to the same amount each month with the borrower not making any real progress toward paying down the principal amount, all things being equal.  Why do financial institutions offer these types of loans?  First, there is a demand for them by consumers.  Second, financial institutions are a business and, like any business, they need to generate revenue.  Interest payments on credit cards creates a steady stream of revenue for the credit card issuer.  Financial institutions need revenue to continue to operate.

An additional struggle with credit cards is that many consumers use them as a source of cash.  This happens when a consumer uses their credit cards for purchases when they have no available cash.  It is better to wait to purchase products when cash is available than to use credit cards as a source of cash. 

Lesson 34 - Unsecured Loans

When a borrower does not pay off their credit cards each month, they create a continual cycle of credit card balances remaining the same or increasing each month.  Eventually, the monthly payment for a credit card becomes easier to make than the total amount of the expenses being incurred.  Once a borrower uses the credit card to its credit limit, they have to decide if they will stop using the credit card or try to get another one.  They also have to figure out how they will repay the credit card debt they have built up.  Many consumers, who are now stuck in a credit card spending and debt cycle, get another credit card.  This cycle is called “living beyond ones means.” 

Lesson 34 - Unsecured Loans

Overall, credit cards take a long time to pay off if no additional debt is incurred and only the minimum payment is made each month.  A hefty amount of interest is paid for the convenience of using a credit card.  Credit card issuers make this possible by setting the minimum payment at a low percentage (1 to 3.5%) of the outstanding balance. 

Take a look at the illustration to the right at a sample credit card amortization.  An amortization schedule is a table that shows how a loan is slowly paid off or how an investment increases in value over time.  It is an example of a credit card with a $5,000 outstanding balance, a 14.990% interest rate, and a monthly payment requirement of 2% of the outstanding balance.  As can be seen, after 120 payments, or 10 years, with no additional debt incurred, there remains an outstanding balance of $2,023.92 and $4,951.32 has been paid in interest (almost the entire amount of credit charged) while only $2,976.08 has been paid toward principal.  If the same credit card loan maintained a payment of $100 each month, it would take 79 months, or nearly 8 years, to pay off the credit card.  The combination of a high-interest rate and adjusting monthly payment causes the credit card debt to continue on for years and years.

Lesson 34 - Unsecured Loans

Credit cards are a convenient and useful financial tool IF they are paid off each month.  An example of a credit card being a useful tool is for traveling.  It is not recommended to carry large sums of cash while traveling or to use debit cards for security reasons.  Stolen cash cannot be replaced and it is more difficult to replace funds from fraudulent transactions on debit cards.  

Credit card issuers are offering some great loyalty programs and it’s tempting to use a credit card for purchases.  The loyalty programs are great for those who pay off their outstanding balance each month, but for those who don’t, it can be a tremendous financial burden. 

Exercise 34 - Question 1

  • closed-end
  • circular
  • revolving
  • rotating

A loan that does not have a maturity date and the borrower can keep borrowing up to the credit limit is called a _______________ loan: 

Exercise 34 - Question 2

  • closed-end loan.
  • open-end loan.
  • circular loan.
  • rotating loan.

Another name for a revolving loan is a:

Exercise 34 - Question 3

  • closed-end loan.
  • open-end loan.
  • revolving loan.
  • rotating loan.

A loan with a maturity date is a:

Exercise 34 - Question 4

  • untaken balance.
  • available balance.
  • credit balance.
  • presented balance.

The difference between the credit limit and the outstanding balance is the:

Exercise 34 - Question 5

  • that sometimes will have collateral.
  • that have collateral.
  • that do not have any collateral.
  • All of the above.

Unsecured loans are loans:

Exercise 34 - Question 6

  • a source of cash.
  • a source of increased wealth.
  • a way to make more money.
  • a way to earn more cash.

Many borrowers use credit cards as:

Exercise 34 - Question 7

  • the increase of a loan balance or the decrease of an investment balance plus interest accrued over time.
  • the decrease of a loan balance or the increase of an investment balance plus interest accrued over time.
  • only the decrease of a loan balance over time.
  • only the increase of an investment balance over time.

An amortization schedule shows:

Exercise 34 - Question 8

  • living within their means.
  • living beyond their means.
  • both a and b.
  • neither a or b.

When a person is spending more than what they make and has to use credit cards for that purpose, they are:

Exercise 34 - Question 9

  • to pay most of the principal balance each month.
  • work just like a short-term loan.
  • take just a few months to pay off.
  • take many years to pay off.

The structure of credit card repayment is inherently set up to:

Exercise 34 - Question 10

  • use it for everyday living purchases.
  • have a large outstanding balance.
  • pay it off each month.
  • Any of the answers are good.

The best use of a credit card is to:

Lesson 35 - Calculating a Loan Payment

It is beneficial to know how to calculate a loan payment before seeking a loan.  This helps with budgeting and setting financial goals.  There are many financial calculators online; however, this lesson is going to share how to calculate a fixed interest rate loan payment by hand.  An illustration of the loan payment formula is below with an explanation of the various components.

PMT = Payment
PV = Present value
r = interest rate
n = number of payments in a year
                                                              t = total number of payments 

Let’s calculate a payment by hand.  Here are the loan terms:  A 3-year loan for $5,000 at 3% interest.  The loan requires monthly payments.

Step 1:  Write out the problem using the formula.

*When using an online loan payment calculator, the answer may be slightly different due to rounding in step 3.

Now it’s time to practice in Exercise 35.1.

Exercise 35 - Question 1

Using a scientific or online loan payment calculator*, determine the loan payment for this question.  Each loan has monthly payments.  Remember, answers between an online calculator and a scientific calculator may be different up to a few dollars due to rounding. 

*www.creditkarma.com/calculators/loan is one of many sites offering a loan payment calculator.  

  • $116.32
  • $135.42
  • $106.69
  • $98.75

What is the monthly loan payment for a 3-year loan for $4,000 at 3% interest: Choose the closest answer.

Exercise 35 - Question 2

Using a scientific or online loan payment calculator*, determine the loan payment for this question.  Each loan has monthly payments.  Remember, answers between an online calculator and a scientific calculator may be different up to a few dollars due to rounding. 

*www.creditkarma.com/calculators/loan is one of many sites offering a loan payment calculator.  

  • $179.47
  • $228.15
  • $203.21
  • $198.76

What is the monthly loan payment for a 4-year loan for $9,000 at 4% interest: Choose the closest answer.

Exercise 35 - Question 3

Using a scientific or online loan payment calculator*, determine the loan payment for this question.  Each loan has monthly payments.  Remember, answers between an online calculator and a scientific calculator may be different up to a few dollars due to rounding. 

*www.creditkarma.com/calculators/loan is one of many sites offering a loan payment calculator.  

  • $365.37
  • $343.16
  • $320.81
  • $299.44

A 5-year loan for $17,000 at 5% interest has a monthly loan payment of:  Choose the closest answer.

Exercise 35 - Question 4

Using a scientific or online loan payment calculator*, determine the loan payment for this question.  Each loan has monthly payments.  Remember, answers between an online calculator and a scientific calculator may be different up to a few dollars due to rounding. 

*www.creditkarma.com/calculators/loan is one of many sites offering a loan payment calculator.  

  • $710.89
  • $696.65
  • $676.76
  • $688.29

A 10-year loan for $60,000 at 7% interest has a monthly loan payment of:  Choose the closest answer.

Exercise 35 - Question 5

Using a scientific or online loan payment calculator*, determine the loan payment for this question.  Each loan has monthly payments.  Remember, answers between an online calculator and a scientific calculator may be different up to a few dollars due to rounding. 

*www.creditkarma.com/calculators/loan is one of many sites offering a loan payment calculator.  

  • $1,012.63
  • $999.59
  • $1,234.01
  • $1,197.43

What is the monthly loan payment for a 15-year loan for $120,000 at 6% interest:  Choose the closest answer.

Quiz - Section 9 - Question 1

  • co-borrower
  • borrower
  • guarantor
  • lender

A ___________________ isn’t liable for a loan until the borrower defaults:

Quiz - Section 9 - Question 2

  • open-end loan.
  • closed-end loan.
  • encompassing loan.
  • maturity loan.

A revolving loan is also known as a:

Quiz - Section 9 - Question 3

Using a scientific or online loan payment calculator*, determine the loan payment for this question.  Each loan has monthly payments.  Remember, answers between an online calculator and a scientific calculator may be different up to a few dollars due to rounding. 

*www.creditkarma.com/calculators/loan is one of many sites offering a loan payment calculator.  

  • $196.64
  • $174.49
  • $165.73
  • $182.34

Frank got a 3-year auto loan for $6,000 at 3% and has to make monthly payments.  His monthly payment will be closest to:

Quiz - Section 9 - Question 4

  • co-borrower(s).
  • borrower(s).
  • guarantor(s).
  • lender(s).

