Quick Reference Cheat Sheet
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🎯 Most Important Formulas
Time Value of Money
| Formula | Use |
|---|---|
| FV = PV(1 + r)ᵗ | Future value of lump sum |
| PV = FV / (1 + r)ᵗ | Present value of lump sum |
| FVA = PMT × [(1+r)ᵗ-1] / r | Future value of annuity |
| PVA = PMT × [1-1/(1+r)ᵗ] / r | Present value of annuity |
| Rule of 72 = 72 / rate | Years to double money |
| i = prt | Simple interest |
Financial Ratios
| Ratio | Formula | Benchmark |
|---|---|---|
| Basic Liquidity | Liquid Assets / Monthly Expenses | ≥ 3 |
| Asset-to-Debt | Total Assets / Total Liabilities | > 1 |
| Debt Service-to-Income | Annual Debt / Gross Income | ≤ 0.333 |
| Investment Assets | Investment Assets / Total Assets | Age-dependent |
Other Key Formulas
| Formula | Use |
|---|---|
| Net Worth = Assets - Liabilities | Financial wealth |
| Surplus = Income - Expenses | Cash flow |
| Real Change = Nominal - Inflation | Inflation-adjusted income |
| Average Tax Rate = Tax / Gross Income | Overall tax burden |
📊 Key Concepts Summary
Personal Finance Fundamentals
- Financial Success: Spend less than you earn
- Savings: Income not spent on current consumption
- Investments: Assets purchased to provide additional income
- Compound Interest: Earning interest on interest (most powerful wealth builder)
Economic Concepts
- Business Cycle: Expansion → Contraction → Recession → Trough → Expansion (6-8 years)
- Procyclic Indicator: Moves WITH economy (e.g., GDP)
- Countercyclic Indicator: Moves OPPOSITE to economy (e.g., unemployment)
- Leading Indicator: Changes BEFORE economy (e.g., stock market)
Inflation & Interest
- Inflation: Steady rise in prices (measured by CPI)
- Deflation: Sustained decline in prices (leads to recession)
- Federal Funds Rate: Benchmark rate banks charge each other
- Real Income = Nominal Income adjusted for inflation
Economic Decision Making
- Opportunity Cost: Value of next best alternative foregone
- Marginal Utility: Extra satisfaction from one more unit
- Marginal Cost: Additional cost of one more unit
- Marginal Tax Rate: Tax rate on LAST dollar earned
💰 Financial Statements
Balance Sheet Components
Assets:
- Monetary (liquid): Cash, checking, savings
- Tangible: Car, house, personal property
- Investment: Stocks, bonds, retirement accounts
Liabilities:
- Short-term (< 1 year): Credit cards, personal loans
- Long-term (> 1 year): Mortgage, car loan, student loans
Net Worth = Assets - Liabilities
Cash-Flow Statement
- Income: Wages, bonuses, interest, dividends
- Fixed Expenses: Rent, car payment, insurance
- Variable Expenses: Food, utilities, entertainment
- Surplus/Deficit = Income - Expenses
📈 Investment Timing
| Economic Phase | Best Investment |
|---|---|
| Recession Trough | Stocks (will rise soon) |
| Steady Growth | Stocks & mutual funds |
| Slowdown Signs | Fixed-interest securities |
💳 Budgeting Process
Before Budgeting
- Set financial goals (long, intermediate, short-term)
- Make budget estimates
- Revise if expenses > income
- Plan cash flows
- Establish revolving savings fund
During Budgeting
- Monitor unexpended balances
- Set budget for each shopping trip
- Use subordinate budgets
- Consider envelope system
After Budgeting
- Evaluate progress
- Calculate budget variances
- Handle net surplus: carry forward, save, pay debt, or invest
🏛️ Tax Management
Eight Steps to Calculate Taxes
- Determine total income
- Subtract exclusions → Gross Income
- Subtract adjustments → AGI
- Subtract standard/itemized deductions
- Subtract exemptions → Taxable Income
- Calculate preliminary tax liability
- Subtract tax credits
- Calculate balance due/refund
Tax Reduction Strategies
- Premium-only plan (POP): Pretax health insurance
- Transportation plan: Pretax transit/parking
- FSA: Pretax medical ($3K) or child care ($5K) - use it or lose it!
- 401(k): Pretax retirement + employer match
- Postpone income: Delay to next year if lower bracket
- Bunch deductions: Prepay to exceed standard deduction
Tax Credits (Better than Deductions!)
