Personal Finance Bold Terms

Personal Financial Planning

The process of managing your money to achieve perosnal economic satisfaction

Financial Plan

Formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities

Adult Life Cycle

Stages in the family situation and financial needs of an adult

Values

Ideas and principles that a person considers correct, desirable, and important

Economiccs

Study of how wealth is created and distributed

Inflation

Rise in the general level of prices

SMART Goals

Specific, Measurable, Action-oriented, Realistic, Time-based

Money Management

Refers to the day-to-day financial activities necessary to manage current personal economic resources while working toward long-term financial security

Balance sheet /net worth statment/ statment of financial position

Financial statement that reports what an individual or family owns and owes

Liquid Assets

Cash and items of value that can easily be converted to cash

Current Liablities

Debts that must be paid within a short time (less than a year)

Long-term Liabililties

Debts that you do not have to pay in fill until a more than a year from now

Net Worth

The difference between total assets and total libalities

Insolvency

Inablity to pay debts when they are due beacuase libalities exceed the value of assets

Cash Flow

Actual inflow and outflow of cash during a given time period

Cash Flow Statement (i.e., personal income and expenditure statement)

Summarizes cash receipts and payments for a given period

Inflows

Deposits made into your account (i.e., income from emplyments; interest earned on a savings account)

Outflows

Checks written, cash withdrawals, and debit card payments (i.e., rent; food; loans)

Income

Inflow of cash to an indivudal or household

Take-home pay (net pay or disposable income)

Earnings after deductions for taxes and other items

Discretionary Income

Money left over after paying for housing, food, and other necessities

Budget (Spending Plan)

Necessary for sucessful financial planning

Budget Variance

Difference between the amount budgeted and the actual amount received or spent

SWOT analysis

(Strengths, Weaknesses, Opportunities, Threats) - a planning tool used by companies that can also help with money managment and budgeting activities

Excise Tax

Imposed by federal and state governments on specific goods and services, such as gasoline, cigarettes, alcoholic beverages, tires, and air travel

Estate Tax

Imposed on the value of a person’s property at the time of death

Inheritance Tax

Levied on the value of property bequeathed by a decreased person

Taxable Income

Net amount of income after allowable deductions

Earned Income

Usually in the form of wages, salary, commission, fees, tips, or bounses

Investment Income

Money received in the form of dividends, interest, or rent from investments

Passion Income

Results from business activities in which you do not actively participate, such as a limited partnership or rental property that you do not actively manage

Exclusions

An amount not included in gross income

Tax-exempt Income

Income that is not subject to tax

Tax-deferred Income

Income that will be taxes at a later date

Adjusted Gross Income (AGI)

Gross income after certain reductions called adjustments to income have been made (i.e., contributions to retriement account; alimony payments)

Tax Shelters

Investments that provide immediate tax benefits and reasonable expectations of a future financial return

Tax Deduction

Amount subtracted from adjusted gross income to arrive at taxable income

Itemized Deductions

Expenses a taxpayer is allowed to deduct from the gross income (i.e., medical and dental expenses)

Marginal Tax Rates

Used to calculate tax on the last (and next) dollar of taxable income

Average Tax Rates

Based on the total tax due divided by taxable incoem

Tax Credits

Subtracted directly from the amount of taxes owed

Tax Audit

Detailed examination of your tax return by the IRS

Tax Avoidance

Use of legitimate methods to reduce your tax obligation

Tax Evasion

Use of illegal actions to reduce one’s taxes

Tuition and Fees Deduction

Allows you to reduce your AGI by as much as $4,000 for expenses paid in the current year

American Opportunity Credit

• Allows a credit of up to $2,500

• Limited to the first four years of postsecondary education

• Student must be enrolled at least half-time

Lifetime Learning Credit

• Limited to $2,000

• Can be used for part-time education and graduate school funds, as well as postsecondary education beyond the first four years

Tax-exempt Investments

Interest income from municipal bonds, which are issued by state and local governments, and other tax-exempt investments is not subject to federal income tax

Tax-deferred investments

• Tax-deferred annuities are usually issued by insurance companies

• Health savings accounts may be utilized for current health care expenses or for retirement in future years

• Retirement plans, such as an IRA, SEP-IRA, or 401(k) plan

Capital Gains

Profits from the sale of a capital asset such as stocks, bonds, or real estate

Self Employment

◦ Self-employed persons may deduct expenses such as

health and certain life insurance as business costs

◦ TCJA may allow you to deduct up to 20% of the income

due to the Qualified Business Income deduction

◦ Recall, business owners also must pay self-employment

tax in addition to the regular tax rate

Children’s Investments

◦ Children under 18 or a full-time student under 24 with

investment income of more than $2,200 is taxed at

parents’ top rate

◦ For investment income under $2,200, child receives a

deduction of $1,100, and the next $1,100 is taxed at his or

her own rate

Traditional IRA

Available to people who do not participate in employer-sponsored retirement plans or who have an AGI under a certain amount

