Unit 5: Personal Goals, Budgeting, and Investing

You may pay several kinds of tax: income, payroll (Social Security and Medicare), capital gains, property and sales taxes. The U.S. federal income tax is progressive: each higher rate applies only to the part of income inside that bracket, so people with higher incomes pay a larger share of their income. Deductions lower your taxable income, while credits cut the tax you owe directly. A pay stub shows gross pay, mandatory and voluntary deductions (some taken out before tax) and net pay, the amount you actually have to budget with.

Insurance covers risks that happen by chance and are predictable enough for an insurer to price: personal risks (injury, illness), property risks (damage to a home or car) and liability risks (harm you cause to others). You pay a premium for coverage and file a claim after a loss, paying the deductible yourself first. How much coverage people buy depends on legal requirements, dependents and risk tolerance. People guard against fraud and predatory lending by comparing offers, resisting pressure, protecting personal information and freezing their credit.

Big goals like college, a home and retirement are usually paid for with a mix of savings and other sources, such as student loans, grants, mortgages, Social Security and employer retirement plans. Starting early gives compounding, earning returns on past returns, more time to work: at an example 5% a year, $1,000 grows to about $1,629 in 10 years but about $4,322 in 30. Returns depend on an asset's risk, fees and taxes, and inflation lowers the real (inflation-adjusted) return. Insured savings accounts and CDs are safer with lower expected returns, while stocks carry more risk and higher expected returns, so investors match choices to their time horizon and risk tolerance and often diversify.