The primary person(s) who borrow money from a financial institution is referred to as:

Quiz - Section 9 - Question 5

  • Mortgage loan
  • Security loan
  • Secured loan
  • Unsecured loan

What type of loan doesn’t require collateral?

Quiz - Section 9 - Question 6

Using a scientific or online loan payment calculator*, determine the loan payment for this question.  Each loan has monthly payments.  Remember, answers between an online calculator and a scientific calculator may be different up to a few dollars due to rounding. 

*www.creditkarma.com/calculators/loan is one of many sites offering a loan payment calculator.  

  • $806.10
  • $856.86
  • $793.84
  • $789.91

Kim got a 10-year mortgage for $76,000 at 5% and has to make monthly payments.  Her monthly payment will be closest to:

Quiz - Section 9 - Question 7

  • Mortgage loan
  • Auto loan
  • Boat loan
  • All of the above

Which of the following is a secured loan: 

Quiz - Section 9 - Question 8

  • amount due.
  • closed balance.
  • available balance.
  • non-available balance.

The difference between the credit limit on a credit card and outstanding balance is the:

Quiz - Section 9 - Question 9

Using a scientific or online loan payment calculator*, determine the loan payment for this question.  Each loan has monthly payments.  Remember, answers between an online calculator and a scientific calculator may be different up to a few dollars due to rounding. 

*www.creditkarma.com/calculators/loan is one of many sites offering a loan payment calculator.  

  • $257.13
  • $238.65
  • $229.01
  • $223.90

Stuart obtained a 4-year auto loan for $11,000 at 2% and has to make monthly payments.  His monthly payment will be closest to:

Quiz - Section 9 - Question 10

  • cared
  • respected
  • strengthen
  • defaulted

When a borrower stops making loan payments, they have ________________ on their loan:

Quiz - Section 9 - Question 11

  • principal
  • interest
  • major
  • None of these

The _______________ amount is the what was borrowed or owed on a loan:

Quiz - Section 9 - Question 12

Using a scientific or online loan payment calculator*, determine the loan payment for this question.  Each loan has monthly payments.  Remember, answers between an online calculator and a scientific calculator may be different up to a few dollars due to rounding. 

*www.creditkarma.com/calculators/loan is one of many sites offering a loan payment calculator.  

  • $272.50
  • $301.00
  • $261.73
  • $283.96

Becky obtained a 5-year auto loan for $16,000 at 2.50% and has to make monthly payments.  Her monthly payment will be closest to:

Quiz - Section 9 - Question 13

  • one co-borrower.
  • no collateral.
  • collateral.
  • two co-borrowers.

All secured loans require:

Quiz - Section 9 - Question 14

  • mandatory option.
  • source of cash.
  • Both a and b.
  • None of the above.

When a consumer uses credit cards due to no available cash, they are using credit cards as a:

Quiz - Section 9 - Question 15

Using a scientific or online loan payment calculator*, determine the loan payment for this question.  Each loan has monthly payments.  Remember, answers between an online calculator and a scientific calculator may be different up to a few dollars due to rounding. 

*www.creditkarma.com/calculators/loan is one of many sites offering a loan payment calculator.  

  • $291.58
  • $302.03
  • $352.03
  • $333.33

Richard obtained a 6-year auto loan for $23,000 at 3.25% and has to make monthly payments.  His monthly payment will be closest to:

Loans - Part II

Lesson 36 - Creditor's Loan Approval Process - Underwriting

Creditors have a process for determining whether to underwrite a loan for a borrower.  Underwriting a loan simply means a lender analyzes the strength and weaknesses of a borrower’s credit history to determine if they should extend credit and puts their findings in writing.  They use the Five C’s of Credit as their guide when evaluating the financial condition, credit report, credit score, debts, income, and debt ratios of a borrower.

Lesson 36 - Creditor's Loan Approval Process - Five C's of Credit - Character

The Five C’s of Credit are character, capital, capacity, conditions, and collateral.  Character is the borrower’s willingness to repay their debts.  A credit report shows how willing a borrower has been in the past to pay their debts on time. 

Lesson 36 - Creditor's Loan Approval Process - Five C's of Credit - Capital

Capital is how much a borrower is putting down as a deposit toward a loan.  The lender wants to know if the borrower is risking any money of their own for the loan they are requesting.  Also, capital shows the remaining resources a borrower has after they make the down payment.  Those with high amounts in savings or investments are less risky. 

Lesson 36 - Creditor's Loan Approval Process - Five C's of Credit - Capacity

Capacity tells the lender if the borrower has enough income to pay the request debt on time and continuously until the debt has been retired. 

Lesson 36 - Creditor's Loan Approval Process - Five C's of Credit - Conditions

Conditions apply to the current economy in the market where the borrower resides.  The lender wants to make sure the market is stable for the product being purchased.  For example, if a borrower is considering to purchase a house, the lender wants to be fairly confident the housing market will be stable during the duration of the loan. 

Lesson 36 - Creditor's Loan Approval Process - Five C's of Credit - Collateral

Collateral is the capital asset(s) that offers protection for lender in case the borrower defaults on the loan. 

Lesson 36 - Creditor's Loan Approval Process - Debt-to-Income (DTI) Ratio

Each financial institution runs a variety of ratios.  The most common ratio used for personal loans such as mortgages, auto loans, and credit cards is the debt-to-income (DTI) ratio.  The DTI calculates the total recurring debt payments each month divided by total gross monthly income and it looks like this:

Lesson 36 - Creditor's Loan Approval Process

For example, if the loan is for a car, the lender would take the new potential payment and all other recurring debt payments for each month and add them together.  The would not include any payments that will be no longer exist within the next month to three months or are not recurring.  Then, they divide that number by the borrower’s total monthly gross income.  The maximum DTI threshold to qualify for a loan is set by each financial institution.

Lesson 36 - Creditor's Loan Approval Process - Example 36.1

Suppose:   Hanna wants to get an auto loan.  The lender is calculating Hanna’s DTI.  Her new auto loan payment would be $250.00 and she has monthly mortgage and student loan payments of $450.00 and $125.00, respectively.  Her monthly gross income is $3,000.  What is her DTI?

Answer:  27.50%.  Total monthly debt payment of $825 (250 + 450 + 125) / $3,000. 

Lesson 36 - Creditor's Loan Approval Process

Creditors look at all of the information as a whole to determine if a person qualifies for a loan.  For some loans, such as a mortgage loan, the lender will request a verification of employment and salary to verify the borrower’s income.  This can sometimes be done by presenting paystubs.  Or, the lender may request verification of employment from the employer itself.  Each financial institution has different requirements. 

In order to obtain a loan at a credit union, the borrower must be a member of the credit union as required by the NCUA regulatory guidelines.  Banks typically do not require borrowers to have accounts at their institutions. 

Exercise 36 - Question 1

  • Character
  • Capital
  • Collateral
  • Capacity

Which of the following Five C’s of Credit shows a borrower’s willingness and ability to repay a loan:

Exercise 36 - Question 2

  • Collateral
  • Capacity
  • Capital
  • Conditions

Which of the following describes when a borrower puts down a deposit for a loan:

Exercise 36 - Question 3

  • Character
  • Conditions
  • Collateral
  • Capacity

When a lender evaluates the economy and current market conditions, they are looking at:

Exercise 36 - Question 4

  • Capital
  • Capacity
  • Character
  • Collateral

The lender requires _________________ to protect them in case a borrower defaults on a loan:

Exercise 36 - Question 5

  • Collateral
  • Character
  • Capacity
  • Conditions

Which of the following is a borrower’s ability to repay their debts:

Exercise 36 - Question 6

Remember the formula for calculating a DTI ratio:

  • 33.08%
  • 29.46%
  • 30.44%
  • 328.57%

Sarah has $1,400 in total monthly recurring debt and $4,600 in total monthly gross income.  What is her DTI:

Exercise 36 - Question 7

Remember the formula for calculating a DTI ratio:

  • 36.36%
  • 30.30%
  • 330%
  • 275%

Bambi has $1,000 in total monthly recurring debt, $200 in non-recurring debt, and $3,300 in total monthly gross income.  What is her DTI:

Exercise 36 - Question 8

Remember the formula for calculating a DTI ratio:

  • 31.25%
  • 52.08%
  • 320%
  • 312.50%

Chuck has the following monthly debt payments: $300 for rent, $75 for a student loan, one final payment of $500, and will have a new loan payment of $375.  His monthly gross income is $2,400.  What is his DTI:

Exercise 36 - Question 9

Remember the formula for calculating a DTI ratio:

  • 129.39%
  • 168.27%
  • 77.29%
  • 59.43%

Greg has the following monthly debt payments: $450 for mortgage, $82 for a credit card, one final payment of $250, and will have a new loan payment of $300.  His monthly gross income is $1,400.  What is his DTI:

Exercise 36 - Question 10

Remember the formula for calculating a DTI ratio:

  • 49.11%
  • 260.64%
  • 38.37%
  • 203.63%

Kate has the following monthly debt payments: $500 for rent, $125 for a credit card, and she will have a new loan payment of $175.  Her monthly gross income is $1,629.  What is her DTI:

Lesson 37 - Credit Reports

A credit report is a report listing details of a person’s credit history.  It shows their history of loans, history of payments, judgments, liens, and any bankruptcies.  It also shows their current and former addresses.  Additionally, it lists the date and financial institution of any credit reports that have been requested in the past 45 days.  When a lender sees a list of financial institutions that have requested a credit report for a borrower within a short period of time, they usually suspect the borrower has been turned down for the requested loan.

