Financial Independence and Credit Management

These flashcards cover key vocabulary terms and definitions related to financial independence, budgeting, credit, and lending practices.

DEFINE: Financial Independence

Having enough financial stability and resources to support one’s desired lifestyle and meet financial goals without depending on others.

DEFINE: Budget

A document that tracks cash flow and helps calculate net worth.

DEFINE: Net Worth

The total value of a person's financial assets minus liabilities.

DEFINE: 50-30-20 Rule

A budgeting guideline that allocates 50% of income to needs, 30% to wants, and 20% to savings.

DEFINE: Credit

Funds provided by a creditor to a borrower that the borrower will repay with interest or fees in the future.

DEFINE: Good Debt

Debt taken to allow people to reach their life goals faster and build their net worth, such as student loans or home loans.

DEFINE: Bad Debt

Unnecessary debt taken out of desperation for essential needs, often high-interest and detrimental to financial health.

DEFINE: The 3 C's of Credit (what lenders are looking for)

Character: credit history, past payment behavior and reliability to pay on time to deadlines

Capital: assets (savings, investments, real estate) which can serve as collateral

Capacity: borrower's ability to repay the loan (consistent income, debts/loans, living expenses, dependants (ex. children))

DEFINE: Predatory Lending

Predatory lending: illegal lending practices

• Lender charging high loan fees

•  Lender provides home equity loan with the expectation of default so he can take ownership

•  Lender ties other products to loan approval

•  Lender includes balloon payment at end of loan

• Loan agreement includes confusing information

DIFFERENCE BETWEEN: Nominal Interest Rate and Effective Interest Rate

Nominal :The stated interest rate on a loan or investment, not accounting for compounding frequency.

Effective: The actual return or cost of borrowing after accounting for the effect of compounding.

Calculate the 50 30 20 rule when someone has $865

(percentage*price)/100

—

50% (needs): $432.50

30% (personal): $259.50

20% (savings): $173

Leasing vs. Financing (Car)

Leasing : pay to use the car for a fixed period. At the end of the term, you either return it, extend the lease, or buy it

Financing : Lending company allows you to own the car as long as you make regular payments (with interest) back over years or months until the debt is repaid

Payday Loan

A short-term loan provided in advance of a paycheque, often with high interest rates. (up to 60%)

compound interest equation

Lump Sum Formula

DEFINE: leasing vs Finance vs Buying vehicle

Leasing involves renting a vehicle for a set period, leading to lower monthly payments but no ownership at the end.

Financing allows you to make monthly payments towards ownership

buying means paying the full price upfront.

Pros and cons of Financing

Pros:

• Spreading out a large expense over years makes it easier to pay off

• Allows you to focus on other financial goals while still owning a car

• Helps improve credit score (paying off loan in time every month)

• Easier to negotiate pricing

Cons:

• More expensive than buying (due to interest)

• Missed payments results in bad credit score and financial trouble

pros and cons of leasing a car

Pros: Do not need a substantial down payment

•  Return the car at the end of the lease period

•  Lower monthly car payment than financing

Cons: You have no equity investment, i.e., you do not own the car

• You are responsible for maintenance costs and damage to the leased vehicle

•  There is usually a kilometre limit for leased vehicle

• early termination fees for if you don’t want to keep paying for the car before the leasing term ends

What types of loans have the highest interest rates

Payday loans: a short-term loan provided to you if you need funds in advance of receiving your Paycheque (60% interest rate)

When would you use a credit card, a debit card or a line of credit?

Line of credit:

• (similar to loan or credit card with lower interest rate + no fees),

• approved for credit limit, but user decides how much money they borrow at a given time  - offered by banks to those with extremely good credit

Credit card:

• borrow money from a lender up to a certain limit

Debit card;

• directly access the money in your bank account