Personal Finance (Dave Ramsey)

7 Baby Steps

steps people should take to reach financial success

step 1 of 7 Baby Steps

$1,000 in an emergency fund (or $500 if you make less than $20,000 a year)

step 2 of 7 Baby Steps

pay off all debt except the house utilizing the debt snowball

step 3 of 7 Baby Steps

three or six months expenses in saving

step 4 of 7 Baby Steps

invest 15% of your household income into Roth IRAs and pre-tax retirement plans

step 5 of 7 Baby Steps

college funding

step 6 of 7 Baby Steps

pay off your home early

step 7 of 7 Baby Steps

build wealth and give

what do baby steps 1 and 3 have to do with?

saving and emergency fund

sinking fund

saving money for a purchase or to pay off a debt and letting the internet work for you rather than against you

amoral

money is neither good nor bad

money market

emergency fund goes in here

compound interest

interest paid on interest; previously earned money grows faster; works over time

interest

money paid to a saver by a financial institution

Murphy's Law

anything that can go wrong will go wrong

discipline

key to wealth building

the US has a \______ savings rate

-0.6%

saving money is about \______ and \______

emotion; contentment

money is \______

amoral

you should save money for 3 basic reasons

1. emergency fund
2. purchases
3. wealth building

a great place to keep your emergency fund is in a \______ account from a mutual fund company

money market

your emergency fund is not an \______ , it is \______

investment; insurance

\______ the emergency fund for purchases

do not touch

the emergency fund is your \______ savings priority

first

the second thing you save money for is \______

purchases

instead of borrowing to purchases, pay cash by using a \______ approach

sinking fund

the third thing you save money for is \______

wealth building

\______ is a key ingredient when it comes to wealth building

discipline

\______ withdrawals are a good way to build in discipline

pre-authorized checking (PAC)

\______ helps build \______ when saving

PACs; discipline

your income level \______ your saving habits

doesn't affect

compound interest formula

FV \= PV(1 + r/m)^mt

annual

m \= 1

semiannual

m \= 2

quarterly

m \= 4

monthly

m \= 12

weekly

m \= 52

daily

m \= 365

why do you think the US has a negative savings rate?

advertising and marketing surrounding us; we are encouraged to spend money rather than save it

explain the relationship between having an emergency fund and Murphy's Law

Murphy's Law is less likely to strike if you are prepared; the emergency fund is your defense against the unexpected and Murphy's Law

what are the three primary savings goal?

1. emergency fund
2. purchases
3. wealth building

why do teenagers need an emergency fund?

unexpected events will always occur and an emergency fund prepares and prevents you from having to borrow money

what is the the 80/20 rule?

handling money is 80% behavior and only 20% head knowledge

annual fee

a yearly fee that's charged by the credit card company for the convenience of the credit card

annual percentage rate (APR)

cost of borrowing money on an annual basis; takes into account the interest rate and other related fees on a loan

credit

the granting of a loan and the creation of debt; any form of deferred payment

debt snowball

Preferred method of debt repayment; includes a list of all debts organized from smallest to largest balance; minimum payments are made to all debts except for the smallest, which is attacked with the largest possible payments

depreciation

A decrease or loss in value

tax deduction

An expense, such as a charitable contribution, that can be deducted from one's taxable income

according to The Wall Street Journal \______ of Americans are living paycheck to paycheck

70%

unsecured loan

given to borrowers based on their financial resources or ability to repay the loan

secured loan

usually needed when borrowing large amounts of money

examples of unsecured loans

- personal loans
- student loans
- personal lines of credit

home equity loan

credit line offered by mortgage lenders that allows a homeowner to borrow money against the equity in their home

examples of secured loans

- automobile loans
- mortgages
- home equity loans

the way to minimize the money lost on things that go down in value is to buy ______

slightly used

adjustable rate mortgage (ARM)

home loan secured by a deed of trust or mortgage in which the interest rate will change periodically (annually, etc.)

foreclosure

Process by which the holder of a mortgage sells the property of a homeowner who has not made interest and/or principal payments on time as stipulated in the mortgage contract

debt consolidation

combining debt into one payment; saves little or no interest

debt consolidation is \______

not wise to do

buying used cars is a good way to minimize \______

depreciation

you ______ need a credit card to rent a car

don’t

the typical millionaire drives \______ cars

used

\______ are the number one target of credit card companies

teens

why does the bank require a co-signer?

the bank requires a co-signer because the person isn't likely to repay

home equity loans \______ a good way to consolidate debt

aren't

it is \______ to take out an ARM or balloon mortgage

never wise

paying off the balance of your credit card each month is \______ use of credit

not an acceptable

the best way to teach teenagers about money is to get them a credit card (true or false)

false

it is ______ to attack your debt by consolidating many payments into one

not good

carrying cash ______ in an increase of spending versus paying with credit

does not result

steps out of debt

1. quit borrowing more money
2. you must save money
3. sell something
4. part-time job or overtime (temporarily)
5. use the debt snowball

buyer's remorse

feeling regret or concern after making a large purchase

brand recognition / awareness

refers to the public's ability to recall and recognize a brand by its logo, jingles, packaging, etc.

caveat emptor

Latin term for "buyer beware"

financing

to buy an item with credit; paying over time

finance charge

the total dollar amount of all interest and fees you pay for the use of credit

grace period

time period during which a borrower can buy the full balance of credit due with no finance charges

impulse purchase

an item that is bought without previous planning or consideration of the long-term effects

opportunity cost

refers to the financial opportunity that is given up because you choose to do something else with your money

rule of 78

pre-payment penalty in a financing contract; the portion of a 90 days same as cash agreement that states that the entire loan amount plus the interest accumulated over the first 90 days becomes due immediately

significant purchase

An amount of money you spend, usually $300, that causes some pain to part with

introductory rate

an interest rate charged to a customer during the early stages of a loan; the rate often goes up after a specified period of time

balloon mortgage

a home loan in which the sum of the monthly payments is insufficient to repay the entire loan; a final payment comes due, which is a lump sum of the remaining principal due

credit card

tool used to finance a purchase

credit limit

the maximum dollar amount that can be borrowed on a credit card

debit card

Type of card, often bearing the seal of a major credit card company, issued by a bank and used to make purchases; unlike a credit card, the money comes directly out of a checking account; also called a check card

four major ways of consumer awareness

1. personal selling
2. financing as a marketing tool
3. TV, radio, internet, and other media
4. product positioning

what is included in product positioning?

- brand recognition
- color
- shelf position
- packaging

our bodies go through physiological changes when making a \______

significant purchase

what do to when making a significant purchase?

- wait overnight
- consider your buying motives
- never buy anything you do not understand
- consider the opportunity cost of your money
- seek wise counsel

90 days same as cash

if you pay within 90 days, there are no finance fees, but if you pay late, you will be charged interest for the entire 90 days.

ATM card

automated teller card which allows you to make transactions in automated teller machines

budget

a written cash flow plan

carbon check

a copy of each check you write

envelope system

series of envelopes that are divided into categories (food, entertainment, gas, etc.) and are used to store cash for planned monthly expenses

reconcile

to match your bank statement with your checkbook

zero-based budget

A cash flow plan that assigns an expense to every dollar of your income, wherein the total income minus the total expenses equals zero

you must do a written \______ every \______

cash flow plan; month

you must keep your \______ balanced

checkbook