Real World Finance: Boost Your Financial Literacy as All Schools Have Failed to Do

By Jerry L. Copley

As a former mathematics teacher and a master's degree recipient, I have witnessed a decline in basic mathematical abilities and financial literacy over the past twenty years. It is disheartening. To witness the anxieties people struggle with in their everyday lives--especially when due to reliance on credit--prompted me to do something. I decided to write a book to break down even complex financial concepts into understandable terms. Over the years, I have talked with business owners, bank mortgage lenders, sales professionals, finance managers, and college and high school students, along with coworkers, about the many financial topics individuals encounter throughout their lives. To be honest, I was somewhat surprised by the lack of understanding around basic financial concepts like budgeting, compensation and remuneration, insurance, credit, investments, and even taxation.

Education has always been an integral part of my life. I believe in the total education of the individual, not just subject-matter expertise. An education that can last throughout a lifetime is complex yet simple, timeless yet timely, and most importantly, it builds a foundation that is needed for ultimate success. This book, Real World Finance: Boost Your Financial Literacy as All Schools Have Failed to Do, builds the financial education that seems to be missing from society today. It details financial concepts necessary to guide the individual through a lifetime of experiences and endeavors. The financial topics include budgets, credit, insurance, investments, retirement, and worker compensation with fringe benefits and taxes, all tailored to an individual's personal financial life.

As a former tax associate, I have assisted hundreds with their tax returns. In too many cases, individuals did not know how to fill out, complete, and/or file their required tax return. Some didn't even know what their W-2 was! I have become determined to increase their financial literacy as I did with the thousands of students I taught.

Real World Finance: Boost Your Financial Literacy as All Schools Have Failed to Do explains topics using real-world examples from employee compensation and lease versus purchase to loans, insurance, retirement, and the importance of investment to taxation. Employing this method breaks down any intimidation of mathematics (encountered by many of my former students and the general population) while teaching necessary financial concepts and calculations needed for everyday living--purchasing a car, buying insurance, setting up a budget, comparing total compensation from various job opportunities, retirement and investing, filing tax returns, comparing leasing, renting versus ownership, and more. A Walmart employee I recently spoke with told me he had to learn many of these concepts for himself after suffering financial hardship. He wished he would have been introduced to these concepts in school. When I informed him I had taught many of the topics contained in Real World Finance: Boost Your Financial Literacy as All Schools Have Failed to Do to my students, he responded, "I wish I had you as a teacher."

I want to help more people like the Walmart employee and others. I sincerely think they will not only benefit from the topics--they will find them interesting and the narrative informative.

Thank you in advance for taking the time to look at Real World Finance: Boost Your Financial Literacy as All Schools Have Failed to Do!

• Language: English
• Publisher: Page Publishing, Inc.
• Release date: Jun 13, 2023
• ISBN: 9798887939339

Book preview

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Real World Finance: Boost Your Financial Literacy as All Schools Have Failed to Do

Jerry L. Copley Jr.

Copyright © 2023 Jerry L. Copley Jr.

All rights reserved

First Edition

PAGE PUBLISHING

Conneaut Lake, PA

First originally published by Page Publishing 2023

ISBN 979-8-88793-897-4 (pbk)

ISBN 979-8-88793-933-9 (digital)

Printed in the United States of America

Table of Contents

Introduction

Chapter 1

Compensation, True Employment Costs, and Fringe Benefits

Chapter 2

Budgets

Chapter 3

Credit

Chapter 4

Loans

Chapter 5

Investments

Chapter 6

Insurance

Chapter 7

Leases and Rent versus Ownership

Chapter 8

Taxes

Chapter 9

Bankruptcy

Core Beliefs

Praise or Review of Book Information

Formulas Used

References

About the Author

Introduction

I cannot thank my friends, family, and God enough for always standing with me when I have failed to live up to my beliefs. I thank you for always being there for me, believing in me, and supporting me.

