Personal Finance Chapter 1

Financial Plan

A formal report analyzing a person's financial situation and recommending future financial actions.

Financial Planning

The process of managing money to achieve financial goals.

Values

Personal beliefs and principles that influence financial decisions.

Adult Life Cycle

Stages of adulthood that affect financial needs and decisions.

Federal Reserve (The Fed)

The central bank of the United States.

Inflation

A general increase in prices that reduces purchasing power.

Consumer Price Index (CPI)

A measure of changes in the average prices consumers pay for goods and services.

Interest Rate

The cost of borrowing money or the return earned on savings.

Purchasing Power

The amount of goods and services money can buy.

Opportunity Cost

The value of the next best alternative given up.

Trade-off

Another term for opportunity cost.

Time Value of Money

The concept that money today is worth more than the same amount in the future.

Principal

The original amount invested or borrowed.

Simple Interest

Interest earned only on the original principal.

Compound Interest

Interest earned on both principal and previously earned interest.

Future Value

The amount current money will grow to in the future.

Present Value

The current value of a future amount of money.

Compounding

The process of earning interest on previously earned interest.

Discounting

The process of finding the present value of future money.

SMART Goals

Goals that are Specific, Measurable, Action-oriented, Realistic, and Time-based.

Short-Term Goal

A goal achieved within two years or less.

Intermediate Goal

A goal achieved in two to five years.

Long-Term Goal

A goal requiring more than five years to achieve.

Financial Goal

A goal involving money or financial resources.

Nonfinancial Goal

A goal involving personal growth, relationships, health, or education.

Earning

Obtaining income from work, investments, or business ownership.

Planning

Using budgeting and financial strategies to manage money.

Saving

Setting aside money for emergencies and future goals.

Future Value of a Single Amount

The future value of one lump-sum deposit.

Future Value of an Annuity

The future value of a series of regular deposits.

Present Value of a Single Amount

The amount needed today to reach a future goal.

Present Value of an Annuity

The current value of a series of future payments.

Financial Planning Process

A six-step process for making sound financial decisions.

Simple Interest vs. Compound Interest

Simple interest is earned only on principal; compound interest is earned on principal and previous interest.

Future Value vs. Present Value

Future value determines what money will grow to; present value determines what future money is worth today.

Short-, Intermediate-, and Long-Term Goals

Short-term: ≤2 years; Intermediate: 2–5 years; Long-term: >5 years.

Financial Goals vs. Nonfinancial Goals

Financial goals involve money; nonfinancial goals involve personal well-being.

Inflation vs. CPI

Inflation is rising prices; CPI measures inflation.

Principal vs. Interest

Principal is the original amount; interest is the cost or earnings on that amount.