Studied by 1 person
financial literacy
How well you can understand and use personal finance-related information
one of the most important predictors of savings and investment success and overall well-being.
financial knowledge
the ability to understand personal finance information
financial risk tolerance
unwillingness to engage in financial endeavors that have uncertain outcomes.
key action steps to financial well-being
Keep good records
Spend less than you earn
Maintain appropriate insurance
Save money on a regular basis
human capital
ability and willingness to work, learn, earn, and make wise decisions about how to save and invest money.
social capital
how well you are able to form connections with other people
Informal Social Capital
the interpersonal relationships you form with your family and close friends
Formal Social Capital
connect you with people in professional, recreational, leisure, and social communities
Calculate the Payback period
Total Costs/Increase in annual income
Risk
uncertainty associated with any physical, social, emotional, environmental, labor market, or financial activity
risk taking
doing something that involves the possibility of a gain or a loss
wealth creation and risk tolerance
In financial markets, the only way to accumulate a certain level of wealth is to take informed financial risks with your savings.
Identify the SMART goal process
Specific Measurable Attainable Relevant Timely
Specific
Document the when, what, where, and how aspects of the goal
Measurable
Attach a quantifiable standard for achieving the goal
Attainable
Be realistic about whether you can achieve the goal
Relevant
Develop those financial goals that are crucial to improving your financial situation
Timely
Create a goal you can meet in a reasonable amount of time
Goal Time Horizons
time between creating a goal and achieving the goal
short-term time horizon
less than 1 year
long term time horizon
greater than 1 year
Past Oriented
based on memories, whether good or bad. Those who view past events negatively have the most trouble staying on their financial path
Present-Oriented
based on hedonistic perspective or fatalistic perspective
hedonistic perspective
doing things for pleasure, the experience, and excitement of the action
fatalistic perspective
unable to visualize a meaningful future
Future-Oriented
based on a calculation of the consequences of actions in terms of a future payoff
self-efficacy
how well you believe you can do something.
hyperbolic discounting
occurs when the value of future benefits is perceived to be lower than that of an alternative available right now.
Heuristics
•Based on past experiences •Automatic and rarely used with forethought •Can help you make quick decisions, however, they sometimes lead to problematic choices and outcomes
Status quo bias
the preference to keep things the way they are rather than change
loss-averse
characteristic of being very reluctant to do anything that might lead to loss
optimism bias
people believe that, compared with other people, they are more likely to experience positive events and less likely to experience negative events in the future
Confirmation bias
a tendency to search for information that supports our preconceptions and to ignore or distort contradictory evidence
interior finance
refers to your knowledge, attitudes, perceptions, and abilities
exterior finance
the observable actions you take with money and the associated outcomes such as Loan payment amounts saving rates cash flow management net worth
Interest
the price paid for the use of borrowed money Borrowed money you pay back with interest (loan) Lended money you generate interest (savings, loaning)
True/False: It can take up to 99 years to receive your federally insured money from the Federal Deposit Insurance Corporation (FDIC).
False
BOTH Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) protect your deposit up to
$250,00
APR (Annual Percentage Rate)
annual sum of the periodic interest rates applied to the account, without considering the effect of compound growth.
APY (annual percentage yield)
The effective annual rate of return taking into account the effect of compounding interest.
APR Formula
periodic interest rate x number of periods in the year
APY Formula
[(1+Periodic Interest rate)^(number of periods in a year)]-1
Time Value of Money calculations
FV: Future Value PV: Present value N: # of periods I/Y: Interest PMT: a series of more than one payment or deposits
Time Vale of Money (TVM) formula
FV/(1+i)^N
future value of an annuity
the amount accumulated in the future when a series of payments is invested and accrues interest
Future value of an annuity formula
FVA=(PMT/i)[((1+i)^n)-1]
present value of an annuity
The amount at a present time that is equivalent to a series of payments and interest in the future.