- Lifetime learning: $2,000
- First-time home buyer: $8,000
- Child tax credit: $1,000 per child
- Energy-savings: $2,500
🎓 Final Exam Cheat Sheet (Topics 9–14)
Full chapters: Final Exam Home → 09–14.
Risk & insurance (09)
| Formula / idea | Use |
|---|---|
| Reimbursement = (1 − coinsurance %) × (Loss − Deductible) | Health / deductible + coinsurance |
| Replacement reimbursement = (Loss − Deductible) × (Insurance carried ÷ (RV × 80% or 100%)) | Partial loss vs. replacement-value rule |
| LTV = Debt ÷ Property value | Leverage in real estate |
Must-know concepts: Pure risk (loss only) vs. speculative risk (gain or loss) · 5-step risk management · Avoid / retain / control / transfer · Large-loss principle · Indemnity · Physical vs. morale vs. moral hazard · Deductible ↑ → premium ↓
Investment fundamentals (10)
| Formula / idea | Use |
|---|---|
| Total return = Current income + Capital gain (or loss) | Stocks, bonds, property |
| Yield = Total return ÷ Price paid | One-year return as % |
| Risk premium | Extra return over “safe” rate (e.g. T-bill) for taking risk |
Must-know: Conservative / moderate / aggressive · Active vs. passive · Lending (debt: fixed income + maturity) vs. owning (equity) · Diversification cuts random (firm-specific) risk · Match time horizon to risk
Stocks & bonds (11)
| Ratio | Formula | Note |
|---|---|---|
| P/E | Price per share ÷ EPS | Lower often = more income, slower growth |
| EPS | Profit after preferred ÷ Common shares | Profitability per share |
| Dividend yield | Annual dividend per share ÷ Market price | Income focus |
| Payout ratio | Dividends ÷ Earnings | Lower → more retained for growth |
| P/S | Market cap ÷ Annual sales | Lecture: avoid > 1.5; < 0.75 often “good” |
| Book value per share | Shareholders’ equity ÷ Shares | If BV > price → may be underpriced |
Must-know: Common (residual claim, votes) vs. preferred (fixed dividend, priority) vs. bond (creditor, interest + maturity) · Beta: 1 = market; >1 more volatile; <1 less
Mutual funds (12)
| Formula / idea | Use |
|---|---|
| NAV = (MV assets − MV liabilities) ÷ Shares outstanding | Price per fund share |
| Load | Up-front % of purchase; no-load = buy at NAV only |
Must-know: Open-end (redeem at NAV) · Income vs. growth vs. balanced objectives · Index = unmanaged, low fee · Fees compound—lower cost often wins long run
Real estate & high-risk (13)
| Formula | Use |
|---|---|
| Price-to-rent = Price ÷ (12 × monthly rent) | Higher (e.g. > ~20) → harder rental profit |
| Rental yield = (Annual rent ÷ 2) ÷ Purchase price | Rough screen (half rent to expenses) |
| Capital gain = Sale price − Purchase − Capital improvements | Repairs often separate (lecture) |
| DCF price = Σ CFₜ ÷ (1 + r)ᵗ | Max price for required return r |
Must-know: Leverage magnifies equity return · Depreciation on building, not land · Collectibles/metals/gems = mostly appreciation, illiquid, high risk
Retirement (14)
| Formula / idea | Use |
|---|---|
| Shortfall = Desired retirement income − SS − Pension | Must fund from savings |
| Annual withdrawal = Nest egg ÷ PVA factor(r, years) | How much you can take each year |
| Nest egg gap | PV of shortfall − FV of current savings → then solve PMT to close |
Must-know: 80–100% income replacement (rule of thumb) · Diversify; shift safer near retirement · Annuity = lump sum for guaranteed payments
Key Things to Remember (Final)
- Deductible first, then apply coinsurance to the remainder
- P/E, EPS, dividend yield—know which is which
- NAV is not “stock price” logic—it’s pool value per share
- Price-to-rent and rental yield test rental deals
- Retirement math = TVM + shortfall + annuity factors
🎓 Key Definitions
| Term | Definition |
|---|---|
| Financial Literacy | Knowledge fundamental to being smart about money |
| Opportunity Cost | Value of next best alternative foregone |
| Liquidity | Speed/ease of converting asset to cash |
| Solvency | Assets > Liabilities (not insolvent) |
| Marginal Tax Rate | Tax rate on last dollar earned |
| Progressive Tax | Rate increases as income increases |
| Regressive Tax | Takes decreasing proportion as income rises |
| Tax Credit | Dollar-for-dollar tax reduction |
| Tax Deduction | Reduces taxable income |
| AGI | Adjusted Gross Income (Gross - Adjustments) |
| Taxable Income | AGI - Deductions - Exemptions |
⚠️ Common Mistakes to Avoid
Time Value of Money
- ❌ Using percentage instead of decimal (use 0.08, not 8)
- ❌ Mixing time periods (annual rate with monthly periods)
- ❌ Confusing PV and FV
Financial Ratios
- ❌ Using monthly instead of annual for debt service ratio
- ❌ Using net income instead of gross income
- ❌ Including non-liquid assets in liquidity ratio
Taxes
- ❌ Multiplying entire income by marginal rate (use progressive!)
