+1443 776-2705 panelessays@gmail.com

Study the textbook “Personal Finance” by Vickie Bajtelsmit for each chapters and any of the supplemental materials. When you have reflected on the completed chapter, write a short minimum 400 words essay for each chapter. Describing your thoughts and how this material applies to your life now or how it might apply in the future. Think about what you've done, what you've learned, and how it could apply to your life.  What from the topic do you want to be sure to remember in the future?  Are there any personal goals that you've identified?  Are there any habits you need to change? Is there anything about your financial life you need to change? 

Chapter 1. The Financial Planning Process

Chapter 2. Financial Planning Tools, Personal Financial Statements, and the Time Value of Money

Chapter 3. Budgeting and Cash Management

Chapter 4. Tax Planning

Chapter 5. Managing Credit Cards and Consumer Loans

Chapter 6. Making Automobile and Housing Decisions

Chapter 7. Insuring Cars and Homes

Chapter 8. Life Insurance and Long Term Care Planning

Chapter 9. Employee Benefits, Health, Disability, and Retirement

Chapter 10. Saving for Distant Goals – Retirement and Education Funding

Chapter 11. The Fundamentals of Investing

Chapter 12. Investing in Stocks and Bonds

Chapter 13. Investing in Mutual Funds and Real Estate

Chapter 14. Estate Planning

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Personal Finance

Vickie Bajtelsmit Colorado State University

with Linda Rastelli

Credits PUBLISHER Anne Smith

PROJECT EDITOR Beth Tripmacher

MARKETING MANAGER Jennifer Slomack

SENIOR EDITORIAL ASSISTANT Tiara Kelly

PRODUCTION MANAGER Kelly Tavares

PRODUCTION ASSISTANT Courtney Leshko

PROJECT MANAGER Shana Meyer

CREATIVE DIRECTOR Harry Nolan

COVER DESIGNER Hope Miller

COVER PHOTO © George Doyle/Getty Images

Wiley 200th Anniversary Logo designed by: Richard J. Pacifico

This book was set in Times New Roman by Techbooks and printed and bound by R.R. Donnelley. The cover was printed by R.R. Donnelley.

This book is printed on acid free paper. �

Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc. 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201) 748-6011, fax (201) 748-6008, website http://www.wiley.com/go/permissions.

To order books or for customer service please, call 1-800-CALL WILEY (225-5945).

ISBN-13 978-0-470-11123-9

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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VI APPENDIX—PERSONAL FINANCE WORKSHEETS

PREFACE College classrooms bring together learners from many backgrounds with a variety of aspirations. Although the students are in the same course, they are not necessarily on the same path. This diversity, cou- pled with the reality that these learners often have jobs, families, and other commitments, requires a flexibility that our nation’s higher edu- cation system is addressing. Distance learning, shorter course terms, chunked curriculum, new disciplines, evening courses, and certifica- tion programs are some of the approaches that colleges employ to reach as many students as possible and help them clarify and achieve their goals.

Wiley Pathways books, a new line of texts from John Wiley & Sons, Inc., are designed to help you address this diversity and the need for flexibility. These books focus on the fundamentals, identify core competencies and skills, and promote independent learning. The focus on the fundamentals helps students grasp the subject, bringing them all to the same basic understanding. These books use clear, everyday language, presented in an uncluttered format, making the content more accessible and the reading experience more pleasurable. The core competencies and practical skills focus help students suc- ceed in the classroom and beyond, whether in another course or in a professional setting. A variety of built-in learning resources promote independent learning and help instructors and students gauge stu- dents’ understanding of the content. These resources enable students to think critically about their new knowledge, and apply their skills in any situation.

Our goal with Wiley Pathways books—with its brief, inviting for- mat, clear language, and core competencies and skills focus—is to cel- ebrate the many students in your courses, respect their needs, and help you guide them on their way.

Wiley Pathways Pedagogy

To meet the needs of working college students, all Wiley Pathways texts explicitly use an outcomes and assessment-based pedagogy for the books: students will review what they have learned, acquire new information and skills, and apply their new knowledge and skills to real-life situations. Based on the recently updated categories of Bloom’s Taxonomy of Learning, Wiley Pathways Personal Finance presents key

topics in personal finance (the content) in easy-to-follow chapters. The text then prompts analysis, synthesis, and evaluation with a variety of learning aids and assessment tools. Students move efficiently from reviewing what they have learned, to acquiring new information and skills, to applying their new knowledge and skills to real-life scenarios.

