Lecture Notes Review: Personal Finance, Economics, Insurance, Taxes, and Estate Planning Flashcards

A comprehensive set of practice questions covering emergency funds, financial statements, asset categories, cash flow, credit, insurance, mortgages, taxes, investments, retirement planning, estate planning, and ACA health insurance concepts drawn from the provided notes.

What is the recommended size of an emergency fund for most small crises, and what rough dollar amount is given as an example?

3–6 months of income in an emergency fund; about $2,000 for many small crises.

What are financial statements, and which two are most useful for individuals or families?

Financial statements are compilations of personal financial data describing current financial condition; the two most useful are the balance sheet and the cash-flow statement.

What does a balance sheet (net worth statement) show?

A snapshot of assets, liabilities, and net worth on a specific date (NW = Assets − Liabilities).

What does a cash-flow statement track?

Income and expenses over a period of time, showing where money came from and where it went.

Name three examples of monetary assets.

Cash, checking accounts, savings accounts (and related cash equivalents like refunds due).

What are the three parts of a balance sheet?

Assets, Liabilities, and Net Worth.

How is net worth calculated?

Net Worth = Assets − Liabilities.

What is the difference between tangible assets and investment assets?

Tangible assets (e.g., furniture, vehicles) maintain lifestyle and typically depreciate; investment assets (e.g., stocks, bonds, real estate, retirement accounts) have a long life and are intended to grow wealth.

What are liabilities, and how are they categorized?

Debts owed; categorized as short-term (current) liabilities due within a year and long-term (non-current) liabilities.

What are the three parts of the cash-flow statement, and what basis are these statements usually prepared on?

Income, Expenses, and Surplus/Deficit; usually prepared on a cash basis.

List examples of income sources mentioned.

Bonuses and commissions; child support and alimony; Social Security benefits; pensions and profit-sharing; scholarships and grants; interest and dividends; income from asset sales; other income.

Differentiate fixed and variable expenses with examples.

Fixed expenses are regular and invariable (e.g., rent, loans); variable expenses can change (e.g., meals, utilities, transportation, childcare).

State the formula for the Liquidity Ratio as presented.

Monetary assets divided by monthly expenses (Liquidity Ratio = Monetary assets / monthly expenses).

Explain the Asset-to-Debt Ratio.

Total assets divided by total debt (Asset-to-Debt Ratio = Total assets / Total debt).

What is the Debt-to-Income Ratio and how is it calculated?

Debt-to-Income Ratio = Annual debt repayments / gross annual income × 100.

What does the Debt Payments-to-Disposable Income Ratio measure, and how is it calculated?

Estimates funds available for debt repayment; calculated as Monthly non-mortgage debt payments / Monthly disposable income.

Define Investment Assets-to-Total Assets Ratio.

Investment assets divided by total assets (Investment assets / Total assets).

What is a revolving line of credit in the context of non-credit-card debt?

An open-ended line of credit that allows drawing up to a maximum limit and repaying at one’s pace with minimum payments.

Name the three non-credit-card debt types mentioned.

Unsecured personal loans, home equity line of credit, and overdraft protection.

What is a grace period in credit cards?

A set period after the billing cycle ends during which you can pay the balance in full without being charged interest.

What is a teaser rate in credit cards, and how long must it stay in effect?

An introductory, typically low APR offered to entice applications; federal law requires teaser rates to stay in effect for six months.

How is a chargeback defined under the Fair Credit Billing Act (FCBA)?

Disputing charges when goods/services are not delivered, are damaged, or were not authorized; must be reported within 60 days of the first bill containing the error, lender has 30 days to acknowledge and up to 90 days to resolve.

What is the difference between a deductible and coinsurance?

Deductible: you pay the initial loss amount before coverage kicks in; coinsurance: you and insurer share the remaining loss proportionately.

What is the large-loss principle in insurance planning?

Insure the risks you cannot afford and retain the risks you can reasonably afford.

Name and describe the six main types of homeowners insurance forms (HO-1 to HO-8) and their focus.

HO-1: named-perils with 10 coverages; HO-2: named-perils with 16 coverages; HO-3: all-risk dwelling with named-peril personal property; HO-5: all-risk dwelling and personal property; HO-8: old homes, actual cash value; HO-4: renters contents (named perils); HO-6: condominium contents and liability.

