Notes
Income and budgeting
- Gross pay minus deductions (income taxes, Social Security and Medicare, insurance, retirement) equals net pay. Know the W-4, W-2 and Form 1040.
- A budget compares income with fixed and variable expenses. The 50/30/20 guideline: needs, wants, savings. Pay yourself first and build an emergency fund of 3 to 6 months of expenses.
Banking and saving
- Checking for spending; savings, money market accounts and CDs for saving. Insured deposits are protected up to a legal limit. Avoid overdraft fees.
- Compound interest: $A = P(1 + r)^t$. Rule of 72: years to double $\displaystyle \approx \frac{72}{\text{rate}}$.
Credit and loans
- Monthly credit card interest $\displaystyle \approx \frac{APR}{12} \times$ balance. Paying only the minimum is costly.
- Credit scores depend most on payment history and credit utilization.
- Total interest on a loan = total payments − amount borrowed. Longer terms mean lower payments but more interest. Federal student loans offer more protections than private loans.
Investing and protection
- Higher return means higher risk; diversify with index or mutual funds; start early. Use employer 401(k) matches; Roth accounts are taxed now, traditional accounts later.
- Insurance: premium, deductible, copay, coinsurance. Guard against identity theft and phishing.
Topics in this unit
Each topic has its own short notes and practice.
Practice
$85 + 72.68 + 30 + 50 = 237.68$, and $950 - 237.68 = 712.32$.
$\displaystyle \frac{72}{9} = 8$.
Payment history and low utilization are the two biggest factors.
$460 \times 60 = 27{,}600$, and $27{,}600 - 24{,}000 = 3{,}600$.
$3{,}000 \times 1.05^2 = 3{,}000 \times 1.1025 = 3{,}307.50$.
Taking on more of the first costs yourself lowers the premium.
Free response
Write your answer first, then open the scoring guide.
Free-response question
Priya earns $2,800 a month in net pay. Her monthly expenses are rent $1,000, groceries $350, car payment $300, gas $120, phone $60, eating out $250, streaming services $40 and clothing $100. Treat rent, groceries, car payment, gas and phone as needs, and the other items as wants.
(a) Calculate Priya's total monthly expenses and the amount left over each month.
Show the answer and scoring guide
Total $= 1{,}000 + 350 + 300 + 120 + 60 + 250 + 40 + 100 = 2{,}220$ dollars. Left over $= 2{,}800 - 2{,}220 = 580$ dollars a month.
Check off the points you earned:
(b) Compare Priya's spending on needs and wants with the 50/30/20 guideline.
Show the answer and scoring guide
Guideline: needs $0.50 \times 2{,}800 = 1{,}400$, wants $0.30 \times 2{,}800 = 840$, savings $0.20 \times 2{,}800 = 560$ dollars. Priya's needs are $1{,}000 + 350 + 300 + 120 + 60 = 1{,}830$ dollars, which is $430 above the guideline. Her wants are $250 + 40 + 100 = 390$ dollars, $450 below the guideline. Her $580 left over is more than the $560 savings target, so she can meet the savings goal, but her needs take a large share of her income (about 65%).
Check off the points you earned:
(c) Priya also has a $3,000 credit card balance at an $18\%$ APR and no emergency fund. Calculate about how much interest the balance costs her each month, and recommend how she should use her $580 left over. Explain.
Show the answer and scoring guide
Monthly interest $\displaystyle \approx \frac{0.18}{12} \times 3{,}000 = 0.015 \times 3{,}000 = 45$ dollars. A sound plan is to put part of the $580 toward a small starter emergency fund and the rest toward paying down the credit card well above the minimum, because the card's 18% interest is far higher than what savings would earn. Once the card is paid off, she can build a full emergency fund of 3 to 6 months of expenses.
Check off the points you earned: