Preparing for the 1 st Assessment Exam

1. Preparing for the 1st Assessment Exam Personal Finance: a Gospel Perspective

2. Preparing for the 1st Assessment Exam • How to do well on my exams (by order of what I think is most important): • 1. Review the PowerPoints for each class • These are the things I consider important • Especially look for application problems and know how to do them • 2. Review the previous quizzes and exams • Check your answers from the net • 3. Review the readings and homework problems • Think through the purpose for each problem

3. Financial Statements • Mickey and Minnie, both recent BYU graduates, together get paid $4,500 every month. Monthly expenses include $750 on taxes, $1,200 on housing and utilities, $750 on transportation, $450 on other expenses, $350 on food, $550 on charitable contributions, and $450 on savings. • A. Prepare an income statement (the right way) and then calculate and interpret their net savings ratio. How are they doing? • B. Assuming they have $6,000 in monetary assets, what is their month’s living expense covered ratio? What does that mean? What should it be?

4. Both get $4,500 every month. Monthly expenses include $750 on taxes, $1,200 on housing and utilities, $750 on transportation, $450 on other expenses, $350 on food, $550 on charitable contributions, and $450 on savings. A. Prepare an income statement (the right way) and then calculate and interpret their net savings ratio. How are they doing? B. Assuming they have $2,000 in monetary assets, what is their month’s living expense covered ratio? What does that mean?

5. They get a total of $4,500 every month. Monthly expenses include $750 on taxes, $1,200 on housing and utilities, $750 on transportation, $450 on other expenses, $350 on food, $550 on charitable contributions, and $450 on savings. A. Prepare an income statement (the right way) and then calculate and interpret their net savings ratio. How are they doing? B. Assuming they have $2,000 in monetary assets, what is their month’s living expense covered ratio? What does that mean? What should it be? Net Savings Ratio (2) Income for Savings450 = 12% Income for Living 3,750 The right way is to pay the Lord first, and pay yourself second. Income Statement Income before Tax 4,500 Taxes 750 Pay the Lord 550 Pay themselves 450 Expenses Utilities/Housing 1,200 Transportation/other 750 Food 350 Other expenses 450 They save 12% of their net living expenses and 10% of their gross. While this can be high or low, depending on the age and situation of the family, it is the minimum for us Gross savings ratio: Income for savings / Total Income: 450 / 4,500 = 10%

6. They get a total of $4,500 every month. Monthly expenses include $750 on taxes, $1,200 on housing and utilities, $750 on transportation, $450 on other expenses, $350 on food, $550 on charitable contributions, and $450 on savings. A. Prepare an income statement (the right way) and then calculate and interpret their net savings ratio. How are they doing? B. Assuming they have $2,000 in monetary assets, what is their month’s living expense covered ratio? What does that mean? What should it be? • B. Assuming they have $6,000 in monetary assets, their months living expense covered ratio, the number of month’s they could cover their living expenses without any new money, would be: • 6,000 / 2,750 = 2.2 times • The recommended level is 3-6 months, which means that if they lost their jobs, they could still survive for 3-6 months before they run out of money

7. Consumer Loans • Jonathan needs approximately $2,500 to buy a new computer. A 2-year unsecured loan is available with in-store financing for 10%. The current rate on his revolving home equity line of credit is 5.75%, although he is reluctant to use it. Jon is in the 28% federal tax bracket and the 5.75% state tax bracket. • a. What are the advantages and disadvantages of each loan? • b. Regardless of the loan chosen, Rich wants to pay off the loan in 24 months. Calculate the monthly payments for him, assuming both loans use the simple interest calculation method. • C. Which loan should he choose?

8. Jonathan needs $2,500. A 2-year in-store unsecured loan is 10 percent. The revolving home equity line of credit is 5.75%. Jon is in the 28% federal and the 5.75% state tax bracket. a. What are the advantages and disadvantages of each loan? b. Rich wants to pay off the loan in 24 months. Calculate the monthly payments.