As a former mathematics and chemistry teacher of twenty years and a tax associate, coupled with other experiences in the private sector, for an additional twelve years, I have come to understand there are many high school or college students and individuals in the general public who truly do not have a grasp on how mathematics, taxation, compensation, insurance, investments, and finance (loans, credit, leases) calculations encompass one's life. I have encountered educated people who actually believe that if they worked more overtime, they would truly not benefit from the additional cash in their pockets. Mind you, some of these people are college graduates. They have a lack of understanding about how the tax system truly works. In addition, some of them think that they were actually paying into taxes the percentage of their last dollar for their entire tax obligation. To put it differently, they believed the money they earned in total was all being taxed at the rate of their last dollar. They did not understand our current progressive tax system.

I have taught high school students about finance, economics, taxation, investments, compensation, and mathematics and have tried to iterate to college-educated colleagues how to get a raise while making the same money. All they have to do is to contribute to a company matching 401(k) retirement plan in which most companies match a percentage of an employee's contribution. There were many misconceptions or trivial to nonexistent knowledge concerning these topics. Concerning retirement investment accounts, my private-sector colleagues would receive a bit less cash in their pockets at the time their paychecks would be issued but would realize that their bank accounts (investment account) increased more and that they could earn more from their money tax-free while it is invested. They could, once vested, withdraw their savings (investment) and receive more money, even when paying the taxes due, from a lump-sum distribution than the cash they would have had by simply participating in the plan. Amazing. They complained about a raise only to not take advantage of such raises when pointed out mathematically to them. Again, these were college-educated individuals. My high school students were also informed of this phenomenon and had to develop spreadsheets demonstrating the tax savings and the increase in their wealth. I will explain in this book how to do so.

From my private-sector experiences, coupled with interactions with employees at fast-food and retail stores, I have witnessed a lack of basic mathematical knowledge both in terms of making change and the calculation of sales tax due and amount owed when computer systems crash (cash register electrical interruptions or power outages). Simple discount calculations were difficult for employees without the aid of calculators or, nowadays, a posting on retail racks showing prices at various discount rates. Most older people understand what I am speaking of and quite possibly believe teachers aren't performing their job responsibilities or have a negative connotation about teachers (which could have changed a bit due to the corona virus as many have had to homeschool their children or grandchildren).

In this book, I will bring to light my educational background in mathematical formulas utilized in accounting, finance, taxation, and compensation—which will allow individuals to understand where mathematical equations are encountered and applicable in their lives in an effort to better comprehend the necessity of formulas. These formulas, coupled with my knowledge of basic computer-programming, will define what a variable is, and provide insight with my master of business administration coursework to present what many say are intimidating, complex formulas and the true value of what one is being paid for their services when earning a salary from a company.

I will try to keep this book simple and provide knowledge that can be taken into the readers' real lives to help them begin to understand where mathematics related to real-life applications is encountered throughout their life, providing, in essence, necessary equations needed to enhance one's life, leading to a financially successful and productive life. Hopefully, this book will lead to a belief that to consider oneself successful, one does not have to always have advanced college degrees or be something that someone else wants you to be. I believe a successful person is one who has the things and does the things they want to do while treating people and society respectfully—in other words, not infringing upon the rights of others or mistreating them in any manner to obtain the items you want or have a desire to possess. My father always said, It is easier to work when you do not have to work. It was not until I had grown older and more mature that I believe I finally realized what he meant. My father's meaning of this statement to me is, When no one else can control your job or your outlook on success in life because you took it upon yourself to obtain the financial resources to not have someone else dictate to you that they control you—in essence, your haves or your future, so to speak, meaning what you worked for (your house, car, fishing pole, friends, future or current vacations) that makes your life pleasing. A Bible verse illuminates this exact point: The rich rule over the poor, and the borrower is the slave of the lender (Proverbs 22:7, New American Bible).

