Exam 1 Review: Personal Financial Planning

Vocabulary practice flashcards covering concepts from Chapters 1, 2, 4, and 5 for Exam 1 Review.

Financial Planning

The process of defining short-, intermediate-, and long-term financial goals, establishing strategies to achieve them, and managing personal financial resources effectively.

Emergency Fund

A dedicated savings reserve set aside to cover unexpected expenses or income disruptions, typically measured in recommended months of income coverage.

Estate Planning

A major area of financial planning distinct from wealth accumulation, focused on planning the management and transfer of an individual's assets upon death.

Monitoring and Revising the Plan

The final step of the financial planning process, involving continuous evaluation and adjustments to align with changing economic conditions and personal goals.

Real Assets

Physical or tangible assets, such as real estate or property, as distinguished from financial paper assets.

Financial Assets

Intangible paper assets whose value is derived from a contractual claim, such as stocks, bonds, and bank deposits.

Consumption Assets

Assets purchased for personal use and immediate enjoyment that generally depreciate over time, as opposed to investment assets.

Investment Assets

Assets acquired specifically for the purpose of earning a return, generating income, or accumulating long-term wealth.

Gross Domestic Product (GDP)

A key macroeconomic indicator representing the total market value of all final goods and services produced within a country.

Consumer Price Index (CPI)

A macroeconomic indicator that tracks inflation by measuring changes over time in the price level of a basket of consumer goods and services.

Business Cycle Stages

The recurring economic sequence consisting of four distinct stages: peak, recession, recovery, and expansion.

Cash Budget

A budget type that projects short-term cash inflows and cash outflows over a given period.

Balance Sheet

A statement of net worth summarizing an individual's or household's assets, liabilities, and net worth at a specific point in time.

Net Worth

The measure of total wealth calculated using the equation $\text{Net Worth} = \text{Assets} - \text{Liabilities}$.

Liquid Assets

Cash or near-cash financial assets that can easily and quickly be converted to cash with minimal loss of value.

Real Property

Immovable property consisting of land and any structures permanently attached to it, as opposed to personal property.

Personal Property

Movable tangible items owned by an individual that are not attached to real estate.

Current Liabilities

Short-term financial obligations or debts that are due and payable within one year.

Long-Term Liabilities

Financial debts or obligations scheduled to be paid over a time frame exceeding one year.

Budget Deficit

The financial outcome where total expenses exceed total income, requiring corrective action or borrowing.

Real Interest Rate

An interest rate that has been adjusted for inflation to reflect the actual gain in purchasing power.

Rule of 72

A mathematical formula used to estimate the number of years required to double an investment, expressed as $\text{Years to Double} \text{ } \frac{72}{\text{Interest Rate}}$.

Compound Interest

The financial process of earning interest on both the initial principal and the accumulated interest from prior periods.

Credit Unions

Member-owned, cooperative depository financial institutions that operate on a non-profit basis to serve members with a common bond.

Federal Deposit Insurance Corporation (FDIC)

A federal agency that provides deposit insurance coverage up to specific financial limits per institution to protect customer account deposits.

Electronic Funds Transfer System (EFTS)

An electronic transaction framework covering tools like debit cards and PINs, where consumer liability limits are determined by the reporting time of lost or stolen cards.

Lowballing

A sales tactic where a seller quotes an unrealistically low price to secure an initial commitment from a buyer, then adds hidden costs or increases the price.

Capitalized Cost

The agreed-upon initial price or value of a vehicle being leased, which directly affects monthly lease payments.

Money Factor

The financing rate or annual interest charge expressed as a decimal factor in auto leasing calculations.

Residual Value

The estimated financial value of a leased vehicle or asset at the end of the lease term.

Closed-End Lease

A lease agreement where the lessee turns in the vehicle at the end of the term without obligation to pay the difference if the market value is lower than the projected residual value.

Open-End Lease

A lease agreement requiring the lessee to pay the difference if the actual market value of the vehicle at the end of the lease is below its pre-established residual value.

Loan-to-Value (LTV) Ratio

A proportion comparing the mortgage loan amount to the home's appraised value, used by lenders to set required down payments.

PITI

An acronym representing the four combined components of a monthly mortgage payment: principal, interest, taxes, and insurance.

Negative Equity

A housing risk concept (also referred to as an underwater mortgage) occurring when the outstanding mortgage balance exceeds the market value of the home.

Foreclosure

The legal proceeding in which a lender reclaims and sells a mortgaged property after the borrower fails to make contractually required mortgage payments.

Emergency Fund

A financial reserve established as part of short-term planning containing at least 6 months' worth of income.

Personal Financial Planning

The process of defining financial goals and developing strategies to achieve them, which helps improve standard of living, spending habits, and overall wealth.

Average Propensity to Consume

The percentage of each dollar of income, on average, that a person spends for current needs rather than savings.

Short-Term Financial Goal

A goal set each year that covers a 12-month period, such as saving $400$ for a item over 4 months.

Standard of Living

The necessities, comforts, and luxuries enjoyed or desired by an individual or family.

Consumer Price Index (CPI)

The primary measure of inflation based on changes in the cost of consumer goods and services.

Budget

A forward-looking financial report based on expected income and expenses used to monitor and control spending.

Investment Assets

Assets acquired specifically for the purpose of earning a return rather than providing a service.

Balance Sheet

A financial statement that describes an individual's or family's financial position at a given point in time.

Current Outstanding Balance

The latest loan balance still due that must be recorded as a liability on a balance sheet.

Fun Money

An allocated budget portion for family members to spend as they wish, promoting individual financial independence and healthy budget relationships.

Nominal Interest Rate

An interest rate that has not been adjusted for inflation.

Income and Expense Statement

A financial statement that measures financial performance and cash flows over a specific period of time.

Discounting

The process of determining the present value of a future sum of money.

Certified Check

A personal check stamped by a bank to guarantee that funds are available, immediately deducting the amount from the payer's account.

Federal Deposit Insurance Corporation (FDIC)

The federal agency that insures deposits at commercial banks, savings banks, and savings and loan associations.

National Credit Union Administration (NCUA)

The federal agency that insures consumer deposit accounts at credit unions.

Liquid Assets

Cash and near-cash resources that can easily be converted into cash with little to no loss in value.

Credit Union

A nonprofit, member-owned financial cooperative providing financial services to members sharing a common bond.

Compound Interest

Interest paid on both the initial principal deposit and the cumulative interest previously earned.

Cashier's Check

A check drawn directly on a bank's funds, purchased for face value plus a service fee, often used by people without personal checking accounts.

Overdraft

A negative balance result occurring when a check is written for an amount greater than the current balance in a checking account.

Prequalification

The process of determining in advance the specific mortgage amount a home buyer is eligible to borrow.

Closing Statement

A document provided to buyers and sellers at or before settlement accounting for all financial transfers and costs in a transaction.

Margin (ARM)

The fixed percentage points added by a lender to an index rate to determine the interest rate on an adjustable-rate mortgage.

Loan-to-Value (LTV) Ratio

The maximum percentage of a property's value that a lender is willing to extend as a loan.

Buydown

A financing arrangement where a builder or seller offers mortgage interest rates below market rates for an initial period.

Lowballing

A sales tactic where a salesperson quotes an artificially low price to secure an offer before negotiating the price upward.

Fixed-Rate Mortgage

A home loan where the interest rate and monthly payment remain unchanged over the entire term of the mortgage.

Earnest Money

A deposit pledged by a home buyer to the seller as evidence of good faith intent to purchase.