Personal Finance Review 1

​Personal Finance Review

Source of income

⚫ Earned Income: Income derived from active

participation in a trade or business, including wages,
salary, tips, commissions and bonuses.

⚫ Unearned Income: Any income that comes from

investments and other sources unrelated to
employment services. Examples: interest from a
savings account, bond interest, alimony, and
dividends from stock

2

Multiple Choice

A job is an example of

• capital gains

• earned income

• investment income

• rental income

Multiple Choice

Books, movies and music are examples of

• earned income

• interest income

• dividend income

• royalty income

Multiple Choice

Which source of income do most of Americans have......

• interest income

• dividend income

• profit income

• earned income

Exemptions

⚫ If you are not claimed as a dependent on another

taxpayer's return, then you can claim one personal tax
exemption. The exemption reduces your taxable income
just like a deduction does, but has fewer restrictions to
claiming it. If you are married and file a joint tax return,
both you and your spouse each get an exemption.

⚫ The IRS allows you to take additional exemptions for

each dependent you claim. Frequently, the source of
these exemptions are the children who live with you for
more than half the year, are under 19 years old (or under
24 if a full-time student) and who don't provide more
than half of their own financial support during the tax
year.

3

Multiple Choice

This money is required by law to be withheld from your paycheck and is managed by the IRS (Internal Revenue Service).

• Personal Excemptions

• Social Security

• Federal Income Tax

• Group Health Insurance

Multiple Choice

True or False: Personal Exemptions/Withholdings help you pay less taxes.

• True

• False

Liquidity

⚫ The ability to convert an asset to cash quickly and

with minimal impact to the price.

⚫ Examples: Cash, Most stocks, money market

instruments and government bonds.

⚫ Money market accounts: Combination of savings and

checking Acct. but you receive higher interest
rate-must carry a high balance!!!

⚫ Bonds- It is the organized exchange on which

participants can lend and borrow large sums of
money- an IOU.

4

Gift cards

⚫ A gift card is a restricted monetary equivalent is issued by

retailers or banks to be used as an alternative to a
non-monetary gift.

⚫ Prepaid cards, gift cards, and gift certificates cannot expire

within five years of activation or unless the terms of the
expiration are clearly disclosed. The law bans dormancy fees,
inactivity fees or service fees on gift cards unless there has
been no activity in a 12-month period and the issuer clearly
discloses all fees before the gift card is purchased.

⚫ Exclusions: Prepaid phone cards , reloadable cards, loyalty or

rewards cards, cards issued for admission to special events or
venues and certificates issued in paper form only are exempt.

5

Discretionary income and budget surplus

⚫ The amount of an individual's income that is left for

spending, investing or saving after taxes and
personal necessities (such as food, shelter, and
clothing) have been paid.

⚫ Discretionary income includes money spent on

luxury items, vacations and non-essential goods and
services.

6

Multiple Choice

What two things does a budget compare?

• Income and Expenses

• Savings and Interest

• Income and Investments

• Expenses and Expenditures

Multiple Choice

Which is an example of a fixed expense?

• Cell Phone

• Utility bill

• Groceries

• Petrol

Multiple Choice

Variable expenses may not be the same every month.

• True

• False

Multiple Choice

Expenses that stay the same every month are _________ expenses. Rent would be an example.

• fixed

• discretionary 

• variable

• intermittent

Multiple Choice

An expense that only occurs because you are choosing to spend money like eating out or buying clothes is a(n) ___________ expense.

• fixed

• discretionary

• variable

• intermittent

Money Orders

⚫ A certificate that allows the stated

payee to receive cash on-demand,
usually issued by governments and
banking institutions. A money order
functions much like a check, in that the
person who purchased the money order
may stop payment

7

Why does the US currency have value

⚫Its value is only based on what we

can get in exchange for it. Or put it
another way, money has value as
long as other people believe the
money you give them can be
exchanged for the goods and
services they desire in the future.

8

Opportunity cost

⚫The value of the best alternative

that must be given up when scarce
resources are used for one purpose
instead of another

⚫Your 2nd best choice that you did

not buy!!!

9

Multiple Choice

What is opportunity cost?

• the value of the next best option that is not selected when a choice is made.

• there is not enough of it.

• things people make to earn money.

• actions people do to earn money.

Multiple Choice

Michael has been invited by a friend to go fishing on Friday. His parents are going to a concert. Michael chooses to go fishing with his friend. What is his opportunity cost?

• fishing with a friend

• going to a concert

Inflation

⚫ Inflation is a general increase in prices and a

corresponding decrease in money's purchasing
power.

⚫ The economic indicator for stable prices is the

Consumer Price Index (CPI). The CPI measures
inflation in consumer goods. Inflation is an increase
in the overall price level—sometimes referred to as
an increase in the cost of living. Inflation is not
when gas prices rise or coffee prices rise—it is when
prices in general are rising.

10

Inflation

⚫ The biggest losers due to inflation are those willing

to lend money. An extreme example would be during
the hyper-inflation of 1923 in Germany. If you had
loaned a friend enough money to buy a car in early
1923 and he had repaid it at the end of 1923 you
might have been able to buy a box of matches with it.
So it is easy to see that the borrower got a car and he
was able to repay it with pocket change. The lender
of course was the big loser.

11

Inflation

⚫ People hurt the most: Those on fixed incomes

(retired people)

⚫ People hurt the least: Borrowers and producers

12

Multiple Choice

Inflation increases

• All prices, including wages.

• All prices, except wages.

• Prices of input goods only.

• Prices of finished goods only.

Multiple Choice

The growth rate in prices is also called:

• the velocity of prices

• GDP spread

• escalation

• inflation

Multiple Choice

When inflation is high the _______________of the dollar decreases

• cost value

• purchasing power

• importance

• validity

What is a bull market?

⚫ The use of "bull" and "bear" to describe markets

comes from the way the animals attack their
opponents. A bull thrusts its horns up into the air
while a bear swipes its paws down. These actions are
metaphors for the movement of a market. If the
trend is up, it's a bull market. If the trend is down,
it's a bear market.

53

Match

Match the following

• Net Worth

• Asset

• Positive Net Worth

• Negative Net Worth

The value of comparing someone's assets to their liabilities.

Anything owned by someone

Assets are more than liabilities

Liabilities are more than assets.

• The value of comparing someone's assets to their liabilities.

• Anything owned by someone

• Assets are more than liabilities

• Liabilities are more than assets.