Lenders will discuss the credit report with the borrower, but will not give a copy of the credit report to the borrower.  This is usually because the financial institution pays a fee for each credit report they request; therefore, they own the credit report.  If the borrower thinks there is an error on their credit report, the lender isn’t able to make any changes or dispute the error. 

Lesson 37 - Credit Reports

If a consumer thinks there is a discrepancy on their credit report, they need to write the reporting agency and dispute any information they think is in error.  If a borrower is denied credit, they will receive a letter in the mail giving them an opportunity to request their credit report.  According to the Fair Credit Reporting Act (FCRA), each credit bureau is required to provide every consumer, 18 years and older, a free copy of their report once a year upon request.  It has to be requested as the credit bureaus do not have to automatically send them to each consumer.  Each credit reporting agency (credit bureaus) offers a free copy as does Credit Karma (creditkarma.com) and AnnualCreditReport.com.  The websites for the three main credit bureaus are experian.com for Experian, transunion.com for Transunion, and equifax.com for Equifax.  If a website requests a form of payment, the consumer should request their credit report from a different site. 

Lesson 37 - Credit Reports

The three most popular credit bureaus (listed in no particular order) for personal credit reports are Experian, Equifax, and TransUnion.  Each reporting agency has a different format for their credit reports; however, they report most of the same information and all three agencies report a FICO score, which will be discussed in Lesson 38.  When married couples apply for a loan together, financial institutions will request a combined credit report. 

Lesson 37 - Credit Reports

When lenders review a credit report they are assessing a person’s character.  They try to answer the following questions:

· Has the borrower shown a willingness and ability to pay back their debts on time?

· Does the borrower have any loan defaults?

· How many times has the borrower applied for credit in the past 45 days?

· Does the borrower have a significant amount of debt compared to their income?

Lesson 37 - Credit Reports

Creditors use credit reports to verify the current address and credit history of a borrower.  When a borrower applies for a loan, they are required to list their debts.  Their list of debts should match the credit report; however, private loans, such as a loan with a family member, will not show up on a credit report, but the loan should be disclosed to the lender.  Below is an illustration of a credit report.

Lesson 37 - Credit Reports

Credit reports can be quite intimating when viewing one for the first time.  It’s important to look at it section by section and read it thoroughly.  If something doesn’t make sense or appears to be in error, contact the credit bureau that created the report using their contact information on the report or website.

Exercise 37 - Fill in the blanks - Questions 1 - 10

1.  A   lists the credit history of an individual.

2.  The three most popular credit bureaus are  ,  and .

3.  Lenders use credit reports to check the  of a borrower.    

4.  If a borrower is  a loan, they will receive a letter in the mail from the credit bureaus.    

5.  Lenders   give a borrower a copy of their credit report.    

6.  Every person who is 18 years old or older can receive a  copy of their credit report
     a year.    

7.  If a person thinks there is a  on their credit report, they can  it by
     writing the credit bureaus.    

8.  Each agency gives a  score on each credit report.    

9.  Credit reports list the history of requested credit reports for the past  days.    

10.  Lenders compare the list of debts on a credit report to the  given by the borrower.

Lesson 38 - FICO Score

FICO Scores are used by creditors to evaluate a borrower’s credit history and to determine if they will extend credit to a particular borrower.  FICO Scores are based on five components on a 100% scale:  30% is based on the amount owed; 10% is based on new credit obtained; 15% is based upon the length credit history; 35% is regarding payment history; and, the remaining 10% has to do with credit mix. 

Lesson 38 - FICO Score

Each financial institution uses a rating system to extend credit.  Many financial institutions use a risk based lending rating system for personal loans, which means they extend credit based on a borrower’s FICO score and determine the interest rate based on which risk category a borrower’s FICO score falls into.  The rating categories are “A,” “B,” “C,” “D,” “E,” and “R.”  An “R” rating would mean the borrower needs to restore or rebuild their credit before obtaining any sort of credit. 

Lesson 38 - FICO Score - Risk Based Rating Scale Example

The illustration to the left shows an example of a financial institution’s rating system based on a borrower’s FICO score.  Each institution using a risk based scale determines the ranges for each of their ratings.  Additionally, some institutions use words like “premier” or “premium” instead of “A Rate” or “B Rate” to define their ranges.

Lesson 38 - FICO Score - Amount Owed

The amount owed applies not only to the total amount owed, but how much credit is available to the borrower to how much is currently borrowed.  For example, a person may have $2,000 in available credit, but only have $500 in outstanding balances.  Many people think that paying off their credit card each month will improve their FICO score and it usually doesn’t.  Here’s why.  Each month, creditors report information about their loans with each borrower to one, two, or all three of the credit bureaus.  They report the outstanding balance and the borrower may pay their balance to zero after the financial institution sends their reports to the credit bureaus.  Since this is the case, it may appear that a borrower has high balances or have maxed out their credit cards.  To keep this situation from negatively affecting a person’s FICO score, they need to keep their total amount of outstanding loan balances at 30% of the total available money to them.  For example, if a borrower has a credit card with a $1,000 credit limit, they should never have a balance of more than $300 on the card.

Lesson 38 - FICO Score - New Credit Component

The new credit component of the FICO score rates how much new credit a person has recently received.  If a person applies for an auto loan, but has recently opened two new credit cards, the financial institution may consider them a high credit risk. 

Lesson 38 - FICO Score - Established Credit

The FICO score includes how long a person has had established credit.  If a person is new to getting loans, this is reflected in their score.  The longer a person has credit and pays on time, the better their score will be.

Lesson 38 - FICO Score - Payment History

Payment history is very important.  While cell phone, utility, and medical bills don’t show up on credit reports if they are paid on time, they will show up on a credit report if a person becomes delinquent and the bill is sent to a collection agency.  Delinquent payments that show up on a credit report have the largest impact on a FICO score at 35%.

Lesson 38 - FICO Score - Credit Mix

The last component of the FICO score is the credit mix.  The credit mix is the combination of loans a person has, which is the mix of secured and unsecured debt.  Many financial institutions require that borrowers have a history of different types of credit and have paid those loans on time in order to receive a house loan.  Also, they look for a certain number of both secured and unsecured loans.  Each financial institution has a different set of criteria.

Exercise 38 - Question 1

  • 30% or less.
  • 40% or less.
  • 50% or less.
  • It doesn’t matter.

A person’s outstanding credit to available credit should be kept at:

Exercise 38 - Question 2

  • 2
  • 6
  • 5
  • 1

A FICO score is on based on _______________ components:

Exercise 38 - Question 3

  • 20
  • 25
  • 10
  • 35

Payment history represents __________________% of a person’s FICO score:.

Exercise 38 - Question 4

  • combination of multiple payments.
  • combination of the secured and unsecured debt on a person’s credit report.
  • how much credit a person has over time.
  • None of these.

Credit mix is the:

Exercise 38 - Question 5

  • Old credit
  • New credit
  • Payment history
  • Credit mix

________________ _______________ rates how much new credit a person has recently received:

Exercise 38 - Question 6

  • amount owed, new credit, length of credit history, and payment history.
  • amount owed, new credit, payment history, and credit mix.
  • amount owed, new credit, length of credit history, payment history, and credit mix.
  • amount owned, old credit, length of credit history, payment history, and credit mix.

The component of the FICO score are:

Exercise 38 - Question 7

  • is when a lender extends a loan to borrower without a FICO score.
  • is when a lender based the interest rate for a loan on the borrower’s FICO score.
  • is when a lender decides to give the same interest rate for a loan to everyone.
  • None of these.

Risk based lending:

Exercise 38 - Question 8

  • A, B, C, D, E, and R rates.
  • A, B, C, D, E, and F rates.
  • A, B, C, D, F, and R rates.
  • A, B, D, E, F, and R rates.
Financial institutions who use risk based lending typically use:

Exercise 38 - Question 9

  • how many mortgages are on a borrower’s credit report.
  • the type of different credit for a borrower.
  • the credit history of a borrower.
  • All of the above.

