FMST 201: Introduction to Financial Management

Vocabulary terms and definitions covering basic financial management, budgeting, retirement accounts, investing, and home-buying processes based on the lecture material.

Money management

The process of planning and controlling your income, expenses, investments, and savings to achieve financial security.

Simple interest

A method where the interest rate is calculated only on the original amount every year and added to the original amount at the end of the term.

Compound interest

A method where interest is calculated on the original amount plus any interest that has already been earned, with earned interest added to the principal for the next round of calculation.

PYF mentality

Stands for "Pay Yourself First"; a practice of transferring a percentage of after-tax earnings to a savings account before paying expenses.

Balanced budget

A financial state where your income minus your expenses equals $0$.

Fixed expenses

Expenses that do not change from month to month.

Flexible expenses

Expenses categorized as external resources.

Discretionary expenses

Spending amounts determined by personal decisions, where you control how much you spend.

50/30/20 Rule

An allocation goal for after-tax income: $50\%$ for essential costs, $30\%$ for needed discretionary expenses, and $20\%$ for savings.

401(k)

An employer-sponsored retirement savings plan where contributions reduce taxable income and taxes are paid only upon withdrawal.

401(k) withdrawal age

The age of $59 \frac{1}{2}$ years, before which withdrawals typically incur a $10\%$ penalty on the current amount.

Expense ratio

The fees charged to a retirement account, with an average percentage of $0.44\%$ (ranging from $0.03\%$ to $1.0\%$).

Traditional IRA

An Individual Retirement Account that is similar to a 401(k) regarding income tax benefits and paying taxes at the time of withdrawal.

ROTH IRA

An account where contributions are taxed first before deposit, making it beneficial if one expects to be in a higher tax bracket at retirement age.

AGI (Adjusted Gross Income)

Your income minus itemized or standardized deductions.

Stock Market

A market made up of investors buying, selling, and trading shares, bonds, and commodities, allowing companies to raise money for expansion or debt payoff.

Conventional Loan

A home loan typically offered to individuals with good credit (average score of $620$) and strong financials.

Debt to Income (DTI) ratio

The percentage of monthly gross income that goes toward paying off debt, used by lenders to decide how much a person can borrow.

Front-end ratio

A DTI calculation representing your future monthly mortgage payment divided by your monthly gross income.

Back-end ratio

A DTI calculation representing all monthly debt payments plus your mortgage payment.

FHA / Freddie Mac / Fannie Mae loans

Loans designed to help low-to-moderate-income families with credit scores between $580$ and $640$ attain homeownership.

PMI (Private Mortgage Insurance)

A monthly fee (generally $between $30$ and $70$ per $100,000 borrowed) required on conventional loans if the down payment is less than $20\%$.

Equity

The portion of homeownership acquired through payments; PMI must be cancelled once the borrower reaches $22\%$ ownership.

MIP (Mortgage Insurance Premium)

A fee for FHA/Fannie Mae/Freddie Mac loans consisting of an upfront premium ($1.75\%$ of loan) and an annual premium ($0.45\%$ to $1.05\%$).

Principal

The original amount borrowed from the lender to purchase a home.

Closing costs

Fees paid to third parties (attorneys, lenders, title companies) to finalize a home loan, typically ranging from $3\%$ to $6\%$ of the loan amount.

Loan estimate

A document a lender is required by law to provide within three business days of receiving a mortgage application, outlining estimated costs.

Hard credit check

A credit inquiry required for a loan estimate; multiple inquiries within a $45$-day period count as only one inquiry for home loan shopping.