Financial Lit Final Exam Review

Trade offs 

- doing one thing at the expense of another

Scarcity

• The fundamental problem of having seemingly unlimited human wants in a world with limited resources 

Wants

something not needed (a new lululemon top or a new makeup product)

needs

• something needed for everyday life (food, water, housing)

Entrepreneur 

• An individual who starts, organizes, and manages a new business, assuming significant financial risks to pursue profit and growth. 

Importance of competition

It drives lower prices, higher quality goods, and increased innovation, more choices

Opportunity cost

• The potential benefit or value of the next best alternative when making a choice.

Factors of production

• 1) land

• 2) labor

• 3) capital

Physical capital

machines

Human capital

 skill sets that people bring to jobs

Profit incentive

• Desire for financial gain 

• Drives individuals and businesses to take risks

Rule of 72 

• 72 divided by the annual rate of return equals the amount of years your investment will be doubled. 

Compound Interest

• Interest that investors earn on the original principal and on the previous interest

• A= P(1+ R/n)^nt

Ex-Dividend

 the day you have to own if you wish to receive a dividend. On the Ex-Dividend date, the price of the stock will open lower equal to the amount of the dividend to reflect the fact that the company will be distributing dividends.

Investment analysis

using fundamental and technical data to determine if a stock / ETF is a good investment

Volume

the total number of shares between a buyer and seller during a given time period

Diversification

Spreading investments across different assets; investing in different areas and not in one spot

Bonds

•  loan you make to a borrower. Typically a company or a government

Risk vs. Reward

• High risk = high reward. Higher potential returns usually come with higher risk. Ex: lottery/gambling. 

• Low risk = low reward. Ex: treasuries /bonds. 

Mutual funds 

• Investment owning stocks or bonds indirectly. 

• A pool of money from many investors used to buy a diversified mix of stocks, bonds, or other assets.

Volatility

• Rapid, significant, and unpredictable price fluctuations in financial markets, indicating higher risk and uncertainty 

Relative Strength Index (RSI) 

• Used by traders to measure the speed and change of price movements

Importance of a budget

• helps keeping track of your money and prepares you for future expenses/ emergencies

Gross income

money you make before taxes and education

Net income

• the amount of money you make after taxes and deductions

Health insurance premiums

• premium is the monthly bill you pay for having that type of health insurance, even if you do not use it. 

Renters insurance

• protects all your things in someone else's building

Disability insurance

• A type of coverage that replaces a portion of your income

• Typically 60%-80%

• Used if illness or injury prevents you from working

Emergency fund

• Saved up money that can cover 3-6 months of expenses 

Liability

• Protects you from financial loss if you are responsible for injuring others or damaging their car 

Fixed expenses

• Expenses that are consistent every month

• Ex: rent, insurance, debt, etc. 

Auto insurance

Factors that affect the monthly price of your insurance: your deductible, your vehicle and mileage, your driving history, and your personal information.

Liability insurance

• covers the damage you cause in a collision. 

Collision

•  covers damages to your car

Comprehensive

• covers damage to your car from natural desisters

• uninsured/ underinsured motorist: covers the damage to your car if the other person does not have auto insurance

Personal injury

covers any injuries to yourself in a collision

Managing debt responsibly

Pay off all debts on time. The longer you wait, the more interest is going to build up, so pay things off on time, if not early.

Mortgage

A loan you take out for a home

FDIC (Federal Depository Insurance Corporation)

 Government agency that insures that you can receive your deposited money from a financial institution should that institution go bankrupt.

P2P payment features

• Digital person to person online payments, that get directly deposited into your bank account. Such as venmo, cashapp, or Zelle. 

Interest

This is the price paid for borrowing money

Simple interest

•  It does not include interest on top of interest. Calculated only on the original amount borrowed or invested over the life span of the loan.  

Compound interest

Calculated on the principal amount. Also, it has accumulated interest from previous periods, allowing it to grow faster.

Secured loan

• When borrowing money for a tangible asset and do not pay it back, it gets taken away back to the lender.

Credit score

shows potential lenders a prediction of how well you can pay back a loan.

Annual Percentage Rate (APR)

Total annual cost of borrowing money including interest rate and additional fees.

Certificate of Deposit (CD)

•  Investment  where money is given to a bank for a fixed amount of time and typically offers a higher interest rate.

Savings 

• money in case of an emergency. ; account safely stores money and earns interest while keeping money accessible. 

Secured credit card

• Credit card that requires a cash deposit that acts as collateral. Good tool for building credit, especially for those with low credit scores

Subsidized loan

• Federal government making interest payment while in school 

Unsubsidized loan

• You are responsible for interest  payments when the loan begins

Discretionary spending

• Money left after you have paid all bills; you can choose where to use the money (wants)

Student loans

Help students pay for post grad education related costs

Government loans

Loans issued by the federal government to help pay for college. Subsidized loans, unsubsidised loans, and direct PLUS loans.

• Fasfa 

• Can help you get financial aid, and it will calculate how much you are eligible to received based on your income. 

Earned income 

The money you make from your job

Form W-4 

For declaring withholdings on your taxes

Progressive Tax

The system where the tax rate increases as the taxable amount increases.

Regressive Tax

Tax rate where the more income you make, the less tax you pay as a % of your income

Proportional tax 

A tax where everyone, regardless of income, pays the same percentage

Ability to pay principle

If you have lots of money, you should be expected to contribute to taxes more

Benefits received principle

If you receive a benefit you should be expected to pay for it.

Net cost of college

Net cost is the sticker price - any grants/scholarships = total cost

Withholding

amount of money taken from your paycheck and given to the government as part of tax payment.