With Wiley Pathways, students not only achieve academic mastery of personal finance topics, but they master real-world skills related to that content. The books help students become independent learners, giving them a distinct advantage in the field, whether they are starting out or seek to advance in their careers.

Organization, Depth and Breadth of the Text

▲ Modular format. Research on college students shows that they access information from textbooks in a non-linear way. Instructors also often wish to reorder textbook content to suit the needs of a particular class. Therefore, although Wiley Pathways Personal Finance proceeds logically from the basics to increasingly more challenging material, chapters are further organized into sections that are self-contained for maximum teaching and learning flexibility.

▲ Numeric system of headings. Wiley Pathways Personal Finance uses a numeric system for headings (for example, 2.3.4 identi- fies the fourth sub-section of section 3 of chapter 2). With this system, students and teachers can quickly and easily pinpoint topics in the table of contents and the text, keeping class time and study sessions focused.

▲ Core content. Topics in the text are organized into fifteen chapters.

Part I: The Personal Financial Planning Process

Chapter 1, Personal Financial Planning in Action, provides an overview of the five steps in the personal financial planning process and the elements of a comprehensive financial plan that are developed throughout the text. How to make effective financial decisions is also explained.

Chapter 2, Money Management Strategies and Skills, looks at ways to collect and organize your financial information. Students learn how to compile and use personal financial statements to evaluate their financial conditions. Simple financial ratios are presented to determine where you need to save or to better allocate money.

PREFACE vii

viii PREFACE

Chapter 3, Managing Your Taxes, examines the United States tax system. Students are helped to understand their federal tax returns, including tax brackets, tax credits and exemptions, and calculating taxable income. How to file a return and avoid common filing errors is presented. Finally, effective tax planning strategies are offered.

Part II: Managing Your Personal Finances

Chapter 4, Managing Your Cash and Savings, explains the objectives and rules of cash management. Students are helped to understand the basic differences between financial institutions, and given guidance in choosing a financial provider. Cash management products and services are detailed. Tips are provided on how to resolve cash management problems, including bounced checks, fraudulent activity, and obtain- ing emergency cash.

Chapter 5, Consumer Credit, helps students make wise credit card and consumer loan decisions. It examines the benefits and costs of consumer credit, including credit cards. How to apply for con- sumer credit and correcting credit mistakes are presented. How to avoid identify theft is explained, as well as other pitfalls of credit card usage.

Chapter 6, Using Consumer Loans, outlines the characteristics and types of consumer loans. Student loans are covered in detail, as well as how interest is calculated on consumer loans and the role of credit reporting agencies. How to improve your creditworthiness is studied, including the five C’s of credit. Managing your debt is explained, including how to reduce it, and as a last resort, filing for bankruptcy.

Chapter 7, Making Automobile and Housing Decisions, examines how to purchase and finance autos and homes. From determining how much you can afford to spend, to negotiating, to obtaining a mortgage or auto loan, all aspects of these important transactions are covered. Whether to lease or buy a car, mortgage financing, choosing a reputable real estate broker, and closing the real estate transaction are also part of this chapter.

Part III: Protecting Yourself with Insurance

Chapter 8, Insuring Your Home and Automobile, shows how to pro- tect your car and home after you have purchased them. It explains how insurance works, including risk pooling, indemnity, liability, exclusions and deductibles. Which risks are covered is discussed, as well as which types of homeowner’s and automobile coverages are available. Next, how to buy insurance, from finding agents to getting

PREFACE ix

quotes, is explained. Making insurance claims is included in this chapter.

Chapter 9, Health and Disability Insurance, reviews why health insurance is an important employee benefit and component of a sound financial plan. The types of health insurance are described, including employer-sponsored and government sponsored plans. Finally, planning for disability income needs is discussed, together with the importance of understanding your chances of becoming disabled at some point.

Chapter 10, Financial Planning with Life Insurance, describes why life insurance may be useful in your financial plan. Topics covered include how to determine your life insurance needs, what types of com- panies sell life insurance, types of policies, and important provisions in a life insurance contract.

Part IV: Managing Your Investments and Your Future

Chapter 11, Investment Basics, outlines clearly how to develop real- istic investment goals, as well as find the money for investing. Fac- tors that reduce investment risk and your investment alternatives are offered. The need for a consistent investment strategy and how to establish one is explored.

Chapter 12, Investing in Stocks and Bonds, explains equity and debt investing in brief detail. Common and preferred stock, how com- mon stock is classified, and buying and selling stock on exchanges are explained. Evaluating the performance of your stock is also pre- sented. Then the advantages and disadvantages of bond investing are explored, including how to buy and sell bonds.

