Finance

long-term收入构成

top 1 % household 年收入 $400,000（月均 $33k），税收贡献 40%

top 5 % household 年收入 $160,000（月均 $13k），税收贡献 60%

top 10 % household 年收入 $113,000（月均 $9k），税收贡献 70%

bottom 47% household 无需缴税

bottom 10% household 依靠政府补助

Net worth

if you sell everything you have, and subtract all the debts, how much money do you have?

4.9% of households have 100 million net worth.

Good Debt vs Bad Debt

Good Debt:

• Education 教育

• Car 车

• Mortgage 购房抵押

• Starting a well thought business

Bad Debt:

• Borrowing money to support a lifestyle beyond one's means

• Shopping to feel good on a bad day

• Borrowing more than you can repay

• Shopping to kill time

• Keeping up with, or ahead of, your peers

Good debt is investing in yourself; while bad debt is sheer consumption.

Credit Card

Credit card is an unsecured line of credit.

Paying cash does not establish good credit.

The best time to establish credit is when you don't need it.

Want to keep dept-to-credit ratio around 30%

one can negotiate the interest rate down

can use three sentences: “Hi, my name is ____. I am a good customer, but I have recently received a couple of pre-approved offers in the mail from other credit card companies with lower APRs and zero balance transfer fees. I want a lower rate of interest on my card, or I will have to cancel my card and switch companies.”

Credit Report

Three major reporting agencies, each one can offer 1 free credit report per year:

• Transunion - Feburary

• Equifax - June

• Experian - October

FICO score formula

35% record of paying bills on time over time

30% debt-to-credit ratio (total balance on credit card and other loans verses the total credit limit)

15% length of credit history

10% new accounts and recent applications for credit

10% mix of credit cards and loans

Improving FICO score

• pay at least the minimum balance due

• keep debt-credit ratio below 30%

• preserve history, cancel new credit cards first

• have a mix of credits (do not have only credit cards)

• do not apply for a lot of new credit at once

Social Security Program

The employer and employee contribute equally to the program

Employer's contribution to the program is tax deductible, while the employees' are not.

Total rate of social security tax is 12.4% of total earned income up to the maximum annual salary cap.

85% of social security benefits are currently taxable to individual.

Medicare Program

Medicare is a three-part healthcare entitlement program available to most people at age 65.

Part A is free to seniors who apply

Part A of medicare tax is 2.9% of total earned income without salary cap.

Part B is optional and means tested

Saving Money

Out of all the after-tax income:

save 6 months of "must-have" expenses as an emergency fund. Keep emergency fund in savings accounts or money market accounts.

i.e. monthly spending $4,000 -> emergency fund $24,000.

save 20% for long-term savings.

1-2-3-4 rule:

10% for short term spending

20% for insurances

30% for high-risk investing

40% for stable long-term investing

Automating savings

1. Sign up for 401k plan

2. Set up your own retirement account (IRA or Roth IRA)

3. Save more tomorrow ---- increase savings rate when getting a raise etc.

4. Start with saving something

Tax

Filing Status

single / married filing jointly / married filing separately / head of household / widower with dependent child

Earned Income

wages, salary, bonous, commissions, royalties, tips, and other money received from personal service. These are evidenced by W-2 form from employer

Unearned Income

taxable interest, ordinary, qualified dividends, business profits / losses, capital gains / losses, pension receipts, tax refunds, Social Security benefits, unemployment compensations, individual retuirement account distributions, real estate activities, partnership income.

Qualified Stock Dividend

For stock that has been held for at least 61 days. Tax rate is

• 20% for single with taxable income > $425,800

• 15% otherwise

• 0% with taxable income < $38,600

Nonqualified Dividend

For stock that has been held for less than 61 days, and ordinary dividends

Reported by Form 1040, are taxed as ordinary income

Total Income

= earned income + unearned income

Adjusted Gross Income

= total income - contribution to retirement plan - student loan interest - health saving account - self-employment tax

Capital Gains Tax

The profit gained from the sale of an asset

Short Term Capital Gains: for assets owned 12 months or less, maximum tax rate is 37%

Long Term Capital Gains: for assets owned over 12 months, maximum tax rate is 20%

Capital losses can be used to offset gains

Can use up to $3,000 of losses to reduce taxable ordinary income per year

Wash Sale Rule

The loss on a security if you purchase the identical security within 30 days cannot be used as tax deductible loss

Tax Deduction

Standard deduction:

• $12,000 if single

• $24,000 if married filing jointly

Itemized deduction:

itemized on Form 1040

Tax Credit

Tax credit are worth more than tax deduction:

• Tax deduction reduce the total taxable income

• Tax credit reduce the amount of tax, dollar to dollar

Dependent tax credit ($500 for non-child), child tax credit (for child under 17), alternative energy credit, earned income credit (for low-income earners), education credit

Gift Tax

Investment

And Jack Bogle, who founded both Vanguard and the first indexed mutual fund, recommends that the percentage of your portfolio invested in the bonds be roughly equal to your age and the percentage in stocks roughly 100 minus your age.

Business Structure 商业实体种类

Sole Proprietorship 个人独资

If owner dies, the business dies.

The proprietor has unlimited personal liability.

Partnership 合伙

General partner has unlimited liability; Limited partner has limited liability, which is the amount of their investment

Partnership does not pay federal income tax

Form K-1 is used for filing tax

Corporation 企业

Dividends: distribute a part of the corporation's after-tax profit to its shareholders --> dividends are taxed twice

Charter Corporation (C-Corp): Most common one, pay dividends to shareholders

Subchapter S Corporation (S-Corp): do not pay dividends, tax is reported directly by shareholders similar to a partnership

Limited Liability Corporation (LLC): do not pay dividends, usually well suited for single owner

Bonds

obligate the issuer to pay a specified amount of interest for a specified amount of time, and then repay the bond holder the face amount of bond.

Bonds issued by corporations (corporate bonds) are secured by corporate asset. Interest is tax-deductible to the corporation as expense, and taxable to bondholder as ordinary income.

Bonds issued by state and local government (municipal bonds) are secured by assets, taxes, revenue, or assessments. Insterest is free from federal income tax.

When interest rate rise, existing bonds decline in market value; when interest rate fall, existing bonds rise in market value.

Mutual Fund

professionally managed portfolios consist of stocks, bonds, and other investment divided into shares.

NAV: total value of fund's holdings divided by the number of fund's shares.

Stock Discipline

Never borrow money to buy stock

Do not try to predict market timing and trend

Invest in stocks with money you don't need in 5 years

Dollar-cost averaging - invest a fixed amount of money in shares of a stock on a regular time schedule

Rebalancing the stock portfolio at least every year

Market Cap

= price of single share x total number of shares

P/E ratio

Price per earnings ratio = price of a single share divided by the earnings of that share

It tells what the market is currently paying for each dollar of earnings

PEG rate

P/E ratio / expected growth rate

Form W-4

Form W-4 Employee’s Withholding Certificate

Contains the information about the employee (married? income? dependents? etc.) the employers need to know to correctly calculate and file the amount of tax for the employee.