Established credit defines:

Exercise 38 - Question 10

  • never changes their interest rates.
  • uses government designated interest rates.
  • has the exact same interest rates.
  • decides their interest rates.

Every lending institution:

Quiz - Section 10 - Question 1

Remember the formula for calculating a DTI ratio:

  • 160.22%
  • 38.28%
  • 62.41%
  • 57.76%

Charlie has the following monthly debt payments: $500 for rent, $135 for a student loan, one final payment of $700, and will have a new loan payment of $475.  His monthly gross income is $2,900.  What is his DTI:

Quiz - Section 10 - Question 2

  • Character, capital, capacity, conditions, and collateral.
  • Capital, capacity, conditions, collateral, and charm.
  • Character, capability, capital, conditions, and collateral.
  • Character, capital, capacity, circumstances, and collateral.

The Five C’s of Credit are:

Quiz - Section 10 - Question 3

  • is a report listing credit possibilities for a borrower.
  • is a report listing the details of a person’s credit history.
  • is a report listing a person’s work experience.
  • None of the above.

A credit report:

Quiz - Section 10 - Question 4

Remember the formula for calculating a DTI ratio:

  • 186.00%
  • 245.60%
  • 40.72%
  • 53.76%

Bill has the following monthly debt payments: $1,200 for rent, $298 for a credit card, one final payment of $600, and will have a new loan payment of $375.  His monthly gross income is $4,600.  What is his DTI:

Quiz - Section 10 - Question 5

  • amount owned, new credit, length of credit history, payment history, and credit mix.
  • amount owed, old credit, length of credit history, payment history, and credit mix.
  • amount owed, new credit, length of credit history, payment history, and credit variations.
  • amount owed, new credit, length of credit history, payment history, and credit mix.

The five categories of a FICO score are:

Quiz - Section 10 - Question 6

  • Experian, Equifax, and SubUnion.
  • Experian, EquiNow, and TransUnion.
  • Equifax, Experian, and TransUnion.
  • Equifax, ExperFICO, and TransUnion.

The three most popular credit bureaus are:

Quiz - Section 10 - Question 7

Remember the formula for calculating a DTI ratio:

  • 50.19%
  • 59.79%
  • 45.59%
  • 55.78%

Sally has the following monthly debt payments: $750 for mortgage, $94 for a credit card, one final payment of $225, and will have a new loan payment of $333.  Her monthly gross income is $2,345.  What is her DTI:

Quiz - Section 10 - Question 8

  • how many payments a borrower made in the last year.
  • how well a borrower has made payments in the past.
  • how well a borrower will make payments in the future.
  • All of the above.

The payment history on a FICO score rates:

Quiz - Section 10 - Question 9

  • multiplying total of all monthly recurring debt payments by total monthly gross income.
  • dividing total of all monthly recurring debt payments by total monthly gross income.
  • dividing total monthly gross income by total of all monthly recurring debt payments.
  • subtracting total monthly gross income from total of all monthly recurring debt payments.

The DTI ratio is calculated by:

Quiz - Section 10 - Question 10

Remember the formula for calculating a DTI ratio:

  • 32.11%
  • 20.32%
  • 34.83%
  • 30.84%

Kari has the following monthly debt payments: $525 for mortgage, $125 for a two-year personal loan, one final payment of $235, and will have a new loan payment of $200.  Her monthly gross income is $2,756.  What is her DTI:

Quiz - Section 10 - Question 11

  • match the list of debts on their credit report.
  • also list everyday expenses such as groceries.
  • only list their rent or mortgage payment.
  • None of the above.

A borrower’s list of debts on a loan application should:

Quiz - Section 10 - Question 12

  • uses the government standard interest rates for auto loans.
  • copies their competitor’s rates.
  • has their own set of interest rates.
  • uses the state interest rates published each morning.

Each financial institution:

Quiz - Section 10 - Question 13

Remember the formula for calculating a DTI ratio:

  • 30.99%
  • 27.59%
  • 27.32%
  • 23.92%

Tom has the following monthly debt payments: $684 for mortgage, $135 for a student loan, $125 for a credit card, and will have a new loan payment of $196.  His monthly gross income is $3,679.  What is his DTI:

Quiz - Section 10 - Question 14

  • a lender analyzes the strength and weaknesses of a lender’s credit history to determine if they should extend credit and puts their findings in writing.
  • a lender analyzes the accomplishments of a borrower’s credit history to determine if they should extend credit and puts their findings in writing.
  • a lender analyzes the strength and weaknesses of a borrower’s work history to determine if they should extend credit and puts their findings in writing.
  • a lender analyzes the strength and weaknesses of a borrower’s credit history to determine if they should extend credit and puts their findings in writing.
Underwriting a loan means:

Quiz - Section 10 - Question 15

  • which payment a borrower will make on their loan.
  • which interest rate a borrower qualifies.
  • how many co-borrowers there should be on a loan.
  • All of the above.

FICO scores in risk based lending institutions determines:

Unit II Test

Unit II Test - Question 1

  • for their owners/members.
  • and invest them back into their organizations to meet their goals.
  • for consumers.
  • to pay huge salaries to CEO.

Not-for-profit organizations earn profits:

Unit II Test - Question 2

  • at ATM machines and to make purchases.
  • only to make purchases.
  • only at ATM machines to deposit and withdraw money.
  • only inside a financial institution.

ATM cards can be used:

Unit II Test - Question 3

  • up to $250,000 for each depositor either by the FDIC for credit unions or by the NCUA for banks.
  • up to $250,000 for each depositor either by the FDIC for banks or by the NCUA for credit unions.
  • up to $150,000 for each account either by the FDIC for credit unions or by the NCUA for banks.
  • up to $150,000 for each depositor either by the FDIC for credit unions or by the NCUA for banks.

Savings and checking accounts are usually insured:

Unit II Test - Question 4

  • withholding deposit.
  • withdrawal.
  • wait deposit.
  • None of these.

In a check register, WD stands for:

Unit II Test - Question 5

  • can only purchase common stocks.
  • do not purchase or sell stocks.
  • are investors who used to hold shares in a company, but sold them.
  • are investor who hold shares, or ownership, of a company with stocks that they purchase.

Shareholders:

Unit II Test - Question 6

  • debtholder.
  • bondholder.
  • bondsperson.
  • bond debtor.

The owner of a bond is a:

Unit II Test - Question 7

  • invest in both U.S. and global stocks.
  • are typically comprised of short-term debt securities.
  • are made up of corporate, municipal, and federal bonds.
  • are only made up of treasury bills.

Fixed-income funds:

Unit II Test - Question 8

  • future exchange markets.
  • foundational markets.
  • foreign exchange markets.
  • None of these.

FOREX stands for:

Unit II Test - Question 9

  • high monthly payments.
  • collateral.
  • low monthly payments.
  • short loan terms.

All secured loans have:

Unit II Test - Question 10

  • variable maturity dates.
  • fixed maturity dates.
  • have a 24-month maturity date.
  • do not have a maturity date.

Revolving loans:

Unit II Test - Question 11

Using a scientific or online loan payment calculator*, determine the loan payment for this question.  Each loan has monthly payments.  Remember, answers between an online calculator and a scientific calculator may be different up to a few dollars due to rounding. 

*www.creditkarma.com/calculators/loan is one of many sites offering a loan payment calculator.  

  • $671.99
  • $699.99
  • $703.76
  • $653.64

What is the monthly loan payment for a 7-year loan for $46,000 at 6% interest:  Choose the closest answer. 

Unit II Test - Question 12

  • how much they are willing to put down as a deposit for a loan.
  • their willingness to pay their debts.
  • the value of a borrower’s capital asset.
  • All of these.

The character of a borrower measures:

Unit II Test - Question 13

  • only if a borrower doesn’t have a co-borrower.
  • rarely.
  • almost any time a person wants to borrow money.
  • every other time a person borrows money.

Financial institutions run a credit report:

Unit II Test - Question 14

  • are used by consumers to calculate their monthly loan payments.
  • are used by creditors to determine a borrower’s monthly loan payment.
  • are used by consumers to measure the interest rates of financial institutions.
  • are used by creditors to evaluate a borrower’s credit history.

FICO scores:

Unit II Test - Question 15

  • applies to credit unions and not banks.
  • applies to banks and not credit unions.
  • applies to both credit unions and banks.
  • applies to neither banks nor credit unions.

“Field of membership”:

Unit II Test - Question 16

  • One-hundred, fifty six, and 94 cents --------------------------------------
  • One hundred, fifty-six and ninety-four/100 ----------------------------
  • One hundred, fifty-six and 94/100 ----------------------------------------
  • One hundred and fifty-six dollars and 94/100 -------------------------

A check for $156.94 would be written as which of the following on a check:

Unit II Test - Question 17

  • 3
  • 10
  • 4
  • 6

What is the federal limit of withdrawals that can be made from a savings account each month:

Unit II Test - Question 18

  • once a quarter.
  • once a month.
  • once a year.
  • once a week.

