Key Concepts in Personal Finance and Economics

U.S. currency value

It's fiat money — people accept it as a medium of exchange.

Money order

A prepaid, secure form of payment purchased at stores or post offices.

Opportunity cost

The next best alternative given up when making a decision.

Who is hurt most by inflation?

Lenders and people on fixed incomes.

Who is hurt least by inflation?

Borrowers with large debts.

Pay Yourself First

Automatically saving a portion of income before spending.

CD (Certificate of Deposit)

A time deposit that earns interest; penalties for early withdrawal.

Financial institutions providing loans

Banks, credit unions, pawnshops, payday lenders, etc.

Institutions charging highest interest

Pawnshops, payday lenders, tax refund lenders, finance companies.

Credit union

A non-profit, member-owned financial institution.

Overdraft protection

A short-term loan to cover transactions when funds are low.

Compound interest

Interest calculated on both the principal and the accumulated interest.

Simple interest

Interest calculated only on the original principal.

Time Value of Money

Money today is worth more than the same amount in the future.

Most liquid financial products

Checking and savings accounts.

Least liquid financial products

CDs and money market accounts.

Rule of 72 formula

72 ÷ Interest Rate = Years to Double Investment.

Reconcile checking accounts

To detect bank errors or unrecorded transactions.

Student loan repayment start

Usually 6 months after graduation (grace period).

Tax anticipation loan

Short-term, high-interest loan based on expected tax refund.

Credit card cash advance

Cash borrowed from your credit card — high fees/interest.

Truth in Lending Act

Requires lenders to fully disclose loan terms and costs.

Effect of paying only minimum on credit card

Increases repayment time and total interest paid.

Credit score effect on interest rates

Lower score = higher interest rates.

Debt-to-credit ratio

Debt used ÷ total credit available.

Credit report

A record of credit use and repayment history.

3 credit bureaus

Equifax, Experian, TransUnion.

Credit card lost liability

Up to $50 if reported before fraud; $0 after.

Extending loan payments effect

You pay more interest over time.

Steps after identity theft

Cancel cards, check accounts, alert bureaus, possibly get a new SSN.

Predatory loans

High-interest loans targeting desperate borrowers.

Collateral

An asset pledged to secure a loan.

Pawnshop

Lends money in exchange for personal property as collateral.

Insurance

A financial product that transfers risk from an individual to a company.

Deductible

The out-of-pocket amount paid before insurance coverage kicks in.

Term life insurance

Life insurance for a specific time period.

Whole life insurance

Lifetime coverage that includes a savings component.

Co-pay

A fixed fee for medical services paid by the insured.

Renters insurance

Personal belongings and liability in a rental property.

Disability insurance

Replaces income if you're unable to work due to injury or illness.

Car insurance premiums

Good grades, safe driving, and good credit history.

Securities/equities

Financial assets like stocks and bonds.

Bull market

A market in which prices are rising.

Bear market

A market in which prices are falling.

Bonds

Loans to companies/government that pay interest.

Mutual funds

Pooled investments managed by professionals.

Diversification

Spreading investments to reduce risk.

Dividends

Profit distributions to shareholders.

Treasury Bills (T-bills)

Short-term, low-risk government securities.

Portfolio

A collection of financial investments.

Net worth calculation

Assets - Liabilities = Net Worth.

Assets

Home equity, savings, investments.

Liabilities

Mortgage, loans, credit card debt.

Pension

Retirement income provided by an employer.

401(k)

Employer-sponsored retirement plan with pre-tax contributions.

Traditional IRA

Tax-deductible contributions; taxed upon withdrawal.

Roth IRA

Contributions taxed now; tax-free withdrawals in retirement.

Roth 401(k)

Employer-sponsored retirement plan; taxed now, tax-free later.

Inflation

A general increase in prices, reducing purchasing power.

Deflation

A general decrease in prices; can slow the economy.

Depression

A long-term, severe economic downturn.

Graduated taxes

Taxes that increase as income increases.

SEC

Regulates securities markets and protects investors.

Federal Reserve (The Fed)

Central bank controlling U.S. money supply and interest rates.

FDIC

Insures bank deposits up to $250,000.

CFPB

Consumer Financial Protection Bureau — regulates financial products.

Budget

A plan for income and expenses. Helps manage money and avoid overspending.

Grace period (credit)

Time after a purchase before interest is charged on a credit card.

Garnishment

Court-ordered deduction from wages to repay debt.

W-2 form

Sent by employers to show income earned and taxes withheld.

W-4 form

Tells employer how much tax to withhold from paycheck.

1040 form

The IRS form used to file income taxes.

Direct deposit

Electronic deposit of a paycheck into a bank account.

Bounced check

A check that can't be processed due to insufficient funds.

Phishing

A fraudulent attempt to obtain sensitive information.

Scam

steal personal information via fake emails or websites.

Secured credit card

Credit card backed by a cash deposit; helps build credit.

Unsecured loan

A loan not backed by collateral.

Variable interest rate

Interest rate that changes with market conditions.

Fixed interest rate

Interest rate that stays the same over the life of the loan.

Escrow account

Holds funds for property taxes/insurance as part of a mortgage.

Depreciation

A decrease in the value of an asset over time.

Appreciation

An increase in the value of an asset over time.

Refinance

Replacing a loan with a new one for better terms.

Balloon payment

A large payment due at the end of a loan.

Lien

Legal claim on property until a debt is repaid.

Net income

Income after taxes and deductions (take-home pay).

Gross income

Total income before taxes and deductions.

FICO score

A credit score used to evaluate credit risk (300-850).

Identity theft

Stealing someone's personal info to commit fraud.

FAFSA

Free Application for Federal Student Aid.

Depreciation (tax)

A deduction that recovers the cost of an asset over time.

Bankruptcy

a legal process that provides individuals with financial relief when they can no longer repay their debts

Lease

Contract to rent property — no ownership.

Inflation risk

Risk that inflation will erode purchasing power.

Liquidity risk

Risk that you can't access funds quickly when needed.

Capital gain

Profit from selling an asset for more than its purchase price.

Check register

A record of all checking account transactions.

APR

cost of borrowing money.

APY

Annual Percentage Yield — total interest earned, including compounding.