Chapter 13, Investing in Mutual Funds, describes mutual funds and why they may be preferred by the individual investor. Included in the discussion are mutual fund investment classifications. How to select a fund and how to evaluate a fund’s performance are offered as well.

Chapter 14, Planning for Retirement, has information on estimat- ing retirement income needs and sources of retirement income. Described here are IRAs and how to avoid paying more taxes in retirement than you need to. Employee-sponsored and government sponsored benefits are included in the discussion. Finally, preparing for retirement payouts is covered.

Chapter 15, Preserving Your Estate, outlines reasons why you probably need a will, and why estate planning is important for every- one. The key components of estate plans are presented, and how to avoid estate and gift taxes. The types and formats of wills, including how to establish a valid will, is included.

x PREFACE

Pre-reading Learning Aids

Each chapter of Wiley Pathways Personal Finance features the follow- ing learning and study aids to activate students’ prior knowledge of the topics and orient them to the material.

▲ Pre-test. This pre-reading assessment tool in multiple-choice format not only introduces chapter material, but it also helps students anticipate the chapter’s learning outcomes. By focus- ing students’ attention on what they do not know, the self-test provides students with a benchmark against which they can measure their own progress. The pre-test is available online at www.wiley.com/college/bajtelsmit.

▲ What You’ll Learn in this Chapter. This bulleted list focuses on subject matter that will be taught. It tells students what they will be learning in this chapter and why it is significant for their careers. It will also help students understand why the chapter is important and how it relates to other chapters in the text.

▲ After Studying this Chapter, You’ll Be Able To. This list emphasizes capabilities and skills students will learn as a result of reading the chapter. It focuses on execution of subject matter that shows the relationship between what students will learn in the chapter and how the information learned will be applied in an on-the-job situation.

Within-text Learning Aids

The following learning aids are designed to encourage analysis and synthesis of the material, support the learning process, and ensure success during the evaluation phase:

▲ Introduction. This section orients the student by introducing the chapter and explaining its practical value and relevance to the book as a whole. Short summaries of chapter sections pre- view the topics to follow.

▲ “For Example” Boxes. Found within each chapter, these boxes tie section content to real-world examples, scenarios, and applications.

▲ Figures and tables. Line art and photos have been carefully chosen to be truly instructional rather than filler. Tables distill and present information in a way that is easy to identify, access, and understand, enhancing the focus of the text on essential ideas.

PREFACE xi

▲ Self-Check. Related to the “What You’ll Learn” bullets and found at the end of each section, this battery of short answer questions emphasizes student understanding of concepts and mastery of section content. Though the questions may either be discussed in class or studied by students outside of class, students should not go on before they can answer all ques- tions correctly.

▲ Key Terms and Glossary. To help students develop a profes- sional vocabulary, key terms are bolded in the introduction, summary, and when they first appear in the chapter. A com- plete list of key terms with brief definitions appears at the end of each chapter and again in a glossary at the end of the book. Knowledge of key terms is assessed by all assessment tools (see below).

▲ Summary. Each chapter concludes with a summary paragraph that reviews the major concepts in the chapter and links back to the “What You’ll Learn” list.

Evaluation and Assessment Tools

Each Wiley Pathways text consists of a variety of within-chapter and end-of-chapter assessment tools that test how well students have learned the material. These tools also encourage students to extend their learning into different scenarios and higher levels of under- standing and thinking. The following assessment tools appear in every chapter of Wiley Pathways Personal Finance:

▲ Summary Questions help students summarize the chapter’s main points by asking a series of multiple choice and true/false questions that emphasize student understanding of concepts and mastery of chapter content. Students should be able to answer all of the Summary Questions correctly before moving on.

▲ Applying this Chapter Questions drive home key ideas by asking students to synthesize and apply chapter concepts to new, real- life situations and scenarios. Asks student to practice using the material they have learned in contrived situations that help reinforce their understanding, and may throw light on impor- tant considerations, advantages, or drawbacks to a specific methodology.

▲ You Try It Questions are designed to extend students’ thinking, and so are ideal for discussion, writing assignments, or for use

xii PREFACE

as case studies. Using an open-ended format and sometimes based on Web sources, they encourage students to draw con- clusions using chapter material applied to real-world situations, which fosters both mastery and independent learning.

▲ Post-test should be taken after students have completed the chapter. It includes all of the questions in the pre-test, so that students can see how their learning has progressed and improved.

