financial stewardship exam 2

Cognitive Bias

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

Rational consumer suggestions

1) decide what you need before you shop

2) whenever possible, split your decision over two days (search day and buy day)

Lease

Long term renting

Ways to pay for a car

Cash, financial institution loan, seller loan

most valuable asset you can own

A house

Cost of owning a home

Closing cost, down payment, private mortgage insurance, monthly payments

Private mortgage insurance

If a buyer cannot pay at least 20% of asset value, the lender will likely require private Mortgage insurance (PMI)

Monthly Mortgage Payment (PITI)

Principal, interest, Taxes, insurance

Principal and interest goes to who when buying a home?

Lender

Reasons a borrower pays interest

Lenders cost, risk

What is kept unchanged in a mortgage?

Principal + interest

Why do individuals price their assets over the market value?

endowment effect

What effect does a tax deduction have on tax liability?

It reduces tax liability after marginal tax brackets have been applied.

Which type of insurance provides for the partial replacement of income by employees as a result of accident, illness, etc.?

Disability

What type of auto insurance would compensate Emily in the event that hail damaged the roof of her SUV?

Comprehensive

Some common liability risks include

Driving a car

If lending money involved no risk whatsoever, interest rates would still be charged on debt due to

The cost of loaning funds

Snowball principal

Paying off debt

Transaction Utility

Feeling happy about the “deal” rather than the actual value.

Credit line

flexible repayment within a limit

Deductible

amount paid before insurance pays

Term life insurance

simple, low cost, temporary (10–30 yrs), best for most people.

Whole life insurance

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

eƯicient.

HSA (Health Savings Account)

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

Uninsured/Underinsured Motorist

covers you if the other driver can’t.