FINANCIAL STEWARDSHIP EXAM 2 STUDY GUIDES TERMS AND STUFFFFF

Endowment Effect

We overvalue what we own

Sunk Cost Fallacy

Continuing bad choice because of past investment

Behavioral Economics

Supposes that people are’t always rational

Cognitive Bias

Systematic error in thinking that occurs when people are processing and interpreting information in the world around them

Transaction Utility 

The happiness a consumer gets from the perceived value of the deal 

Rational Buying Process

Decide needs before shopping, Take time (sleep on major decisions), Negotiate respectfully and know your limits

Different ways to buy a car

1. Buy New

2. Buy Used 

3. Lease: Long term renting

Pros and Cons of buying new car

Peace of mind because it is a new car so you know the history but it is costly

Pros and Cons of buying a used car

You get the lowest cost but it takes more time to find, and verify that you are not being lied to about the history of the car. 

Pros and Cons of Leasing

Low hassle but you do not own it

Two places you can buy cars

Dealership and Private 

Pros and cons of Dealership buying car

Higher reputable seller but also higher cost

Pros & Cons of Private buying car

Lower price but also less reputable seller

Costs of owning a home WITH a mortgage

1. Closing Costs 

2. Down Payments 

3. Private mortgage insurance (SOMETIMES)

4. Monthly payments (PITI 

Costs of owning a home Regardless of with or wihtout a morgage

Maintenance fees

What are closing costs

Up-front costs paid when the sale of the home is closed

What do closing costs include 

1. Loan application, origination fees 

2. Title search, insurance proof of ownership

3. Real estate agent fees- to help find and transact the sale 

4. Attorney fees- Ensure legality of deal is correct

5. Appraisal fees- Ensure the home is worth what you are paying

6. Other misc fees- inspections, credit report, property survey, filling fees 

What is a down payment

Buyers initial net worth in the home (20% of the purchase of the home)

If you cannot afford the down payment of 20% you must get ______

Private Mortgage Insurance (PMI)

What does PITI stand for

Principal, Interest, Taxes, Insurance

What do Principal and Interest go to

To the lender to repay the mortgage

What do Taxes and Insurance go to

Collected by the lender and held in escrow account

Why is renting good 

Flexibility and low liquidity risk 
If you cant afford the downpayment of buying

If you are moving around or moving soon 
If you cant afford the homeowners responsibility 

Why is buying good 

Owning build equity and stability 
Tax reductions (No capital gains tax when you sell your primary residence 

Buying a home

1. Prequalify for a loan 

2. Choose a real estate agent

3. Visit homes

4. Enter a contract

5. Close 

What is debt 

A promise to repay money borrowed

What is good debt

Education loans, home mortgages (build assets or income)

What is bad debt

Vacations, consumption items that lose value

Interest Rate = Price of debt

Compensates lender for cost + risk
Secured loans (collateral) have lower rates than unsecured loans 

Biblical perspective on debt

Proverbs 22:7/ avoid unnecessary debt and live within means

What is a loan

Has a fixed payment schedule

What is credit line

Has a flexible repayment withing a limit

What is a credit score and report

Shows that you can be trusted

What are some credit Bureaus

Equifax, Experian, TransUnion

Factors of credit scores/reports

On time payments, utilization %, length of history, new accounts, public records

What is the snowball method

Pay smallest debts first for motivation, then larger ones

Purpose of life insurance

Protect family financially from loss of income. Not to profit from death

What is a premium

Regular payment for coverage

What is a beneficiary 

Recipient of payout 

What is a deductible

Amount paid before insurance pays

When would you need life insurance?

If you have someone that depends on your income

What is term life insurance

Simple, low cost, temporary (10-30 years), best for most people

Whole life insurance

Expensive, includes cash value (savings component), often marketed hard but less efficient

How much life insurance should you buy

About 7-10 x annual income 

Deductible calculations

Insurance pays= loss - deductible

What is health insurance

Protects against major medical costs

What is private health insurance

Employer plans

What is government health insurance

Medicare/Medicaid

What is traditional plan in health insurance

Tend to cover more of the fees as a patient receive service
Have higher monthly premiums
Can use a flexible savings account (tax advantaged savings program

What does HDHP stand for

High Deductible Health Plans

What is HDHP

Patient pays more out of pocket during service
Tend to have lower premiums 

What is a health savings account

Tax-free savings for medical expenses and rolls over year to year

What is disability & long-term care

Replace income if unable to work or cover extended medical needs

Property Insurance

Covers loss or damage to home and possessions

Types of property insruance

Homeowners coverage: Dwelling, other structures, personal property, liability
Limitations: Jewelry or high value items need a floater 
Renters insruance: Covers your belongigns not the building 

Liability Insurance

Protects from lawsuits or injuries to to others

What is umbrella policy 

Extra liability coverage beyond home/auto policies 

Auto Insurance

Liability- Covers damage you cause
Collision- your car in an accident
Comprehensive- non collision losses (theft, hail, fire)

Uninsured/Underinsured Motorist- covers you if the other driver cant

How can you lower premiums

Raise deductible, maintain good credit, drive safely