Checking and savings accounts should be reconciled:

Unit II Test - Question 19

  • liquidated.
  • closed its doors.
  • settled its accounts.
  • discharged its assets.

When a company goes out of business and sells all of its assets, it has: 

Unit II Test - Question 20

  • is money that is available today.
  • is that which is lost when one opportunity is chosen over an alternative one.
  • both a and b are correct.
  • None of the above.

An opportunity cost:

Unit II Test - Question 21

  • had a rating system in the past, but do not any longer.
  • have never had a rating system.
  • have a rating system.
  • None of the above.

Bond:

Unit II Test - Question 22

  • are comprised of stocks owned by only one shareholder.
  • are comprised only of bonds owned by different shareholders.
  • are comprised only of a variety of stocks owned by different shareholders.
  • are comprised of a group of stocks, bonds, and other securities owned by different shareholders.

Mutual funds:

Unit II Test - Question 23

  • risk savvy.
  • risk adverse.
  • risk hostile.
  • risk shrewd.

When an investor is sensitive about losing money from investments, they are:

Unit II Test - Question 24

  • a good reason most of the time.
  • defaulted on their loan.
  • had increased interest rates making payments impossible.
  • improved their payment history.

When a borrower stops making payments on a loan, they have:

Unit II Test - Question 25

  • not liable for a loan until the borrower defaults on the loan.
  • liable for a loan throughout the entire loan.
  • not liable for a loan even if the borrower defaults on the loan.
  • liable for a loan half through the term of the loan.

Guarantors are:

Unit II Test - Question 26

  • money available tomorrow has more value than the same amount of money today.
  • money available today that has equal value to the same amount of money in the future.
  • money available today has less value than the same amount of money in the future.
  • money available today has more value than the same amount of money in the future.

The time value of money states that:

Unit II Test - Question 27

Using a scientific or online loan payment calculator*, determine the loan payment for this question.  Each loan has monthly payments.  Remember, answers between an online calculator and a scientific calculator may be different up to a few dollars due to rounding. 

*www.creditkarma.com/calculators/loan is one of many sites offering a loan payment calculator.  

  • $200.09
  • $192.48
  • $183.05
  • $174.91

What is the monthly loan payment for a 3-year loan for $6,200 at 4% interest;  Choose the closest answer.

Unit II Test - Question 28

Remember the formula for calculating a DTI ratio:

  • 26.12%
  • 51.39%
  • 57.36%
  • 61.76%

Mitch has the following monthly debt payments: $550 for rent, $68 for a credit card, $160 for student loans, and will have a new loan payment of $175.  His monthly gross income is $1,543.  What is his DTI:

Unit II Test - Question 29

  • a best guess by the borrower.
  • their credit report.
  • decided by the lender.
  • None of the above.

The list of debts a borrower puts down on a loan application should match:

Unit II Test - Question 30

  • tell the lender and have them fix it.
  • ignore it.
  • write the credit bureau and dispute the discrepancy.
  • don’t worry about it, because it will eventually disappear.

If a borrower thinks their credit report has a discrepancy, they:

Unit II Test - Question 31

  • equity in a house.
  • ownership of a boat.
  • marketable securities.
  • money borrowed with a loan to buy a car.

Which of the following is considered cash:

Unit II Test - Question 32

  • work on restoring or rebuilding their credit history.
  • not worry about a low credit score.
  • have the lender give them a higher FICO score.
  • be proud of a high FICO score.

A FICO that puts a borrower in the “R” rating category needs to:

Unit II Test - Question 33

  • increases a person’s wealth.
  • does not increase a person’s wealth.
  • always opens up opportunities.
  • should be done whenever possible.

Incurring debt:

Unit II Test - Question 34

An online calculator can be used here .

  • $11,333.90
  • $11,873.03
  • $11,529.07
  • $11,643.39

The future value of investing $7,000 at 5% for 10 years compounded monthly would be closet to: 

Unit II Test - Question 35

  • until the make more money.
  • only once.
  • for necessary reasons.
  • as a source of cash.

When a person uses a credit card for everyday expenses because they don’t have any cash, they are using the credit card:

Financial Pitfalls

Lesson 39 - Treating "Wants" Like "Needs"

One of the most difficult things with creating and following a budget is determining which purchases are truly needs and which are wants.  Wanting something can feel a lot like needing it.  When a person treats a “want” like a “need” it can lead to the financial pitfall of increasing debt. 

A “need” is something a person must have to live such as food, water, clothing, shelter, and human interaction.  Sometimes these needs become confused with wants.  For example, people need clothing; however, most people don’t need expensive brand named clothing.  The same is true for food, water, and shelter.  Buying groceries and cooking instead of eating out and drinking tap water (filtered if necessary) instead of buying bottled water saves a lot of money.  Buying or renting a home based on one’s budget rather than desire for status also goes a long way to avoiding financial pitfalls.

Lesson 39 - Treating "Wants" Like "Needs"

To begin to determining needs from wants, a person should make a list of everything they think they will spend money on in a given month, including what is already being spent.  Then the list of those items should be divided needs (what a person must have) and wants (what can be let go of or purchased in the future).  Below is an illustration of a list of monthly purchases (left column).  The list of purchases is broken out between needs (middle column) and wants (right column) and ideas of how to curb costs.

As can be seen, many purchases can be changed to accommodate needs and wants.  Most people want to spend time having fun with friends and family.  Choosing to buy and prepare food for friends and family in one’s home meets combines both a need and want and lowers costs.

Exercise 39

The exercise for this lesson will be to create a list of your current monthly purchases and projected monthly purchases expected in the future in the left column.  Then, separate those purchases according to needs and wants in the respective columns. 

LIST OF CURRENT AND FUTURE MONTHLY PURCHASES                          NEEDS                                WANTS

Exercise 39

Which purchases were you able to combine to lessen costs?

Lesson 40 - Taking On Too Much Debt

In the fast paced, technology driven society, it can almost seem impossible not to incur debt.  There are so many attractive things pulling at people’s time and financial resources.  Back before credit cards and the substantial increase in loan products, many people saved up their money to buy toys, go out to eat, go to the movies, buy nice clothes, and more.  Since money wasn’t readily available in the form of debt, people went without or very creative with how they spent their time. 

Lesson 40 - Taking On Too Much Debt

It’s easier than ever to take on too much debt.  Many financial institutions have increased their ratios, allowing borrowers to have higher debt percentages.  Giving into debt means potentially giving up future opportunities.  Certain types of debt make sense such as a mortgage.  If a person is going to be paying rent and can get a mortgage for the same monthly payment, and can afford house maintenance, then a mortgage is a way to build equity.  However, many take on a mortgage payment that is really too high even though it fits within the financial institutions ratios. 

Lesson 40 - Taking On Too Much Debt

Living frugally in order to decrease or keep from taking on too much debt should be a first priority.  Once a person is caught up in a cycle of too much debt, it may seem impossible to get off the wheel of debt.  It is possible, though!  It takes determination, planning, budgeting, and following the plan and budget.  It means saying “no” to wants and figuring out a way curb spending on needs.

High school students don’t have debt and can start off with good financial habits.  The following illustration identifies some good financial habits to begin as one starts their financial path:

There are many healthier financial habits, but these are a good place to begin.

Exercise 40.1

Study the list of healthy financial habits, then write each one here.  Refer back to the list if necessary.

Exercise 40.2

What other healthy financial habits could be added to the list?

Lesson 41 - Attitudes Towards Money

There are many different attitudes towards money.  Many books discuss behavioral finance for investors.  Those behavioral attitudes of investors are also displayed in personal finance.  The various attitudes can be likened to attitudes of entitlement, free-spirited, problem solver, organized, and unpredictable; although, there are more.

Lesson 41 - Attitudes Towards Money

Those with an entitlement attitude are like lions.  Lions spend 16 to 20 hours of their day sleeping; therefore, they have learned how to work smarter, not harder.  Even though they may work smarter and not harder, they expect to have whatever they want.  They dominate and rule their kingdom.  This is great for the lion, but not so much for a person.  Those with a lion type personality expect things to be easy and to be successful regardless of planning, effort, experience, or education.  A person with this attitude has to work on controlling their spending, creating and following a budget, and saying “no” to wants.  Working smarter and not harder occurs when a person creates and follows a budget, controls spending, and disciplines themselves to save for surprise expenses.  When a person begins to pile up debt due to overspending, they will have to work harder to pay off the debt and build up their savings. 