- ❌ Confusing marginal and average tax rates
- ❌ Thinking credits and deductions are the same
- ❌ Using both standard and itemized deductions
General
- ❌ Confusing nominal and real income
- ❌ Valuing assets at purchase price vs. fair market value
- ❌ Ignoring opportunity costs
- ❌ Forgetting to adjust for inflation
📝 Quick Calculation Examples
Example 1: Future Value
Question: $1,000 at 8% for 4 years?
FV = $1,000(1.08)⁴ = $1,360.49
Example 2: Present Value
Question: Need $20,000 in 10 years at 7%?
PV = $20,000 / (1.07)¹⁰ = $10,167
Example 3: Rule of 72
Question: Double money at 6%?
Years = 72 / 6 = 12 years
Example 4: Basic Liquidity Ratio
Question: $9,000 liquid, $3,000 monthly expenses?
Ratio = $9,000 / $3,000 = 3.0 ✓
Example 5: Real Income
Question: 5% raise, 3% inflation?
Real change = 5% - 3% = 2%
Example 6: Marginal Tax
Question: $1,000 bonus, 25% marginal rate?
Tax = $1,000 × 0.25 = $250
Net = $750
🎯 Exam Day Checklist
Before Exam
- Review all formulas
- Practice calculations
- Understand concepts, not just memorization
- Get good sleep
- Eat proper meal
- Bring calculator
During Exam
- Read questions carefully
- Write down formulas first
- Show all work
- Check units (%, $, years)
- Label answers clearly
- Double-check calculations
- Manage time wisely
- Review answers before submitting
Key Things to Remember
- Marginal tax is progressive (not flat)
- Tax credit > Tax deduction
- Compound interest > Simple interest
- Real income accounts for inflation
- Asset-to-debt must be > 1 for solvency
- Basic liquidity should be ≥ 3
- Debt service should be ≤ 0.333
🔢 Important Numbers to Remember
| Concept | Number |
|---|---|
| Business cycle duration | 6-8 years |
| Basic liquidity ratio | ≥ 3 months |
| Asset-to-debt ratio | > 1.0 |
| Debt service ratio | ≤ 0.333 (33.3%) |
| Investment assets (20s) | 10% |
| Investment assets (30s) | 11-30% |
| Investment assets (40s+) | 30%+ |
| Standard deduction (single) | $5,700 (US example) |
| Standard deduction (married) | $11,400 (US example) |
| Personal exemption | $3,650 (US example) |
| FSA medical max | $3,000 |
| FSA child care max | $5,000 |
💡 Last-Minute Tips
For Calculations
- Always write the formula first
- Convert percentages to decimals
- Match time periods (annual rate = annual periods)
- Show your work for partial credit
- Use parentheses in complex calculations
For Concepts
- Understand relationships between concepts
- Know when to use each ratio
- Distinguish between similar terms (marginal vs. average)
- Remember which ratios should be high vs. low
- Think about real-world applications
For Success
- Stay calm - you’ve prepared well
- Read carefully - don’t rush
- Start with easy questions - build confidence
- Skip and return to difficult questions
- Trust your preparation - you’ve got this!
🌟 Final Reminders
“You cannot build financial security or wealth unless you spend less than you earn”
“The way to build wealth is to make money on your money, not simply to put money away”
“Time is money - compound interest is the most powerful wealth builder”
Good luck on your exam! 📚✨
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