Instructor and Student Package

Wiley Pathways Personal Finance is available with the following teach- ing and learning supplements. All supplements are available online at the text’s Book Companion Web site, located at www.wiley.com/college/bajtelsmit.

▲ Instructor’s Resource Guide. Provides the following aids and supplements for teaching an Introduction to Personal Finance course: • Sample syllabus. A convenient template that instructors

may use for creating their own course syllabi. • Teaching suggestions. For each chapter, these include a

chapter summary, learning objectives, definitions of key terms, lecture notes, answers to select text question sets, and at least 3 suggestions for classroom activities, such as ideas for speakers to invite, videos to show, and other projects.

▲ PowerPoints. Key information is summarized in 15 to 20 PowerPoints per chapter. Instructors may use these in class or choose to share them with students for class presentations or to provide additional study support.

▲ Test Bank. One test per chapter, as well as a mid-term, and two finals: one cumulative, one non-cumulative. Each includes true/false, multiple choice, and open-ended questions. Answers and page references are provided for the true/false and multiple choice questions, and page references for the open-ended questions. Available in Microsoft Word and computerized formats.

PREFACE xiii

ACKNOWLEDGMENTS Taken together, the content, pedagogy, and assessment elements of Wiley Pathways Personal Finance offer the career-oriented student the most important aspects of personal finance as well as ways to develop the skills and capabilities that current and future employers seek in the individuals they hire and promote. Instructors will appreciate its practical focus, conciseness, and real-world emphasis. We would like to thank the reviewers for their feedback and suggestions during the text’s development. Their advice on how to shape Wiley Pathways Per- sonal Finance into a solid learning tool that meets both their needs and those of their busy students is deeply appreciated.

We would especially like to thank the following reviewers for their significant contributions: Robert Vaughn Diamond, American River College Christine Mooney, Queensborough Community College

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BRIEF CONTENTS Part I: The Personal Financial Planning Process . . . . . . . . . . . . . . . . . . . 1

1. Personal Financial Planning in Action. . . . . . . . . . . . . . . . . . . . . . . . . 1

2. Money Management Strategies and Skills . . . . . . . . . . . . . . . . . . . . . 22

3. Managing Your Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Part II: Managing Your Personal Finances . . . . . . . . . . . . . . . . . . . . . . . 75 4. Managing Your Cash and Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

5. Consumer Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

6. Using Consumer Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

7. Making Automobile and Housing Decisions . . . . . . . . . . . . . . . . . . 158

Part III: Protecting Yourself with Insurance. . . . . . . . . . . . . . . . . . . . . 190 8. Insuring Your Home and Automobile . . . . . . . . . . . . . . . . . . . . . . . 190

9. Health and Disability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 218

10. Financial Planning with Life Insurance . . . . . . . . . . . . . . . . . . . . . 247

Part IV: Managing Your Investments and Your Future . . . . . . . . . . . . . 278 11. Investment Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278

12. Investing in Stocks and Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . 307

13. Investing in Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351

14. Planning for Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380

15. Preserving Your Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404

Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478

CONTENTS Part I: The Personal Financial Planning Process . . . . . . . . . . . . . . . . . . . . . . . . 1

1. Personal Financial Planning in Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

1.1 The Personal Financial Planning Process . . . . . . . . . . . . . . . . . 2 1.1.1 Step 1: Analyze Your Current Financial Position . . . . 3 1.1.2 Step 2: Develop Short-term and Long-term

Financial Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.1.3 Step 3: Identify and Evaluate Alternative Strategies

for Achieving Your Goals . . . . . . . . . . . . . . . . . . . . . 4 1.1.4 Step 4: Implement a Plan for Achieving

Your Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.1.5 Step 5: Regularly Reevaluate and Revise Your

Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Self-Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

1.2 Factors That Influence Personal Financial Planning . . . . . . . . . 6 1.2.1 Changing Needs over the Life Cycle . . . . . . . . . . . . 6 1.2.2 Values and Attitudes . . . . . . . . . . . . . . . . . . . . . . . . 7 1.2.3 Life Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.2.4 General Economic Conditions . . . . . . . . . . . . . . . . . 8

Self-Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

1.3 Elements of a Comprehensive Financial Plan . . . . . . . . . . . . . 12

Self-Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

1.4 Making Effective Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.4.1 Make Reasonable Assumptions . . . . . . . . . . . . . . . 13 1.4.2 Apply Marginal Reasoning . . . . . . . . . . . . . . . . . . . 14 1.4.3 Consider Opportunity Costs . . . . . . . . . . . . . . . . . 14 1.4.4 Use Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . . 15

Self-Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Summary Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Applying This Chapter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