9. Jonathan needs $2,500. A 2-year in-store unsecured loan is 10%. The revolving home equity line of credit is 5.75%. Jon is in the 28% federal and the 5.75% state tax bracket. a. What are the advantages and disadvantages of each loan? b. Rich wants to pay off the loan in 24 months. Calculate the monthly payments. c. Which loan should he take? • A. Advantages and Disadvantages • Unsecured line of credit • + No collateral needed • + Cheaper than a credit card • + Does not put the house at risk • - Expensive • Home equity loan • + interest may be tax deductible • + secured loan so lower rate • - Fail to repay loan may lose the house

10. Jonathan needs $2,500. A 2-year in-store unsecured loan is 10%. The revolving home equity line of credit is 5.75%. Jon is in the 28% federal and the 5.75% state tax bracket. a. What are the advantages and disadvantages of each loan? b. Rich wants to pay off the loan in 24 months. Calculate the monthly payments. c. Which loan should he take? • B. The unsecured loan monthly payment would be: PV = -2,500, I = 10/12, N = 24, PMT = ? • $115.36 • The home equity loan monthly payment would be: PV = -2,500, I = 5.75/12, N = 24, PMT = ? • $110.52 • The home equity loan would save $116.16. In addition, the home equity loan would save $51.46 in taxes based on the deductibility of the interest based on the following equation: [($110.52*24)] -$2500] * .3375. • What Jonathan has to decide is whether or not the $167.62 in total savings is worth the risk of losing the house if he cannot repay the loan.

11. Jonathan needs $2,500. A 2-year in-store unsecured loan is 10%. The revolving home equity line of credit is 5.75%. Jon is in the 28% federal and the 5.75% state tax bracket. a. What are the advantages and disadvantages of each loan? b. Rich wants to pay off the loan in 24 months. Calculate the monthly payments. c. Which loan should he take? • C. Either answer is ok, depending on the why. The home equity loan is cheaper, with tax savings. The unsecured debt does not risk losing the house. • The after-tax cost of the 5.75% home equity loan would be 3.81% using the following calculation that considers the tax savings on both federal and state taxes • 3.81% = 5.75% [ 1 -(.28 + .0575)]

12. Tax Strategy Using the married filing jointly status and their income and expense statement below, calculate the 2004 tax liability for Mork and Mindy Williams (they have five children, ages 4, 8, 12, 16, and 18). Mindy is the Young Women’s President of her ward and has calculated that she drove her car 300 miles last year to girls’ camp, which was not reimbursed. Exemptions are $3,100 per person, the standard deduction for married filing jointly is $9.700, medical expenses over 7.5% of AGI and job-related expenditures over 2% of AGI are deductible, charitable deductions for mileage are .12 per mile, and the child-tax credit is $1,000 per child under 17. a. Calculate their tax liability first using the standard deduction and then using itemized deductions. b. Write a paragraph explaining to the Williams which method they should use and why? In that paragraph, comment on their marginal and average tax rates on taxable income. IncomeExpenses Earned Income $74,000 Home Mortgage interest 6,200 Interest Income 2,100 Un-reimbursed Medical Bills 4,900 Retirement Plan Contributions DI and other donations 250 Mork’s IRA 3,000 Job-related expenditures 1,800 Mindy’s Roth IRA 2,000 Tithing and other offerings 7,000 Tax Table for Married Filing Jointly for 2004: Amount Tax 0 to $14,300 10% $14,300 to $58,100 $1,430 plus 15% of the amount over $14,300 $58,100 to $117,250 $8,000 plus 25% of the amount over $58,100

13. Tax Liability (standard deduction) AGI =74000+2100-3000 = $73,100 Less standard deduction 9,700 Less personal exemptions 21,700 (7 * 3,100) Taxable income $41,700 Tax liability 14,300*10%= 1,430 (41,700-14,300)*15%= 4,110 Total tax liability $5.540 Child tax credit 4,000 Total $1,540 Average tax rate = Total taxes due /Taxable income Average tax rate = $1,540 / 41,700 = 3.7% Marginal tax rate = 15% for both

14. Tax Liability (Itemized deductions) • AGI 73,100 Less itemized deductions: Home mortgage Interest 6,200 Un-reimbursed Medical 0 Job related expenditures 338 Tithes & other offerings 7,000 DI & other donations 250 Mileage 36 • Total itemized (13,824) • Less personal exemptions (21,700) • Taxable Income $37,576 • Tax liability • 14,300*10%= 1,430.0 + [(37,576-14,300)*15%]= 3,491.4 • Total tax liability $4,921.4 • Child tax credit less -4,000 • Tax 921.4 • Average tax rate = $921.4 / 37,576 = 2.45% • Paragraph should include the savings ($618.6), recommendation, and average and marginal tax rates on taxable income, not gross income.