Lesson 41 - Attitudes Towards Money

People with free-spirited attitudes toward money are like monkeys.  Monkeys are mischievous, show-offs, fun, fun-loving, friendly, and social animals.  They would rather play than work.  They hang out together in groups.  People who have a monkey-like personality love to be the life of the party.  They do not value money.  It’s viewed as a means to have fun.  They are not planners or organized.  Creating a budget is the last thing they are interested in doing.  Those with a free-spirited, monkey type attitude toward money need to work toward disciplining themselves to manage their money.  Creating and following a budget will go against who they are as a person, but it is necessary.  These type personalities should make sure to budget for fun!

Lesson 41 - Attitudes Towards Money

The problem solver attitudes are like eagles.  Eagles are fearless, resolute, problem solvers who love to take on challenges.  Like monkeys, they love to put on a show as they soar through the sky.  They understand the dangers to their families and work to avoid those dangers by building their nests high up in trees or cliffs close to water.  They plan their nest location and have a routine for building their nests, mating, and raising their eaglets.  Those who are like eagles’ value security and understand the risks before them.  Eagle types like routine and like to plan; although, they will veer off of the plan if necessary to obtain a goal.  Routine in a budget is good, but it can also be a problem.  One must be willing to change what isn’t working in their budget, but they should veer off using a budget.  Sticking to a budget and following through will bring success in long-run.

Lesson 41 - Attitudes Towards Money

The organizer attitudes towards money are like beavers.  Beavers are organized, clever, creative, predictable, and disciplined animals.  They love to organize their surroundings.  They are creative in building their homes.  They are also resilient!  If their home is destroyed, they build a new one.  They never seem to stop working, but they do have fun.  They work hard so they can enjoy life and be secure.  Beaver personalities love to plan and organize.  In fact, they have probably already started planning a budget and they aren’t even in the “Creating a Budget” section of this working textbook.  That is great!  Those with a beaver personality toward money tend to get so focused on the creation process that they never really get start implementing the budget.  Or, they implement the budget and makes changes on a daily or weekly basis.  Those who fall in this category need to 1) use the budget they created, 2) let their budget exist for a few months before making any changes, and 3) only make one or maybe two changes at a time rather than a complete overhaul of the budget. 

Lesson 41 - Attitudes Towards Money

Crocodile personalities are those who are unpredictable about money.  Crocodiles are non-social, ruthless, sneaky, and focused only on survival.  Crocodiles will do what needs to be done to survive.  They don’t have to work hard for their meals, they just need to be sneaky to catch their prey.  Once in their jaws, prey rarely has any chance of escape.  They wait patiently for their prey.  Doesn’t sound very appealing, but they are intelligent animals!  Those with a crocodile personality tend to be introverts who are intelligent and spend a lot of time thinking about life.  They keep to themselves, but still have strong friendships.  They also tend to find ways to cut corners, which isn’t always a negative thing.  Cutting corners sometimes lead to more efficient ways of completing tasks.  This personality type probably doesn’t see a need to create and follow a budget.  In fact, they most likely think it’s a waste of time because they like living life as it comes.  However, they may have times where they have regretted not planning because of missed opportunities.  Those with this type of attitude toward money need to weigh the pros and cons of creating and following a budget.  It will be difficult at first, but crocodile personalities can use their skills to fine tune an excellent budget.  Financial success doesn’t just happen; it is intentional. 

Lesson 41 - Attitudes Towards Money

These animal personalities are a fun way to start thinking about how a person views money.  Many people make a lot of money, but they don’t know where all of it goes each month.  They live paycheck to paycheck.  Why?  It’s because of their attitude toward money.  If a person understands how they view money, then they can begin to discover their strengths and weaknesses in financial matters.  Once they discover these, they can begin to reinforce their strengths and learn how to overcome their weaknesses, which will help them create a budget that will work for them. 

Exercise 41 - True or False Questions 1 - 4

  • Understanding one’s attitude toward money is the first step to financial success.
  • Financial success is when a person becomes a millionaire.
  • Financial success is different for each and every person and is based on a person accomplishing their own financial goals.
  • Creating and following a reasonable budget can lead to increased opportunities and a higher probability of financial success.

Exercise 41 - Question 5

What is your personality/attitude toward money? 

Exercise 41 - Question 6

What are the strengths of your attitude toward money? 

Exercise 41 - Question 7

What are the weaknesses of your attitude toward money? 

Exercise 41 - Question 8

What changes can you implement now to improve your chances of creating and following a budget? 

Lesson 42 - Always Seeking for the "Get Rich Quick" Scheme

Many people view financial success as earning a lot of money rather than accomplishing their financial goals.  As mentioned in a previous lesson, high-income earners don’t always have a lot of money.  They may have high debt, which causes their financial resources to quickly dwindle each month, leaving them with very little extra.  There are many millionaires’ who are not high-income earners, but because they managed their money appropriately and saved a lot of their income, they have been financially successful.  Additionally, financial success isn’t about all the money a person has, but the accomplishing their financial goals.  It’s a reality that most people will not be millionaire’s in their lifetime; however, they can still be financially satisfied.

Lesson 42 - Always Seeking for the "Get Rich Quick" Scheme

Many people “look” financial well off, but they may actually be in a lot of debt.  The constant pressure in society to be rich had lead numerous people to get scammed by “get rich quick” scams.  It is extremely rare that someone will “get rich quick.”  Financial wealth requires effort and lots of it for the majority of people.  It requires planning, discipline, and hard work. 

Lesson 42 - Always Seeking for the "Get Rich Quick" Scheme

One misnomer is that getting involved in a multi-level marketing company will be easy money.  These companies are not “qet rich quick” companies, but their marketing can sometimes make it seem like no effort is required to make a lot of money.  For those who are high up in the ranks of these companies, they got there from a lot of planning, discipline, and hard work.  They are also great at sales! 

Lesson 42 - Always Seeking for the "Get Rich Quick" Scheme

Basically, except for big inheritances, winning the lottery, winning big in a game show, or some other unusual occurrence, most people will not get rich overnight.  Yes, it may seem like that when a new company explodes in popularity overnight, but the founder of that company most likely had several failed ideas previously, spent a lot of time planning, creating, and organizing along with a healthy dose of determination and hard work. 

Lesson 42 - Always Seeking for the "Get Rich Quick" Scheme

If an opportunity comes along that seems too good to be true, requires a substantial financial investment without quantified proof of stated revenues, then it is probably a scam.  Always research anything that appears too good to be true or too easy to earn money.  Get advice from others before jumping into any situation that states an unreasonable amount of money can be made overnight.  Avoid opportunities that promise you will make money if you simply deposit of a check from an unknown person or entity into your personal checking account in order to make money.  If something looks shady, it probably is. 

Lesson 42 - Always Seeking for the "Get Rich Quick" Scheme

Those that devise “get rich schemes” know that people want to earn money and as easily as possible.  Some people may have gotten themselves into too much debt and are desperate to fix their financial problems.  These schemes use the psychology of behavioral finance to prey on the emotions of people.  Don’t fall for it!  Do the research and make sure a company is legitimate and get sound advice from trustworthy people!

Exercise 42 - True or False Questions 1 - 10

  • It’s easy to get rich overnight.
  • If an opportunity to earn a lot of money quickly seems too good to be true, it probably is.
  • Financial success is different for everyone.
  • Most people become millionaire’s in their lifetime.
  • Financial success takes planning, discipline, determination, and hard work.
  • Advice should be sought for any opportunity that seems like too good of a deal.
  • People who look rich most likely are rich.
  • Joining a multi-level marketing company is easy money.
  • It’s incorrect that high-income earners are financial successful as many of them have a lot of debt.
  • Financial success isn’t about how much money a person earns, but how well they manage their money.

Creating a Budget

Lesson 43 - Budgeting Basics

Creating and maintaining a budget has four steps:  1) list expected expenses and income for a given time period; 2) adjust expenses so there is not a deficit; 3) follow the created budget; and, 4) make adjustments to the budget as necessary.  A deficit is when there is not enough income to pay for all of the expenses in a given time period.  In personal finance, budgets are usually created on a monthly basis and are a rolling budget.  In corporate finance, budgets are typically created on an annual basis.  Some corporate budgets are a rolling “12-month” budget.

Lesson 43 - Budgeting Basics

Rolling budgets usually don’t have an ending date and then a new budget is created at the end of each period.  They continue from month-to-month or year-to-year.  However, instead of adjustments being made at the end of the time period created for the budget, adjustments are made as they come up to
control spending and/or to allow for increases or decreases in income.

Lesson 43 - Budgeting Basics

To begin a personal budget, a list of income and expenses needs to be completed.  A simple budget format will usually look like this: 

Income categories are usually the same for most people; however, categories for expenses vary.  Each person who creates a budget should personalize their categories.

