FIN2450 Key Terms (Exam 1)

adult life cycle

the stages in the family situation and financial needs of an adult

economics

the study of how wealth is created and distributed

financial plan

a formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends actions.

future value

the amount to which current savings will increase based on a certain interest rate and a certain time period; also referred to as compounding.

inflation

a rise in the general level of prices

liquidity

the ability to readily convert financial resources into cash without a loss in value

opportunity cost

what a person gives up by making a choice

personal financial planning

the process of managing your money to achieve personal economic satisfaction

present value

the current value for a future amount based on a certain interest rate and a certain time period; also referred to as discounting.

time value of money

increases in an amount of money as a result of interest earned

values

the ideas and principles that you consider correct, desirable, and important

future value of a single amount

also known as lump sum, this is the value of a one-time, initial investment (present value) after a specific period, including compounded interest

future value of a series of equal amounts

also called an annuity, this is the total value of a series of regular and equal payments at a specific future date, assuming a fixed rate and compounding

present value of a single amount

the current worth of a specific sum of money to be received or paid at a future date

present value of a series of equal amounts

classified as an annuity, this is the current worth of a stream of identical payments that will be received or paid at regular intervals in the future

career

a commitment to a profession that requires continued training and offers a path for professional growth

cover letter

a letter that accompanies a résumé and is designed to express interest in a job and obtain an interview

flexible employee benefit program

also known as cafeteria-style benefits, these are programs that allow workers to base their job benefits on a credit system and personal needs

informational interview

a meeting to gather information about a career or an organization

interview

the formal meeting to discuss a job candidate’s qualifications in detail

job

an employee position mainly to earn money

job creation

the development of an employment position that matches your skills with the needs of an organization

mentor

an experienced employee who serves as a teacher and counselor for a less experienced person in a career field

networking

the process of making and using contacts to obtain and update career information

résumé

a summary of a person’s education, training, experience, and other job qualifications

assets

cash and other items with a monetary value

balance sheet

a financial statement that reports what an individual or a family owns and owes; also called a net worth statement

budget

a specific plan for spending income

budget variance

the difference between the amount budgeted and the actual amount received or spent

cash flow

the actual inflow and outflow of cash during a given time period

cash flow statement

a financial statement that summarizes cash receipts and payments for a time period

current liabilities

debts that must be paid within a short time, usually less than a year

deficit

the amount by which actual spending exceeds planned spending

discretionary income

money left over after paying for housing, food, and other necessities

income

inflows of cash to an individual or a household

insolvency

the inability to pay debts when they are due because liabilities far exceed the value of assets

liabilities

amounts owed to others

liquid assets

cash and items of value that can easily be converted to cash

long-term liabilities

debts that are not required to be paid in full until more than a year from now

money management

day-to-day financial activities necessary to manage personal economic resources while working toward long-term financial security

net worth

the difference between total assets and total liabilities

safe deposit box

a private storage area at a financial institution with maximum security for valuables

surplus

the amount by which actual spending is less than planned spending

take-home pay

earnings after deductions for taxes and other items; also called net pay

adjusted gross income

gross income reduced by certain adjustments, such as contributions to an individual retirement account (IRA) and alimony payments

average tax rate

total tax due divided by taxable income

capital gains

profits from the sale of a capital asset such as stocks, bonds, or real estate

earned income

money received for personal effort, such as wages, salary, commission, fees, tips, or bonuses

estate tax

a tax imposed on the value of a person’s property at the time of his or her death

excise tax

a tax imposed on specific goods and services, such as gasoline, cigarettes, alcoholic beverages, tires, and air travel

exclusion

an amount not included in gross income

exemption

a deduction from adjusted gross income for yourself, your spouse, and qualified dependents that is no longer allowed.

inheritance tax

a tax levied on the value of property bequeathed by a deceased person

investment income

money received in the form of dividends, interest, or rent from investments. also called portfolio income.