Present Value of an Annuity formula
PVA=(PMT/i)(1-(1/[(1+i)^n]))
Amortized Payments
a payment of the same amount for a set number of months or years
Amortized Payments formula
Monthly Payment=PV((I Ă— (1 + I)^N)/((1 + I)^N) - 1)
Future Value (FV)
how much current savings and investments will be worth at a certain date in the future
Present Value (PV)
Value today of a future amount
Annuity
a series of equal regular deposits
Rule of 72
The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest.
balance sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date.
Net Work formula
Assets-Liabilities=Owners equity (ALOE)
liquidity
How quickly and easily an asset can be converted into cash
fair market value
the price someone would realistically pay you to buy the asset
Appreciating Assets
assets that increase in value over time, for example, a house
depreciating assets
assets such as cars and computers, fall in value over time
short term liability
liability typically expected to be paid within one year or less
long-term liability
Liabilities with longer repayment schedule and would include student loans and money borrowed to purchase a house (i.e., a mortgage)
bad debt
borrow money to buy something that either goes down in value quickly or is consumed immediately.
good debt
The concept that sometimes it is worth taking on certain types of debt in order to generate income in the long run. Common examples include college education debt and real estate.
current ratio
current assets / current liabilities=1
debt ratio
total liabilities/total assets = 40%
savings ratio formula
total savings/total income=12% or higher
targeted saving rates based on age
Emergency Fund Ratio
cash and cash equivalents (Monetary Assets) / monthly non-discretionary cash flows(Necessary Expenses); benchmark = 3-6 months
consumer debt-to-income ratio
total consumer debt payments/total income = 15% or less
total debt to income ratio
Total debt payments/Total income=no more than 36% of income being used for debt payments
surplus
Income exceeds expenses
Sections of a budget
Income, Expenses, Surplus/Deficit (Profit/Loss)
deficit
Expenses exceeds income
Save More Tomorrow
Commit to putting half of every future raise towards your saving
Present Bias
A preference for choosing short term pleasures over long term investments
Income
broad term used to describe all sources of money obtained by individuals and households and can include: •Allowances •Public assistance •Interest •Dividends •Social Security payments
Earnings
just one form of income: •Compensation received for services performed for an employer
Wage
•what an employer pays an employee to work •usually based on an hourly rate
Salary
•payment for work for a set period of time •usually an annual amount
commission
•payment based on the sale of a product or service
Bonus
•an extra payment usually based on performance
Overtime
working more than 40 hours in one week. gets paid 1.5x regular wage
Six steps for creating a financial plan
1.Set a Financial Goal 2.Know Your Starting Point 3.Determine Your Financial Score 4.Determine Your Financial Capacity 5.Know Your Time Horizon 6.Formalize and Implement Your Financial Plan
Sole Proprietorship
unlimited liability, limited access to resources, easy start-up, sole receiver of profit
General Partnership
A partnership in which all owners share in operating the business and in assuming liability for the business's debts. unlimited liability
Limited Partnership
general partner manages the business and one or more limited partners invest money in the business
Limited liability partnership
•Partners are not liable for actions of other partners, but are liable for the general obligations of the business
Limited Liability Company (LLC)
A legal entity that is not taxable itself and distributes the profits to its owners, but shields personal assets from business debt like a corporation.
Corporation
A business owned by stockholders who share in its profits but are not personally responsible for its debts. Very effective at limiting liability, but also expensive to form and maintain
Earned Income
money from work primarily through the labor market. •Salaries, wages, commissions, or bonuses
Unearned Income
money from non-labor sources. •Interest from savings accounts •Dividends •Capital gains •Monetary gifts •Government benefits •Money received by inheritance •Proceeds from savings bonds
capital assets
almost everything you own or use for personal or investment purposes, according to the IRS •Your home •Your car •Investments like stocks, bonds, and mutual funds •Ownership interest in a small business you started •Rental or other real estate you own
Calculate capital gain
Calculating steps: Selling Price
Basis (Purchase price)
Selling costs = Realized Capital Gain
Calculate capital loss
Original Price - Price Sold at
Note
Flashcard