Loans are not considered income.  A loan is borrowed money that has to be paid back.  Unless the loan is a line of credit, the money from the loan goes directly to the purchase for which the loan was given such as a car or house.  Funds from a line of credit are available to a borrower, but are not considered income and should not be included in the income section of a budget.  Those funds are typically used for one time purchases such as replacing a roof on a house.

Money from student loans are first paid directly to the college and any excess money from the loan is given to the student or parent obtaining the loan.  That money should be allocated toward other college expenses.  Some budgets allow this money to be listed in the income category since the funds go towards living expenses, materials, books, etc., while in college.  While it is stated as income in these situations, it is not considered income and shouldn’t be thought of as such. Income does not have to be paid back and loans do.

Exercise 43 - Questions 1 - 4

  • List expected expenses and income for a given time period
  • Adjust expenses so there is not a deficit
  • Follow the created budget
  • Make adjustments to the budget as necessary

Exercise 43 - Question 5

  • money that is owed within a given time period.
  • when there is enough income to pay for all of the expenses in a given time period.
  • when there is not enough income to pay for all of the expenses in a given time period.
  • a shortfall in expenses in a given time period.

A deficit is:

Exercise 43 - Question 6

  • revolving budget.
  • rolling budget.
  • static budget.
  • None of these.

A budget that doesn’t have an ending date and is adjusted as necessary is a:

Exercise 43 - Question 7

  • to use the recent history of income and expenses.
  • to make guesses based on what someone thinks will look good.
  • to use already designed categories even if not needed.
  • to lump everything into as few categories as possible.

The best way to start to define budget categories and their budgeted amounts is:

Exercise 43 - Question 8

  • is considered income.
  • can be either income or not income.
  • is not considered income.
  • is considered an asset.

Money from loans:

Exercise 43 - Question 9

  • aren’t really important.
  • are not adjustable.
  • are the same for each person.
  • vary from person to person.

The expense categories:

Exercise 43 - Question 10

  • is income and always put in the income section to pay for college expenses.
  • is not income, but sometimes put in the income section to pay for college expenses.
  • both a and b.
  • neither a or b.

Money received from student loans:

Lesson 44 - Creating a Budget ~ Part I

A monthly budget has been created from the check register below.  The first step in creating a budget is to list the income and then categorize the expenses.  The best way to do this is by looking at the history of actual money received and used.

Take a look at the register and then look at how money has been put into the budget.  In this example, Pamela rents an apartment.  The apartment company pays for water, sewer, and trash.  Pamela is responsible for all other utilities.

Exercise 44

Using this checkbook register, create a budget below.

Tips:  Make sure to use commas when appropriate.  Do not use dollar signs as they are provided for you.

CATEGORY MONTHLY BUDGETED AMOUNT
Income:  
Wages
Interest Income
Investments
Other Income
Total Income:
   
Expenses:  
Savings
Charity
Rent/Mortgage
Renter's or Home Owner Insurance
Auto Loan
Auto Insurance
Auto Gas
Auto Repair
Cell Phone Bill
Cable / Satellite / Internet
Electric Bill
Gas Bill
Trash Bill
Sewer & Water Bill
Food
Personal Maintenance
Entertainment
Eating Out
Clothing
Total Expenses:
   
Net Gain/Loss:

Lesson 45 - Creating a Budget ~ Part II

In Lesson 44, it was shown how to create a new budget from using the historical information from a check register.  Doing this shows the trends in spending.  Does the budget show high expenditures in certain categories that can or should be decreased and low expenditures in categories that can or should be increased?  For example, is there a lot of money being spent on eating out or clothing and no money being put into savings?  If the answer is, “Yes,” then an adjustment would be to be made to those categories.  Adjustments would also need to be made for any deficits.

Lesson 45 - Creating a Budget ~ Part II

Historical data for purchases being made for daily living expenses using a credit card should be included in the budget.  Daily living expenses would include groceries, personal maintenance items, cleaning supplies, dining, entertainment, clothing, gardening supplies, small auto supplies, and much more.  Basically, anything that isn’t a one-time purchase.  Putting money into a savings account will help with one-time, surprise purchases such as needing new tires or brakes on a car.  Including these credit card purchases into the budget will most likely create a deficit.  If this is the case, spending will have to be radically reduced and that can be a huge personal and emotional adjustment. 

Lesson 45 - Creating a Budget ~ Part II

When using the historical information to create a budget, the person creating their budget does not have to continue spending the same amount in those categories.  Adjustments to various categories probably need to be adjusted.  Once adjustments are made to the categories to ensure there is not a deficit and/or overspending in any of the categories, the next step is to use the budget by following it.  After a few months, it’s good to look at how the budget is working out.  

Lesson 45 - Creating a Budget ~ Part II

In order to do Step 4 in creating and maintaining and notice trends in spending and/or weaknesses in the budget in order to make adjustments, it is necessary to have running totals for each category.  A running total for each category will sometimes look like the spreadsheet illustration below.

Lesson 45 - Creating a Budget ~ Part II

Notice that there are columns for January and February.  These show what was actually spent in each category for that month.  The running total columns subtracts the budgeted amount from what was spend for the month.  Looking at line 12 “Auto Gas”, it shows in January the total spent on gasoline for a car was $65.00, this left a balance or running total of $10.  Then in February for the same category, $70 was spent for gasoline.  This left a running total or balance of $15. 

On the other hand, the Clothing category on line 24 shows a running total of $50 at the end of spending for January, but a deficit of $25 at the end of February.  This category would not need to be adjusted since the person can adjust their spending. 

Lesson 45 - Creating a Budget ~ Part II

Items like gas and electric are variable expenses.  Remember, they must be paid each month, but the amount due changes based on consumption.  For categories that vary from month to month, it is best to take the average of the expenses over the past 12 months and use that number as the budgeted amount. 

If there is a category where the running total continues to increase each month, it may be good to decrease the budgeted amount for that category and allocated the difference to a category that is being overspent. 

Additionally, if there is a one-time purchase item that is wanted such as an iPad, that can be included as a category and money allocated toward it each month.  Once the dollar amount has been reached, the item can be purchased.  Then, a new goal can be set for any other large purchases that a person may want to make in the future.

Exercise 45 - True or False Questions 1 - 10

  • Purchases for daily living expenses made with a credit card should be included in a budget.
  • Daily expenses include items that are purchased on a regular basis.
  • Making the adjustment to stop using a credit card for daily living expenses are both an emotional and personal adjustment.
  • The running total in a budget spreadsheet gives a clear picture of which categories show a continual deficit.
  • When saving for a large, one-time purchase it is a good item to create a separate category for that item.
  • Either an increase needs to be made for a category that is continually deficit or a decrease in spending for that category needs to be made.
  • Either an increase needs to be made for a category that is continually deficit or a decrease in spending for that category needs to be made.
  • The running total balance needs to be moved to the next month totals.
  • For expense categories where the balance continues to significantly increase, it is best to reduce the budgeted amount and apply that amount to a category that has a continual negative balance.
  • A rolling budget allows for continual adjustments as trends are noticed or circumstances change.
  • Showing the running totals for each category shows the strengths and weaknesses in spending and allows for more appropriate budget adjustments.

Lesson 46 - Creating a Budget ~ Part III

Now, it’s time for you to make your own budget.  Since you are most likely a high school student completing this program, you may have a lot of expenses paid on your behalf by someone else: a parent or guardian.  Therefore, some research is required to complete your own budget.

First, talk with your parent or guardian and ask them to help you determine how much is spent for you each month.  If that is not possible, do some research on the internet or ask a friend for help.  The categories are going to vary from person to person.  The following is a list of ideas to get you started.

Once you have determined your categories and a budgeted amount for each of them, enter them into the table in Exercise 46. 

Then enter in how much you currently make if you have a job.  Or, enter in how much income you would have to make to pay all of the expenses each month.

 

Exercise 46 - Questions 1 and 2

One a sheet of paper or in the open space below, using the illustration below as a guide, do the following two things:

1.  Fill in category names for your expenses and their monthly cost.

 2.  Fill in the income you currently earn or would need to earn to pay for all of your expenses.

Exercise 46 - Questions 3

Do you earn enough to pay for all of your expenses?  

Exercise 46 - Questions 4

How much do you need to earn to pay for all of your monthly expenses? 

Exercise 46 - Questions 5

Which expenses could you decrease or budget less money for each month? 

Exercise 46 - Questions 6

Are there expenses you were surprised to have?  If so, what are they? 

Exercise 46 - Questions 7

Are the expenses higher than you expected? If so, which ones?

Final Comprehensive Exam

Question 1

  • passive income.
  • earned income.
  • non-earned income.
  • a gift-in-kind.

Money received from performing work or providing services is called:

Question 2

  • revenues.
  • income.
  • earned income.
  • passive income.

