Personal Finance

Determining your Financial Fate

Depository Institutions (Banks)

There are two types of Depository Institutions

  • Commercial Bank
  • Credit Union

Commercial Banks are for profit while Credit Unions aren't, the are non-for-profit. Commercial banks are also open to anyone who wants to open an account but Credit unions have "member requirements." Both offer many services to the public but usually credit unions do not offer as much.

Along with Commercial Banks vs. Credit Unions, within are the accounts you have.

  • Savings Account
  • Checking Account

The major difference between the two is that Checking accounts are meant for everyday expenses while Savings Accounts are for putting your money somewhere to save it so you have something either for emergencies or you have a specific goal. With Checking account there is a myriad of ways to deposit and withdraw money but usually savings account are more limited. Also with checking and savings accounts are the opportunity to earn interest on the money in the account, but usually it's only savings accounts that earn interest.

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You're better off in a community than by yourself... what does that mean?

  • When you're a member of a community you get many benefits because of taxes that you couldn't get by yourself
  • taxes are a way members of a community help each other out

Now, there are different types of taxes.

  • Federal Income Tax
  • State Income Tax
  • Payroll Tax

Federal income tax is determined by earned and unearned income. The higher the income the higher the tax. This tax is paid by a majority of people living in the U.S. who work for registered legal employers and helps fund education, national defense, national roads, disaster relief, and more.

State income tax is similar but more concentrated on the province of a state, not the whole country. It is determined the same way Federal income tax is but instead it is paid by those living in the certain state if it has income tax, which some don't. These taxes vary by state and help fund things like schools, state parks, state highways, etc.

Payroll tax is different than both fore-stated taxes. These taxes are determined by a set percentage of earned income and it is deducted out of your paycheck, unless you're self-employed. This tax is paid by those who are employed and by employers. This helps fund social security programs and medicare.

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Knowing Your Financial Position

There are a few things you need to know about when understanding your financial position.

First off, a financial statement that describes a financial condition.

Net worth vs. Income

Income is money received like getting a paycheck from working. Net worth is depends on how you manage your income. To find your net worth, you subtract the money amount of liabilities you have from the money amount of assets you have.

Assets vs. Liabilities

An asset is everything you own worth monetary value such as cash or value of personal positions.

There are many different types of assets.

  • Monetary Assets
  • Tangible Assets
  • Investment Assets

Monetary Assets can be easily and quickly converted into cash, such ass checking and savings accounts, debit cards

Tangible Assets are also known as Lifestyle or Use assets, and they are things like homes, cars, electronics, etc.

Investments Assets are financial assets bought with the hope that they will generate income and that you will be able to sell in the future for more money. Things like the value of retirement accounts, stocks, etc.

Liabilities are a debt or an obligation owed to someone and alike to assets, there are different liabilities.

Since liabilities are a debt or obligation due, then almost anything could be a liability; a car loan, money borrowed from your parents, payments due on a credit card, etc. If there is money you need to pay back or you promised to do something in order to get something else, then you have liabilities.

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Income and Expense Statement

When it comes to income and expenses you need to understand how to track them and delegate them appropriately. You also need to know what an Income and Expense statement is. An Income and Expense Statement lists and summarizes all of the income you've received and what money you've spent all in a certain time span, usually a month or a year.

Income is money you have received and there are three types of income:

  • Earned income
  • Unearned income
  • Received from government programs

Earned income is any money you receive from working. earned income could be money from a paycheck, tips/commissions/bonuses, or something like money you get from tax returns.

Unearned income is any money you receive from anyone/thing without working. Things like child support, scholarships, or money from someone else would fall under this.

Income from government programs is usually temporary but offer income until you can offer income for yourself. Government programs that offer income are things such as

workers' compensation or scholarships and grants from government sources.

Expenses are anything you have to purchase or delegate money toward. Expenses include things like taxes, saving and investing, insurance, housing, transportation, food, etc.

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Developing a Spending Plan

Creating a spending plan can help keep you money in order and make sure you have enough income to cover you expenses.

---Developing the Spending Plan---

Step 1 - Track current income and expenses

  • This helps you get an idea of where your money is actually going

Step 2 - Personalize your spending plan

  • Make your spending plan work for you and address every expense you have

Step 3 - Allocate money to each category

  • Look at all of your addressed expenses and decide where money from your income will go to

---Maintaining the Spending Plan---

Step 4 - Implement and control

  • Stay consistent with your previously decided upon allocation of income and expenses and don't let it slide

Step 5 - Evaluate and make adjustments

  • Look and see if it works the best way it can for you and make the necessary adjustments to make it better for you and your needs.
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