I pray that I am successful in providing a knowledge base one can utilize in their life to achieve their goals and desires and that, when looking back on the presented information and the gained knowledge, one can appreciate the teaching that may have been accomplished. That is the teacher in me—wanting to help and make a difference in people's lives and society in a positive manner that benefits humankind. That is what drew me to becoming a teacher, or educator, by trade.

Chapter 1

Compensation, True Employment Costs, and Fringe Benefits

When starting a book about adulthood, leaving one's parents' house, and entering the job market—a life of your own—there is no better place to start than compensation. But what is compensation? Compensation is simply an exchange of something of value for labor or a service performed for another person or entity (company). This exchange is generally money in the form of wages for work performed.

You are either on your own, or you acquire a part-time job while still in school. You are growing up, getting a bit older, and you obtain your first job. At this time, the only thing that may have attracted you to this job was an hourly wage you agreed upon during your interview; however, there is much more to compensation (your pay) than just an hourly wage. There are a couple of things to think about concerning this pay for your employment. First, let us say, as you may have heard, Money will not buy you happiness. This is true, but money can relieve some financial anxieties one may have when thinking about what you want in life—your wants and desires. Money also helps determine the standard of living one wants to achieve.

There are two perspectives to consider when talking about compensation. One is from an employee viewpoint, and the other is from the perspective of the employer. An explanation of both perspectives follows.

Upon receiving your first paycheck, you will quickly realize you do not have the availability to spend or save the agreed-upon hourly wage multiplied by the hours you worked. This is called gross pay. Gross pay is calculated by taking your hourly wage and multiplying it by the number of hours you worked. As stated previously, this calculation of compensation is only from that of an employee viewpoint. In essence, the hourly wage is not the spendable money amount from your paycheck. At the very minimum, taxes are taken out of your paycheck. These taxes include, if you are not a state or government employee or outside the Social Security system, at least federal income taxes, Social Security taxes, and Medicare taxes. However, there are other taxes taken out if where you live has a state (currently only seven states do not have this) and/or local income tax. The additional taxes taken out would include, as stated, state and local income taxes (where local could be city, township, or school district, to name a few). Taxes are considered pay-as-you-go taxes—you pay taxes as you earn or receive income throughout the year. There are two ways to pay these taxes. One is directly from your pay (employer is obligated to withhold), and the second is from estimated payments you are required to remit if money is not withheld from a paycheck (self-employment would be an example). I speculate that taxes are collected in this fashion because the taxing authorities believe they may not be able to collect determined amounts in April. Taxes taken directly from your paycheck are called payroll taxes. From a practical standpoint, payroll taxes can be rationalized as taxes withheld from one's pay. In looking at federal tax publications, there are really only four types of payroll employment taxes: (1) federal income tax, (2) Social Security taxes, (3) Medicare tax, and (4) federal unemployment tax (FUTA). A self-employed person pays these taxes, with the exception of the FUTA tax, calculating their taxes owed and paying estimated payments quarterly to the Internal Revenue Service (IRS) four times a year (IRS.gov 2020).

For the sake of explanation, let's say you work for McDonald's. You will pay federal, state, and possibly local (city, depending if the city has an income tax) income taxes, as well as Social Security and Medicare taxes. Social Security and Medicare are taxes levied on employees that assist retirees with living and health-care expenses, disabled individuals, and survivors meeting certain criteria. They stem from the Federal Insurance Contribution Act (FICA), which you may see categorized on your paycheck. You may have heard of these taxes before. However, Social Security encompasses much more than just supplementing retirement. Social Security provides benefits to Old Age, Survivors, and Disability Insurance (OASDI), a term you may not have heard of. It was not until I had taken a course in federal taxation did I hear of this term. The Social Security tax rate is 6.2% of your earnings up to a maximum salary amount of $142,800, the current rate in 2021 (IRS.gov). After earning more than this amount of money yearly, one no longer pays this tax. The employer matches this tax up to and including $142,800 but does not pay any additional Social Security tax above the $142,800 figure. Medicare—a tax for the basic health insurance and hospitalization (HI) of people currently sixty-five and older and people with disabilities or permanent kidney failure (end-stage renal disease)—is taxed at 1.45% on all income (employer is also obligated to pay this percentage on all income). If one earns more than a certain amount of money ($200,000 for single, $250,000 for married filing joint tax returns), this tax is increased by 0.9% (2.35%) for the employee only. These two taxes add up to 7.65% (below income levels stated), which comes directly out of your paycheck.