You Try It . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

2. Money Management Strategies and Skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

2.1 Collecting and Organizing Your Financial Information . . . . . 23 2.1.1 Why You Need to Save Bills and Documents . . . . . . 23

2.1.2 How Long You Should Save Documents . . . . . . . . 23 2.1.3 Where You Should Keep Documents . . . . . . . . . . . 24

Self-Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

2.2 Using Personal Financial Statements . . . . . . . . . . . . . . . . . . . 25 2.2.1 Preparing a Personal Balance Sheet . . . . . . . . . . . . 25 2.2.2 Valuing Your Assets and Debts . . . . . . . . . . . . . . . . 26 2.2.3 Calculating Your Net Worth. . . . . . . . . . . . . . . . . . 28 2.2.4 Preparing a Personal Cash Flow Statement . . . . . . 29

Self-Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

2.3 Using Financial Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 2.3.1 Measuring Liquidity. . . . . . . . . . . . . . . . . . . . . . . . 33 2.3.2 Measuring Debt Usage . . . . . . . . . . . . . . . . . . . . . . 34 2.3.3 Measuring Savings . . . . . . . . . . . . . . . . . . . . . . . . . 36

Self-Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Summary Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Applying This Chapter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

You Try It . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

3. Managing Your Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

3.1 The Basics of Federal Income Tax . . . . . . . . . . . . . . . . . . . . . 43 3.1.1 The Progressive U.S. Tax System . . . . . . . . . . . . . . 43 3.1.2 The Internal Revenue Service. . . . . . . . . . . . . . . . . 44 3.1.3 Tax Rate Schedules . . . . . . . . . . . . . . . . . . . . . . . . 45 3.1.4 Inflation Indexing of Tax Brackets . . . . . . . . . . . . . 47 3.1.5 The Marginal Tax Effect . . . . . . . . . . . . . . . . . . . . . 48

Self-Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

3.2 Calculating Taxable Income and Taxes Owed. . . . . . . . . . . . . 48 3.2.1 Reporting Income . . . . . . . . . . . . . . . . . . . . . . . . . 49 3.2.2 Adjusted Gross Income . . . . . . . . . . . . . . . . . . . . . 51 3.2.3 Standard vs. Itemized Deductions . . . . . . . . . . . . . 52 3.2.4 Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 3.2.5 Final Calculation of Taxes Owed . . . . . . . . . . . . . . 54 3.2.6 Paying Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Self-Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

3.3 Filing Your Federal Tax Return . . . . . . . . . . . . . . . . . . . . . . . 58 3.3.1 Filing Status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 3.3.2 Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 3.3.3 Age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 3.3.4 When and Where to File Taxes . . . . . . . . . . . . . . . 60 3.3.5 IRS Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

CONTENTS xvii

3.3.6 The Most Common Filing Errors . . . . . . . . . . . . . . 61

Self-Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

3.4 Tax Planning Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 3.4.1 Tax Evasion vs. Tax Avoidance. . . . . . . . . . . . . . . . 63 3.4.2 Reducing Taxable Income . . . . . . . . . . . . . . . . . . . 64 3.4.3 Defering Taxable Income . . . . . . . . . . . . . . . . . . . . 65 3.4.4 Receiving Income That Is Subject to Lower

Tax Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 3.4.5 Increasing Deductions and Exemptions

from Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 3.4.6 Maximizing Tax Credits . . . . . . . . . . . . . . . . . . . . . 67

Self-Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Summary Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Applying This Chapter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

You Try It . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Part II: Managing Your Personal Finances . . . . . . . . . . . . . . . . . . . . . . . . 75

4. Managing Your Cash and Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

4.1 Objectives of Cash Management . . . . . . . . . . . . . . . . . . . . . . 76 4.1.1 Managing Transactions . . . . . . . . . . . . . . . . . . . . . 77 4.1.2 Preparing for Cash Emergencies . . . . . . . . . . . . . . 77 4.1.3 Making Temporary Investments. . . . . . . . . . . . . . . 78 4.1.4 How Much Should You Hold in Cash?. . . . . . . . . . 78

Self-Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

4.2 Rules of Effective Cash Management . . . . . . . . . . . . . . . . . . . 79 4.2.1 Balancing Your Checkbook Every Month. . . . . . . . 79 4.2.2 Paying Your Bills on Time . . . . . . . . . . . . . . . . . . . 80 4.2.3 Paying Yourself First . . . . . . . . . . . . . . . . . . . . . . . 80 4.2.4 Evaluating Alternative Accounts

and Providers . . . . . . . . . . . . . . . …