What does PITI stand for and what is its relevance in housing costs?

PITI = Principal + Interest + Taxes + Insurance; often paid through an escrow account.

What is a lien in mortgage lending?

A legal right by which the lender can take or sell the property if the loan is not repaid.

What is amortization in a mortgage loan?

The gradual repayment of a loan through regular payments, where early payments are mostly interest and later payments are more principal.

Explain the concept of equity in a home.

Equity = current market value of the home minus the outstanding loan balance; equity increases as you pay down principal or property value rises.

List three factors that affect monthly mortgage payments.

Amount borrowed, interest rate, and loan term.

What is an acceleration clause?

A clause allowing the lender to demand repayment of the entire loan if the borrower misses repayments.

What is a recourse clause?

Gives the lender the right to pursue the borrower’s other assets if the collateral does not cover the debt.

What is loan-to-value (LTV) and what is a typical threshold that triggers mortgage insurance?

LTV = loan amount / home value; typical threshold is 80% (below which mortgage insurance is often required if higher).

What is a beneficiary designation in estate planning?

A designation naming who will receive assets upon death; may include contingent beneficiaries and overrides wills.

What is nonprobate property and give examples?

Assets that transfer outside probate through contracts or beneficiary designations (e.g., joint tenancy with right of survivorship, payable-on-death designations, retirement accounts).

What is the difference between a will and a trust (living vs testamentary) in estate planning?

A will transfers assets via probate; a living trust can transfer assets before death and avoid probate; testamentary trusts take effect after death.

What is a revocable living trust good for?

Protects and manages assets during life and can avoid probate; can designate successor trustees and handle incapacity.

What is a durable power of attorney in estate planning?

A document appointing someone to handle legal and financial matters if you become incapacitated.

What is the federal estate tax exemption amount, and how does portability affect spouses?

Exemption amount is $11.4 million per individual; portability allows unused exemption to pass to the surviving spouse, effectively doubling the exemption for a married couple.

What is the annual gift tax exclusion amount?

$15,000 per recipient per year.

What are advance directives, and what are the three types commonly discussed?

Legal documents describing end-of-life wishes; types: living will, health care proxy, and durable power of attorney.

What does ERISA regulate in employer-sponsored retirement plans, and what organization backs defined-benefit plans?

ERISA regulates qualified retirement plans; the Pension Benefit Guaranty Corporation (PBGC) backs defined-benefit plans.

What is vesting, and what are the two main vesting methods?

Vesting is the nonforfeitable right to employer contributions; methods include cliff vesting and graduated vesting.

What is portability in retirement plans?

The ability to transfer retirement funds from one employer’s plan to another plan or to an IRA without taxes or penalties.

What is a 401(k) match, and why is it valuable?

Employer contributions that match employee contributions; it is like free money and boosts retirement savings.

What is the difference between a traditional IRA and a Roth IRA?

Traditional IRA: tax-deductible contributions with tax-deferred growth; Roth IRA: after-tax contributions with tax-free withdrawals.

What are the two main types of investment risks listed, and give an example of each?

Business failure/financial risk (e.g., a company goes bankrupt) and inflation risk (loss of purchasing power over time).

What is the Rule of 70 and how is it used?

Approximate method to estimate how long it takes for the value of money to lose half of its buying power due to inflation: 70 / inflation rate.

What is the difference between marginal tax rate and average tax rate?

Marginal tax rate is the rate applied to the last dollar of income; average tax rate is total taxes divided by total income; brackets create a progressive system.

What is a tax credit vs a tax deduction?

A tax credit reduces tax liability dollar-for-dollar; a deduction reduces taxable income, lowering taxes by the deduction amount times the marginal tax rate.

What is the effect of capital gains tax, and how are long-term vs short-term gains taxed differently?

Capital gains taxes apply to gains from asset sales; long-term gains (held >1 year) are taxed at lower rates than short-term gains (1 year or less) which are taxed as ordinary income.

What is the standard deduction and when might itemizing be preferable?

A fixed deduction available to all taxpayers; itemize deductions if total exceeds the standard deduction amount to reduce taxable income more.