Let us consider an example to determine how much money is spendable from the paycheck you just received working for $11.50 an hour for twenty hours with a federal tax of 10%, state tax of 2%, and a local tax of 1.5%.

Gross pay = Hourly Wage × Hours Worked = = $230

(In mathematics, when multiplying fractions if the unit(s) and/or common factors are in both the numerator [top] and denominator [bottom], one can cancel out the unit(s) and/or common factors. This technique is used in chemistry and physics also. One can do this to perform unit cancellation or unit conversions; thus, in this example, hour [denominator—wages] cancels the hour [numerator—hours worked].)

Your net pay is the amount you get to spend, save, or pay living expenses with. Your net pay is only $181.35 out of the $230 earned (78.8% of what you earned). As my former students used to say, let's keep the alphabet in English and the numbers in math as they did not fully grasp the idea of variables—letters representing numbers. I made each of my algebra students develop a Microsoft Excel workbook containing information from each student in class working different hours with various hourly wages, forcing them to use formulas and variables to calculate the above values (gross pay, taxes, net pay or take-home pay). I graded it by having the students save the workbook on my TravelDrive, and then I changed either the hours worked or the hourly wage. When one of these numbers changed, I watched to ensure the other numbers changed, utilizing the formulas necessary for the calculation of the entries (gross pay, taxes, and net pay). If they did not change, then I knew they did not provide the formulas into the spreadsheet cells as required.

From an employee-example perspective of compensation—namely, gross pay to net pay—one can use this same formula technique when figuring out a price they will pay when a discount is applied to any purchase. To calculate the price one would pay, one would mimic the above compensation example (I will also use the same terminology) and subtract the discount amount from the retail price by simply multiplying the discount percentage and the retail price. For instance, if a pair of jeans at JCPenney cost $50 (gross, retail in this case) and JCPenney was offering a discount of 25% (federal tax rate, discount percent in this case), JCPenney would discount $12.50 ($50 × 0.25) and charge only $37.50 ($50 - $12.50) for the jeans without sales tax applied. For a percent markup of anything, one can use the sales tax on this example. For instance, say the sales tax rate is 8%, then the out-the-door price for this pair of discounted jeans would be $40.50 ($37.50 × 0.08 + $37.50). To determine a markup in this case, one would take the price paid (for a product, this would be called the retail price) and subtract the discount price (price of the item after the discount amount was taken off, which is called the wholesale price) and then divide this answer by the discount price (wholesale price). In this example, the markup percentage would be

( ) × 100% or × 100% = 8% (markup percentage).

We have just illustrated discount and markup from a business-finance standpoint.

Let us return our focus to compensation taken from an employer's point of view now. You, as an employee, cost the company or the person you work for much more money than what meets the eye. As an employee, you only see what your paycheck reflects—namely, the gross pay minus any taxes paid and/or any other deduction—when starting your first job as a young adult. For instance, your parents most generally have you covered on their medical insurance policy, if they have one; therefore, you may not see such a deduction. In most instances, you will notice on your paycheck a gross pay amount, federal income tax, Social Security and Medicare deductions (taxes), and possibly state and local income taxes. However, there are other expenses (payments) the company (employer) must make on your behalf to employ you. These additional expenses are employer contributions to Social Security (6.2% up to a maximum of $142,800 for 2021), Medicare (1.45% of wages earned with no maximum for employers), state and federal unemployment taxes (tax rate percentage dependent upon state and if credit is given by federal to