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Chapter 1-4 Study Guide

1) Standard of living-the necessities, comforts, and luxuries enjoyed or

desired by an individual or family
2) Personal financial planning-a systematic process that considers important
elements of an individuals financial affairs in order to fulfill financial goals
3) The Six-Step Financial Planning Process:
1. Define financial goals
2. Develop financial plans and strategies to achieve goals
3. Implement financial plans and strategies
4. Periodically develop and implement to monitor and control progress
toward goals
5. Use financial statements to evaluate results of plans and budgets, taking
corrective action as required
6. Redefine goals and revise plans and strategies as personal circumstances
4) Financial goals-results that an individual wants to attain, such as buying a
home, building a college fund, or achieving financial independence
5) Money-the medium of exchange used as a measure of value in financial
6) Utility-the amount of satisfaction received from purchasing certain types or
quantities of goods and services
7) Long-term goals-should indicate wants and desires for a period covering
about 6 years out to the next 30 or 40 years
8) Short-term goals-cover a 12 month period
9) Intermediate goals-bridge the gap between short and long-term goals and
are goals made between 2 to 5 years
Goal dates-target dates in the future when certain financial objectives
are expected to be completed
People use technology in Financial Planning.
The financial planning environment contains various interrelated
groups of players, each attempting to fulfill certain goals.
The Players:
1. Government-Federal, state, and local governments provide us with many
essential public goods and services, such as police and fire protection,
national defense, highways, public education, and health care.
Government can taxation and regulate important stuff.
2. Business-are an important part of the circular flow of income that
sustains our free enterprise system
3. Consumers-is the central player in the financial planning environment;
choices ultimately determine the kinds of goods and services that
businesses will provide
What Determines Your Personal Income?
1. Demographics and Your Income
2. Your Education
3. Where You Live
4. Your Career
5. Planning Your Career
Balance sheet-a financial statement that describes a persons
financial position at a given point in time

Income and expense statement-a financial statement that
measures financial performance over time
Budget-a detailed financial report that looks forward, based on
expected income and expenses
Assets-items that one owns
Liabilities-debts, such as credit card charges, loans, and mortgages
Net worth-an individuals or familys actual wealth; determined by
subtracting total liabilities from total assets
Equity-the actual ownership interest in a specific asset or group of
Income-earnings received as wages, salaries, bonuses, commissions,
interest and dividends, or proceeds from the sale of assets
Expenses-money spent on living expenses and to pay taxes, purchase
assets, or repay debt
Cash surplus-an excess amount of income over expenses that results
in increased net worth
Cash deficit-an excess amount of expenses over income, resulting in
insufficient funds as well as in decreased net worth
You can use a cash surplus for savings or investment purposes, to
acquire assets, or to reduce debt.
Liquidity ratio-total liquid assets divided by total current debts;
measures the ability to pay current debts
Debt service ratio-total monthly loan payments divided by monthly
gross (before-tax) income; provides a measure of the ability to pay debts
Your cash budget focuses on those areas that you can control and most
people have limited control over things like taxes withheld, contributions to
company insurance and pension plans, and the like. Budgets look toward the
Time value of money-the concept that a dollar today is worth more
than a dollar received in the future
Future Value of a Single Amount: Future value=Amount Invested *
Future value factor
Present Value of a Single Amount: Present value=Future value *
present value factor
Taxes-the dues paid for membership in our society; the cost of living in
this country
The overriding objective of tax planning is simple: to maximize the
amount of money you keep by minimizing the amount of taxes you pay.
Income taxes-a type of tax levied on taxable income by the federal
government and by many state and local governments
Progressive tax structure-a tax structure in which the larger the
amount of taxable income, the higher the rate at which it is taxed
Taxable income-the amount of income subject to taxes; it is
calculated by subtracting adjustments, the larger of itemized or standard
deductions, and exemptions from gross income
Preparing and filing your tax returns involves more than merely filling
out and filing a form on or before April 15.

Filing extension-an extension of time beyond the April 15 deadline
during which taxpayers, with the approval of the IRS, can file their returns
without incurring penalties
In filing for an extension, however, the taxpayer must estimate the
taxes due and remit that amount with the application. The extension does not
give taxpayers more time to pay their taxes.
In addition to returns that stand out in some way and warrant further
investigation, the IRS also randomly selects some returns for a tax audit-an
examination to validate the returns accuracy. The odds of being audited are
actually quite low; the IRS audits fewer than 2% of returns. However, higherincome earners tend to have a greater chance of being audited.
Tax evasion-the illegal act of failing to accurately report income or
deductions and, in extreme cases, failing to pay taxes altogether
Tax avoidance-the act of reducing taxes in ways that are legal and
compatible with the intent of Congress
Cash management-the routine, day-to-day administration of cash
and near-cash resources, also known as liquid assets, by an individual or
Commercial banks-are for profit
Credit Unions-nonprofit organization and it is member owned
Deposit insurance-a type of insurance that protects funds on deposit
against failure of the institution; can be insured by the FDIC and the NCUA
Securities purchased through your bank are not protected by any form
of deposit insurance.
Demand deposit-an account held at a financial institution from which
funds can be withdrawn on demand by the account holder; same as a
checking account
Time deposit-a savings deposit at a financial institution; remains on
deposit for a longer time than a demand deposit
Electronic funds transfer systems (EFTSs)-systems using the
latest telecommunications and computer technology to electronically transfer
funds into and out of customers accounts
Debit cards-specially coded plastic cards used to transfer funds from
a customers bank account to the recipients account to pay for goods and
Automated teller machine (ATM)-a remote computer terminal that
customers of depository institutions can use to make basic transactions 24
hours a day, 7 days a week
Factors that typically influence the choice of where to maintain a
checking account are convenience, services, and cost.
Overdraft-the result of writing a check for an amount greater than the
current account balance
Stop payment-an order made by an account holder instructing the
depository institution to refuse payment on an already issued check
Cashiers check-a check payable to a third party that is drawn by a
bank on itself in exchange for the amount specified plus, in most cases, a
service fee (of about $5); the best assurance you can give that the check is
Travelers check-a check sold (for a fee of about 1.5%) by many large
financial institutions, typically in denominations ranging from $20 to $100,

that can be used for making purchases and exchanged for local currencies in
most parts of the world
Certified check-a personal check that is guaranteed (for a fee of $10
to $15 or more) by the bank on which it is drawn; personal check that the
bank certifies with a stamp to guarantee that the funds are available