What items are included in the 10 essential health benefits under the ACA?

Ambulatory services, emergency services, hospitalization, maternity and newborn care, mental health and substance use, prescription drugs, rehabilitative services, laboratory services, preventive and wellness services, pediatric services.

What is a health savings account (HSA) and who offers them?

A tax-advantaged medical savings account; often offered with high-deductible health plans, allows pretax contributions and tax-free growth for qualified medical expenses.

What is the difference between a high-deductible health plan (HDHP) and traditional health plans?

HDHPs have higher deductibles and lower premiums and are often paired with HSAs; traditional plans have lower deductibles but higher premiums.

What is an umbrella liability insurance policy?

An extra liability coverage layer that kicks in when the underlying policy limits are exceeded, typically $1 million–$5 million.

What is the purpose of a beneficiary designation, and why is it important to keep it up to date?

Directs who will receive assets upon death; overrides wills in some cases; updates are essential to avoid unintended heirs.

What is a will’s executor responsible for?

Managing the estate, paying debts, collecting assets, filing final tax returns, and distributing remaining assets to beneficiaries.

What is probate, and why might nonprobate property be preferred?

Probate is court-supervised asset transfer after death; nonprobate property transfers outside probate via contracts, beneficiaries, or joint ownership, saving time and costs.

What is the purpose of a living will and a POLST form?

Living will states preferences for life-sustaining treatments; POLST (physician's order for life-sustaining treatment) translates wishes into actionable medical orders.

What is the purpose of a durable power of attorney in health care or finances?

Authorizes someone to make health care or financial decisions on your behalf if you are unable to act.

What is the difference between a will and a trust in terms of probate avoidance?

Wills go through probate; trusts (especially revocable living trusts) can avoid probate and manage assets during incapacity.

What is the significance of the 80% replacement-cost requirement in homeowners insurance?

If insured value is only 80% of replacement cost, you may face coinsurance penalties for partial losses.

What is the purpose of inflation guard in homeowners insurance?

Automatically increases coverage each year to keep pace with inflation.

What does the term “net worth” represent in personal finance?

Total assets minus total liabilities; a snapshot of overall financial health.

What is the purpose of a CD laddering strategy?

Staggered maturity dates to manage interest-rate risk and provide liquidity while earning higher average rates.

What is the difference between investment-grade bonds and junk bonds?

Investment-grade bonds have lower default risk with lower yields; junk bonds offer higher yields but come with higher risk.

What is a 529 plan, and what are its two main types?

Qualified tuition programs; prepaid tuition plans and college savings plans (529 plans) for education expenses.

What is the concept of dollar-cost averaging (DCA)?

Systematically investing equal sums at regular intervals regardless of price to reduce timing risk and discipline investing.

What is the difference between a term life policy and cash-value life policy?

Term life provides pure life protection for a period; cash-value life builds cash value and combines insurance with an investment component.

What is a “buy and hold” investment strategy?

Hold a diversified portfolio for the long term, reinvest dividends, and avoid excessive trading.

What is “portfolio diversification” and why is it important?

Holding different asset classes to reduce risk and smooth returns over time.

What is the purpose of demographic and economic indicators (e.g., GDP, CPI, LEI) in economics?

To gauge overall economic health, inflation, growth, and future directions of the economy.

What is the difference between a standard deduction and itemized deductions in tax planning?

Standard deduction is a fixed amount; itemized deductions are specific expenses (medical, charitable donations, taxes, mortgage interest) that can be added if they exceed the standard deduction.

What is the concept of “portfolio risk” related to diversification?

Spreading investments across asset classes to minimize unsystematic (idiosyncratic) risk and reduce volatility.

Why is it important to check the background of a financial planner or advisor?

To ensure fiduciary duty, qualifications, and avoidance of conflicts of interest; regulators (SEC, FINRA, CFP Board) can be consulted.

What is the purpose of a beneficiary designation on retirement accounts and life insurance?

Speeds transfer to heirs and can override wills; ensure proper beneficiaries are named and updated after life events.

What is the significance of the federal estate tax exemption amount, and what is its current approximate value?

Threshold above which estate taxes apply; approx. $11.4 million per individual (doubling for married couples via portability).