Senior Sem Exam 3

What does act your wage mean?

Live below your means. Spend less than what you make, invest the difference, be patient

Rule of 72

Formula that estimates how many years it takes for an investment to double by dividing 72 by the annual interest rate

What percent of American households would experience dire financial stress if they miss 1 paycheck

65

5 ways financial independent people act

They drive used cars, own homes outright, own a business, at least 5 sources of income, invest in at least 20% of income in stocks

Examples of assets

Investments, income=producing property, business

Examples of liabilities

Credit card dept, student loans, car loans

Compound interest

Interest earned on both your original investment and the interest you’ve already accumulated

401K

Employer-sponsored retirement account, matching, taxxed

Roth IRA

Individual retirement account, no match, contributions are made with after-tax money

Gross pay vs. net pay

Gross pay-money earned before taxes and deductions. Net pay-money you actually take home

Common deductions

Federal income tax, state income tax, social security, Medicare (FICA), health/vision/dental, 401K, HSA

Net worth

Asset-liabilities

Oppurtunity cost

What you give up when choosing one option over another

Inflation

The increase in prices over time, decreases purchasing power

Cost of living

The actual cost of maintaining your lifestyle

Important financial considerations in marriage

“Our money”, communicate, budget, build emergency fund, eliminate debt, set goals

Buying a car facts

Monthly car payments, insurance, gas, maintenance, depreciating

Buying a house facts

Mortgage payments should not exceed 25% of net income

A mortgage payment consists of

Principal, interest, homeowners insurance, property taxes

Amortization

Process of paying off a loan over time through scheduled payments

Breakeven point

Point when approx 25% of mortgage goes towards principal,

5 strategies to pay off student loans are

treat the loan like a mortgage, create 3-5 year goals, establish repayment fund, start early w part time college job, prioritize paying off loans

Dave Ramsey’s 7 baby steps

Save 1k for emergency fund, pay off all debt, save 3-6 months of emergency funds, invest 15% of income for retirement, save for kid’s college, pay off house, build wealth and give generously.

Federal taxes

Taken from paycheck by the government to fund a national program or service

State taxes

Taxes collected by state to fund state services, schools, roads, etcS

Social security tax

Payroll tax that helps fund retirement, disability, and survivor benefits

Mortgage definition

Loan used to purchase a home

Mortgage interest rate

Percentage charged by the lender for borrowing money

PMI

Insurance that protects the lender if the borrower stops making payments

Escrow

An account managed by the mortgage lender that collects money for expenses like property taxes and homeowners insurance

Accelerated payments

Making extra payments or paying more frequently to reduce the mortgage balance and save on interest

Homeownership costs and insurances:

Insurance, property insurance, flood insurance, rain/hail coverage, property taxes, HOA, utilities

When and why PMI

Protects the lender, required when down payment is less than 20%

The first law

Make it obvious

What does make it obvious mean

To build a new habit, you must create clear, consistent signals in your environment

Habit stacking

Linking a new behavior to an existing one

The second law

Make it attractive W

What does make it attractive mean

We are wired to pursue behaviors that promise immediate rewards

Temptation bundling

Linking an enjoyable behavior with a productive one (laundry while listening to an audio book)

The third law

Make it easy

What does make it easy mean

Humans favor the path of least resistance

The two minute rule

Any new habit should take less than two minutes to start

The fourth law

Make it satisfying

What does make it satisfying mean

The brain has a need for immediate reinforcement. Good habits fail to stick when the rewards arrive too late

____ and ____ create lasting change

Willpower, motivation

How to break a bad habit

Make it inverted from the good laws

Goldilocks rule

Humans experience peak motivation when working on tasks that are right on the edge of their current abilities

The greatest threat to success is what

Boredom

Positive compounds

Productivity, knowledge, relationships

Negative compounds

Stress, negative thoughts, outrage

Three levels of change

Outcome, process, identity

4 Steps to building a habit

Cue, craving, response, reward (these correspond with the four laws

Habit definition

A behavior that has been repeated enough times to become automatic

Two most common cues are

Time and locationI

Implementation intention formula

(Behavior) at (time) in (location)