Taxes, Saving, & Investing Study Guide
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| What is the 1st rule of savings? | You must pay yourself before any other bills.
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| The concept of Compound Interest | interest earned on top of last years (& the years before that) interest.
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| Rule of 72 formula | 72 / interest rate
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| What does the rule of 72 show | how long it would take to double your money if it is left in an interest earing account
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| 1st question to ask before opening a savings account | How long will you be keeping the money in the account?
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| 2nd question to ask before opening a savings account | How often will you want to withdraw the money?
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| 3rd question to ask before opening a savings account | How much money will you keep in the account?
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| Basic savings account | has the lowest interest rate but fewer restrictions
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| Higher yield savings account | has higher interest rates but more restrictions
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| Certificate of deposite (CD) | earn higher interest rates than savings account, but is very difficult to withdraw (may come with a fee)
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| Bond | a company issues the bond with the promise of paying the money back to the buyer of the bond with additional money
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| 3 Components of a Bond | Face value, maturity date, coupon rate
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| Face value | total amount the issuer of the bond will repay to the buyer
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| maturity date | when the issuer of the bond must pay the buyer face value
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| coupon rate | the percent of face value that the bond buyer receives each year
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| Corporate bonds | issued by a private company
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| Municipal bonds | issued by state and/or local governments
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| Treasury bonds | issued by federal government (safe investment)
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| Stock vs. bond | buying a stock gives the buyer partial ownership and buying a bond is a debt instrument that makes the owner pay you back with interest
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| Why do we pay taxes | taxes pay for the government, the government then provides citizens with defense, transportation, education, a legal system (etc.)
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| Income tax | tax on a citizen's income, the main way our gov. is funded
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| sales tax | additional money applied to most things we buy (not food). They are mostly state and local taxes
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| Property tax | tax on people's home, pricier house = higher tax (usually goes toward education)
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| Proportional tax | flat tax. everyone pays the same percentage of income
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| Regressive tax | as income increases, a smaller percentage of income is taken. the more money you make the less money you pay towards taxes
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| Progressive tax | as income increases, a larger percentage of income is taken. the more money you make the more money you pay towards taxes.
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