Roth IRA

◦ Limited to people with an AGI under a certain amount

◦ Contributions are not tax-deductible, but the earnings on

the account are tax-free after five years

SEP-IRA Plan

◦ Self-employed individuals can establish a Simplified

Employment Pension (SEP-IRA) plan

◦ Allows contributions by the employer for employees that

are at least 21 and have worked at least three of the last

five years

401(k) Plan

Tax-deferred retirement plan sponsored by an employer that allows you to contribute a greater tax-deferred amount than you can contribute to an IRA

Coverdell Education Savings Account

◦ Designed to assist parents in saving for the education

of their children

◦ Withdrawals can be used for a variety of educational

sues for kindergarten through college-age students

529 Plan

◦ Helps parents save for the education of their children

◦ No federal tax deduction, but earnings grow tax-free

Credit

An arrangement to recieve cash, goods, or services now and pay for them in the future

Consumer Credit

The use of credit for personal needs (except a home mortgage)

Close-end Credit

One-time loans that the borrower pay back in a specificed period of time and in payments of equal amounts

Open-end Credit

A line of credit in which loans are made on a continuous basis and the borrower is billed periodically for at least partial payment

Interest

The price of borrowing money

Finanace Charge

The total dollar amount you pay to use the credit

Mobile Commerce

The abliity to purchase using a moble device

Loans

Borrowing money with an agreement to repay it, as well as interest, within a certain amount of time

Debt Payments-to-Income Ratio

Calculated by dividing your monthly debt payments (excluding your house payment) by your net monthly income (no more than 20% of net income on conusmer credit payments)

Debt-to-equity Ration

Calculated by dividing your total liabilities by your net worth

• Do not include the value of the home and the amount of mortgage

• A ratio of 1 is the upper limit of debt obligations

Five Cs of Credit

1. Character refers to the borrower’s attitude towards his or her credit obligations

2. Capacity is the borrower’s ability to pay additional debts

3. Capital is the borrower’s assets or net worth

4. Collateral is a valuable asset that is pledged to ensure loan payments

5. Conditions affect a borrower’s ability to repay a loan

Credit Bureaus

Agencies that collect information on how promptly people and business pay their bills

Credit Score

A number that reflects the information in your credit report

Equal Credit Opportunity Act

• Age may be requested but cannot be discriminated against by it

• Can not be denied credit because you receive public assistance

• Discrimination based on race or nationality of people is banned in housing loans

• If risk-based prciing is used, they must be dislcosed to customers

Finance Charge

Total dollar amount of pay to use credt

Annual Percentage Rate (APR)

Percentage cost (or relative cost) of credit on a yearly basis

Simple Interest

Interest computed on principal only and without compounding

Fair Credit Billing Act (FCBA)

Sets procedures for promptly correcting billing mistakes, refusing to make credit card payments on defective goods, and promptly crediting payments

U.S. Bankruptcy Act of 1978

Established a uniform law on the subject of bankruptcies

Warranty

Written guarantee from manufacturer or distributor specifying the conditions under which the product can be returned, replaced, or repaired

Service Contracts

Agreements between a business and a consumer to cover the repair costs of a product

Research-Based Buying

1. Pre-shopping Activities

2. Evaluating Alternatives

3. Selection and Purchase

4. Postpurchase Activities

Small Claims Court

Settles legal differences involving amounts below a set limit and employs a process in which the litigants usually do not use a lawyer

Class-action Suits

Taken by a few individuals on behalf of all the people who have suffered the same alleged injustice

Legal Aid Society

One of a network of community law officers that provides legal assistance to consumers who cannot afford their own attorney

Selecting a Rental Unit

Apartments are the most common type of rental housing, but those needing more room may rent a house

Advantages of Renting

◦ Mobility if the renter needs to move

◦ Fewer maintenance/repair responsibilities

◦ Lower costs to take possession

Disadvantages of Renting

◦ No tax deductions for mortgage interest and property taxes, and no benefit from increased real estate values

◦ Limitations on activities (e.g., loud music or parties)

◦ Restrictions regarding pets and decorating

Lease

A legal document that defines the conditions of a rental agreement

Condominiums

Individually owned housing units in a building with several such units

Cooperative Housing

Form of housing in which the units in a building are owned by a nonprofit

Zoning Laws

Restrictions on how the poropety in an area can be used

Purchase Agreement (contract)

Legal offer ot purchase the home

Earnest Money

Portion of the price of a home tha the buyer deposits as evidence of good faith

Mortgage

A long-term loan on a specific piece of porpoerty such as a home or other real estate

Types of Mortgages

• Fixed-rate, fixed-payment mortgages

• Government-guaranteed financing programs

• Adjustable-rate, variable-payment mortgage

• Interest-only mortgage

• Other options

  • Second mortgage

  • Reverse mortgages

  • Refianncing

  • Buy-down

Amortization

Process of spreading out a loan into equal payments

Closing Costs

Fees and charges paid when a real estate transaction is completed

Title Insurance

Protects the owner or lender against financial loss resulting from future defects in the title and from other unforeseen property claims not excluded by the policy

Deed

Document that transfers ownership of property from one party to another

Escrow Account

Money, usually deposited with a lending institution, for payment of property taxes and insurance

Appraisal

Estimate of the current value of a property