Consumer Economics Chapter 3 Key Concepts

Flashcards created for Consumer Economics Chapter 3 vocabulary terms, facts, and financial concepts.

Percentage of Adults Without a Budget

The statistic indicating that 60% of adults do not keep a budget.

Primary Cause of Financial Struggles

The core principle that financial distress is often caused by spending habits rather than low income.

Values

Fundamental beliefs about what is important, desirable, and worthwhile.

Starter Emergency Fund Target

An initial target range of $500–$2,000 recommended to cover small crises before reaching a full 3–6 month goal.

Lifestyle Creep

The practice of increasing your spending habits as your income increases.

Raise or Bonus Wealth Strategy

Directing 50–75% of raises or bonuses to savings or investments before adjusting spending habits.

Automated Savings Rate

The statistic indicating that 1 in 5 Americans automate their savings directly from their paychecks.

Wealth-Building Principles

General financial strategies including paying credit card balances in full each month, paying off your home before retirement, and taking full advantage of employer retirement plan matches.

Balance Sheet

A financial statement that acts as a status report describing your financial condition on a specific date.

Net Worth Formula

$$\text{Assets} - \text{Liabilities} = \text{Net Worth}$$

Fair Market Value

The required valuation standard for assets listed on a balance sheet.

Monetary Assets

Liquid assets or cash equivalents easily converted into cash, such as checking and savings accounts.

Tangible Assets

Use or lifestyle assets such as a personal car, furniture, and a primary residence.

Short-Term Liabilities

Current liabilities that are due within one year.

Insolvency

A financial condition where an individual owes more than they own, resulting in a negative net worth.

Liquidity Ratio Formula

$$\text{Monetary Assets} \div \text{Monthly Expenses}$$

Liquidity Ratio Benchmark

The recommended benchmark range of 3–6 months for liquidity coverage.

Debt Payments-to-Disposable Income Ratio Benchmark

The recommended limit of less than or equal to 14% for non-mortgage debt payments divided by disposable income.

Financial Records

Documents that evidence financial transactions.

Safeguarding Important Records

The practice of keeping duplicates of important records at your workplace or with relatives to protect against localized disasters.

Non-Tax-Related Records Retention

Documents such as non-tax-related checks and credit card receipts that are safe to purge or shred after one year.

Safe-Deposit Box Items

Critical original documents stored securely at a financial institution, such as stock certificates or deed titles.

Tax Documentation Retention Period

The rule requiring copies of past tax returns and supporting documentation to be kept for the past 3+ years.

Dual-Income Financial Partnership Strategy

Advice for partners to live on one salary and bank all or most of the second salary.

Secret Financial Matters Rate

The statistic indicating that approximately 1 in 5 Americans have secret financial matters that their partner does not know about.

Workplace Retirement Savings Rate Target

The target percentage of saving or investing individually no less than 15% of income when coordinating retirement plans.

Term Life Insurance

The primary life insurance coverage recommended for partners to meet the bulk of their protection needs.

Legal Name Change Notifications

Required administrative steps following marriage to notify the Social Security Administration and driver's licensing office.

Partner Credit Management Advice

Checking credit reports and scores for both partners, and avoiding adding a partner with poor credit as an authorized user.

Budget

A financial document that reflects where you want to go in the future.

Long-Term Goals

Financial targets that are more than 5 years away.

Intermediate-Term Goals

Financial targets achievable in 1 to 5 years, such as building a 3–6 month emergency fund or saving a vehicle down payment.

Disposable Income

Take-home pay calculated as gross income minus tax withholdings and deductions.

Budget Reconciliation Deficit Action

The corrective action taken when expenses exceed income, which is to increase earnings, cut spending, or combine both.

Revolving Savings Fund

A savings account used to save in advance for irregular or large non-monthly expenses, such as insurance premiums or tuition.

Retirement Savings Allocation Target

Allocating 15% of income specifically toward retirement.

Housing Cost Cap Target

The benchmark recommendation to cap housing costs at 25% or less of income.

Zero-Based Budget Core Rule

A budgeting principle where total income minus total expenses (including savings and debt goals) equals zero.

The Four Walls

The essential categories in a Zero-Based Budget that must be covered first: Food, Utilities, Shelter, and Transportation.

Food Category (Four Walls)

Under the Four Walls concept, the spending allocation that specifically refers to grocery money only, excluding dining out.

Debt Snowball Method First Step

Saving a $1,000 starter emergency fund, then listing debts from smallest to largest balance.

Debt Snowball Payment Strategy

Paying off the smallest debt with extra income while making minimum payments on all other debts.

Mid-Month Overspending Adjustment

The rule stating that if you overspend in one category during the month, you must immediately take money from another category to balance it.

Envelope System

A system where cash is withdrawn, placed into physical labeled envelopes for variable categories, and spending stops once an envelope is empty.

50% Portion (50-30-20 Budget)

The portion of income allocated to essentials and necessities in the 50-30-20 budgeting method.

20% Portion (50-30-20 Budget)

The portion of income allocated to savings for retirement and future needs in the 50-30-20 budgeting method.

Cash-Flow Calendar

A tool used primarily to map monthly income versus expenses to identify expected surpluses and shortfalls.

Opportunity Cost

Deferring short-term desires and making trade-offs to support long-term success in financial planning.

Cash-Flow Statement

A document that records past financial transactions to answer 'Where have you been?'.

Solvency

The financial state of having a positive net worth where total assets exceed total liabilities.