Companies typically refer to money that is earned as:

Question 3

  • revenues.
  • earned income.
  • passive income.
  • gift-in-kind.

When a person receives an item in exchange for work performed or services given, it is called:

Question 4

  • are costs that do change from month-to-month.
  • are costs that do not change from month-to-month.
  • are either a or b.
  • are neither a or b.

Fixed expenses:

Question 5

  • fixed expenses.
  • variable expenses.
  • discretionary expenses.
  • mandatory expenses.

Expenses that are not necessary to live are called:

Question 6

  • variable expenses.
  • fixed expenses.
  • mandatory expenses.
  • discretionary expenses.

Expenses that are necessary each month, but change in cost based on consumption are:

Question 7

  • for savings.
  • used for monthly expenses.
  • not necessary.
  • None of the above.

Money that is put aside for use at some point in the future is:

Question 8

  • banks.
  • credit unions.
  • insurance companies.
  • investment companies.

Financial institutions have required memberships are known as:

Question 9

  • credit unions.
  • banks.
  • all financial institutions require memberships.
  • None of the above.

Financial institutions that do not require memberships are known as:

Question 10

  • an expense to the shareholder.
  • a bonus to the shareholder.
  • a dividend to the shareholder.
  • a share to the shareholder.

Money paid by a company to their shareholders is known as:

Question 11

  • maturity date.
  • start date.
  • ending date.
  • beginning date.

The ending date of a loan is known as the:

Question 12

  • a penalty.
  • a CD or IRA withdrawal penalty.
  • a before maturity date penalty.
  • an early withdrawal penalty.

The penalty that is incurred when funds in CDs or IRAs are withdrawn before the allowed date is called:

Question 13

  • fast cash.
  • liquid.
  • quick cash.
  • Any of the above.

Investments or assets that can be turned into cash quickly are considered to be:

Question 14

  • staggering.
  • stacking.
  • laddering.
  • stepping.

Staggering the maturity dates of CDs is known as ________________:

Question 15

  • receiving something from someone after giving them something, too.
  • giving something to someone else with an expectation of payment.
  • giving something to someone else with an expectation of getting it back.
  • freely giving something to someone else without an expectation of anything in return.

Giving means:

Question 16

  • itemizing deductions.
  • listing deductions.
  • cataloging deductions.
  • citing deductions.

Creating a list of various deductions for a tax return to low one’s tax liability is known as:

Question 17

  • money that is owned.
  • money that is owed.
  • is money that is owned or owed depending on the situation.
  • None of these.

A tax liability is:

Question 18

  • a current liability.
  • a liability.
  • an asset.
  • an expense.

An item of value that is owned by an individual is:

Question 19

  • adding total liabilities to total assets.
  • subtracting total liabilities from total assets.
  • subtracting total assets from total liabilities.
  • adding total assets to total monthly income.

Personal net worth is calculated by:

Question 20

  • fixed liabilities.
  • current assets.
  • personal property.
  • fixed assets.

Tangible items that are held for a long period of time and are not expected to be sold or converted to cash are:

Question 21

  • are assets that can be moved.
  • are tangible items that are held for a long period of time and are not expected to be sold, or converted, to cash
  • are liabilities that can be moved.
  • None of the above.

Personal property:

Question 22

  • fixed assets.
  • current assets.
  • liabilities.
  • Either a or b.

Debts that are owed are:

Question 23

  • 40%
  • 52%
  • 47%
  • 21%

If total debts equal $225,000 and total assets equal $475,000, what is the debt Ratio:

Question 24

  • Property, plant, and equipment
  • Trademark
  • Reputation
  • Copyright

Which of the following are examples of tangible assets for a business:

Question 25

  • 2012 Ford Truck
  • Boat
  • Copyright for a book
  • House

Which of the following is an example of an intangible asset:

Question 26

  • Auto loan due in six months.
  • A house loan due in twenty years.
  • A personal loan due in three months.
  • A payday loan

Which of the following is NOT a short-term liability:

Question 27

  • United States Department of Wages
  • United States Department of Salaries
  • United States Department of Labor
  • United States Department of Income

Which department of the United States sets the minimum wage:

Question 28

  • Fair Labor Standards Act
  • Fair Working Standards Act
  • Sarbanes-Oxley Act of 2002
  • Fair Labor Ethics Act

Which of the following Act enforces the minimum wage:

Question 29

  • Gross wages are the monetary funds earned by an employer for work assigned.
  • Gross wages are the benefits given to an employee by an employer.
  • Gross wages are the monetary funds paid to employee after all deductions are subtracted.
  • Gross wages are the monetary funds earned by an employee in exchange for work completed.

Which of the following defines gross wages:

Question 30

  • 401(k)
  • Profit-sharing
  • Child support
  • IRA

Which of the following is not an example of a retirement deduction:

Question 31

  • Government sponsored
  • Employer sponsored
  • Personal
  • All of the above are correct

Retirement plans can be all of the following except:

Question 32

  • FICA
  • State and local taxes
  • Medicare tax
  • All of the above

Deductions can include which of the following:

Question 33

  • fulltime income from working.
  • sleeping in.
  • not having to take classes and tests.
  • None of these.

The opportunity cost of going to college fulltime is:

Question 34

  • less sleep.
  • college degree to potentially increase income.
  • more time with friends.
  • None of these.

The opportunity cost of working fulltime is:

Question 35

  • a
  • b
  • c
  • d

The Compound Interest formula is:

 

 

 

 

 

Choose the letter that represents the correct answer.

Question 36

  • Interest rate income
  • Investment income
  • Speculation income
  • None of these.

The interest earned from and investment is called is:

Question 37

  • Incurring debt will make a person rich.
  • Incurring debt will make life easier.
  • Incurring is always necessary.
  • Incurring debt should be used wisely as a financial tool.

Which of the following is true:

Question 38

  • Four hundred, ninetyone and 46/100 ------
  • Four hundred and ninety-one and 46/100 -------
  • Four hundred, ninety-one and 46/100 -------
  • Four hundred, ninety-one and forty-six/100 ------

$491.46 would be written as follows:

Question 39

  • up to $300,000 for each depositor even if the institution isn’t insured.
  • up to $300,000 for each depositor per insured institution.
  • up to $250,000 for each depositor even if the institution isn’t insured.
  • up to $250,000 for each depositor per insured institution.

Money in accounts in banks and credit unions are insured:

Question 40

  • a for-profit company.
  • a not-for-profit company.
  • a non-profit company.
  • a profit company.

A company that earns revenues through selling products and services and reinvests their earned revenues back into the company to benefit its members  is known as:

Question 41

  • Two withdrawals per month.
  • Four withdrawals per month.
  • Six withdrawals per month.
  • There are no Federal withdrawals limits for savings accounts.

What is the Federal withdrawal limit for savings accounts:

Question 42

  • It doesn’t matter when
  • Immediately
  • Never
  • Once a week

Transactions should be recorded into a register:

Question 43

  • Common stock
  • Preferred stock
  • Mutual stock
  • Money market stock

A type of stock where the shareholder usually does not have the voting rights is:

Question 44

  • Mutual stock
  • Preferred stock
  • Common stock
  • Money market stock

A type of stock where the shareholder usually does have voting rights:

Question 45

  • Character, capital, capacity, conditions, and collateral.
  • Capital, capacity, conditions, collateral, and charm.
  • Character, capability, capital, conditions, and collateral.
  • Character, capital, capacity, circumstances, and collateral.

The Five C’s of Credit are:

Question 46

  • is a report listing credit possibilities for a borrower.
  • is a report listing the details of a person’s credit history.
  • is a report listing a person’s work experience.
  • None of the above.

A credit report:

Question 47

  • Experian, Equifax, and SubUnion.
  • Experian, EquiNow, and TransUnion.
  • Equifax, Experian, and TransUnion.
  • Equifax, ExperFICO, and TransUnion.

The three most popular credit bureaus are:

Question 48

  • debtholder.
  • bondholder.
  • bondsperson.
  • bond debtor.

The owner of a bond is a:

Question 49

  • uses the government standard interest rates for auto loans.
  • copies their competitor’s rates.
  • has their own set of interest rates.
  • uses the state interest rates published each morning.

Each financial institution:

Question 50

Remember the formula for calculating a DTI ratio:

  • 29.70%
  • 28.10%
  • 30.23%
  • 31.94%

Ken has the following monthly debt payments: $643 for mortgage, $95 for a student loan, $35 for a credit card, and will have a new loan payment of $206.  His monthly gross income is $3,297.  What is his DTI:

Glossary

Glossary - Appraisal through Dependents

Glossary - Direct Deposit through Itemizing Deductions

Glossary - Laddering through Personal Income

Glossary - Personal Net Worth through Underwriting

Glossary - Unearned Income through Variable Interest Rate