itemized deductions

expenses that can be deducted from adjusted gross income, such as medical expenses, real estate property taxes, home mortgage interest, charitable contributions, casualty losses, and certain work-related expenses

marginal tax rate

the rate used to calculate tax on the last (and next) dollar of taxable income

passive income

income resulting from business activities in which you do not actively participate

standard deduction

a set amount on which no taxes are paid

taxable income

the net amount of income, after allowable deductions, on which income tax is computed

tax audit

a detailed examination of your tax return by the IRS

tax avoidance

the use of legitimate methods to reduce one’s taxes.

tax credit

an amount subtracted directly from the amount of taxes owed.

tax deduction

an amount subtracted from adjusted gross income to arrive at taxable income

tax-deferred income

income that will be taxed at a later date

tax evasion

the use of illegal actions to reduce one’s taxes

tax-exempt income

income that is not subject to tax

tax shelter

an investment that provides immediate tax benefits and a reasonable expectation of a future financial return

annual percentage yield

the percentage rate expressing the total amount of interest that would be received on a $100 deposit based on the annual rate and frequency of compounding for a 365-day period

asset management account

an all-in-one account that includes savings, checking, borrowing, investing, and other financial services for a single fee; also called a cash management account

certificate of deposit

a savings plan requiring that a certain amount be left on deposit for a stated time period to earn a specified interest rate

commercial bank

a financial institution that offers a full range of financial services to individuals, businesses, and government agencies

compounding

a process that calculates interest based on previously earned interest

credit union

a user-owned, nonprofit, cooperative financial institution that is organized for the benefit of its members

debit card

a plastic access card used for digital banking transactions and purchases; also called a cash card

money market account

a savings account offered by banks and other financial institutions that requires a minimum balance and has earnings based on market interest rates

money market fund

a savings–investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments

rate of return

the percentage of increase in the value of savings as a result of interest earned; also called yield

trust

a legal agreement that provides for the management and control of assets by one party for the benefit of another

capacity

the borrower’s financial ability to meet credit obligations

capital

the borrower’s assets or net worth

character

the borrower’s attitude toward his or her credit obligations

closed-end credit

one-time loans that the borrower pays back in a specified period of time and in payments of equal amounts (mortgage loans, automobile loans).

collateral

a valuable asset that is pledged to ensure loan payments

conditions

the general economic conditions that can affect a borrower’s ability to repay a loan

consumer credit

the use of credit for personal needs (except a home mortgage)

consumer credit reporting reform act

places the burden of proof for accurate credit information on the credit reporting agency

credit

an arrangement to receive cash, goods, or services now and pay for them in the future

credit bureau

a reporting agency that assembles credit and other information about consumers

credit card accountability, responsibility, and disclosure act

places new restrictions on credit card lending and eliminates certain fees

debit card

card that electronically subtracts the amount of a purchase from the buyer’s account at the moment the purchase is made

equal credit opportunity act

bans discrimination in the extension of credit on the basis of race, color, age, gender, marital status, and other factors

fair credit billing act

sets procedures for promptly correcting billing mistakes, refusing to make credit card payments on defective goods, and promptly crediting payments

fair credit reporting act

regulates the use of credit reports, requires the deletion of obsolete information, and gives consumers access to their files and the right to have erroneous data corrected

home equity loan

a loan based on the current market value of a home less the amount still owed on the mortgage

interest

a periodic charge for the use of credit

line of credit

the dollar amount, which may or may not be borrowed, that a lender makes available to a borrower

open-end credit

a line of credit in which loans are made on a continuous basis and the borrower is billed periodically for at least partial payment (credit cards, overdraft protection)

revolving check credit

a prearranged loan from a bank for a specified amount; also called a bank line of credit

add-on interest method

a method of computing interest in which interest is calculated on the full amount of the original principal

adjusted balance method

the assessment of finance charges after payments made during the billing period have been subtracted