W!SE Financial Literacy Certification Test Review

A set of vocabulary flashcards designed to help students learn key financial literacy concepts for the W!SE Financial Literacy Certification Test.

Sources of income

The various means through which an individual can earn money, such as wages, rentals, interest, capital, profits, investments, and entrepreneurship.

Liquidity

The degree to which an asset can be quickly bought or sold in the market without affecting its price.

Exemption

An allowance used to reduce the amount of taxable income.

Opportunity cost

The benefit that is missed or given up when choosing one alternative over another.

Discretionary income

Income that is not allocated for essential expenses, such as food or housing.

Money orders

A payment order for a pre-specified amount of money, often used as a safer alternative to cash or checks.

Credit union

A member-owned financial cooperative that provides lower interest rates on loans compared to traditional banks.

Overdraft protection

A banking feature that allows transactions to be covered even when there are insufficient funds in an account. (a loan that is paid back)

Compound interest

Interest calculated on the initial principal and also on the accumulated interest from previous periods.

Rule of 72

A method for estimating how long an investment will take to double, by dividing # by the annual rate of return.

Truth in Lending Act

Legislation requiring lenders to disclose the true costs of credit transactions to borrowers.

Debt to Credit Ratio

The ratio that compares the amount of debt a person carries to their available credit.

Predatory loans

Loans granted under terms that are unfair or abusive, often targeting borrowers with poor credit.

Insurance deductible

The amount the insured pays out-of-pocket before the insurance company covers the remaining costs.

Term life insurance

Life insurance policy that provides coverage for a specific period, paying a benefit only if the insured dies during that term.

Whole life insurance

A permanent life insurance policy that remains in effect as long as premiums are paid, also serving as an investment.

Mutual Funds

Investment vehicles formed by pooling money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities.

Inflation

The general increase in prices and fall in the purchasing value of money.

Depression

An extended period of economic decline characterized by reduced production and consumption, typically accompanied by high unemployment.

Federal Reserve

The central banking system of the United States, which regulates monetary policy.

Securities and Exchange Commission (SEC)

A governmental agency that regulates the securities markets and protects investors.

Consumer Financial Protection Bureau (CFPB)

An independent federal agency responsible for overseeing consumer protection in the financial sector.

Role of Treasury Dept

collects taxes, prints money, issues treasury bonds 

Pay Yourself First

automatically route money from paycheck to savings (before paying bills)

Why does the U.S. currency have value even though it is not tied to a commodity

there is a belief that money has value and therefore is accepted 

Who is hurt the most and the least with inflation

most hurt are lenders (banks) and people living on a fixed income. Least hurt are those who owe large amounts of money.

Certificate Deposit

it is a time deposit offered at financial institutions – penalty if cashed before maturity. 

Institutions that give loans

banks, credit unions, pawnshops, finance companies, payday lenders, tax preparers  

Which institution(s) charge the highest interest rates on loans:

pawnshops, payday lenders, tax refund lenders, finance companies 

Time value of money

is calculated by value of money with given amount of interest earned over a period of time; the longer the time you keep your money invested, the more interest you will earn. It refers to the principle that a sum of money has greater value now than it will in the future due to its potential earning capacity. This principle underpins the importance of investing and saving.

savings and checking accounts & CERTIFICATE OF DEPOSIT and MONEY MARKET

__________ and ___________ are most liquid (can be transferred easily), __________ and _________ accounts are less liquid (cannot be transferred easily)

Reconciling a Checking account

to view what activity has occurred in your account. Keep current with your check register to know what your current balance is at all times. When you receive your bank statement, you reconcile your check register against the statement to be sure no errors have been made and to record any bank fees and/or interest earned in your register. 

Repayment of student loans:

6 month grace period (after leaving school) before you start making payments.

Tax anticipation loans/refund anticipation loan (RAL)

A ______________ is a short-term consumer loan secured by a taxpayer’s expected tax refund 

Credit Card Cash Advances

provided by credit card companies – withdraw cash with credit card – you pay a higher interest rate 

Truth in Lending Act (Consumer Credit Protection Act) 1968

legislation enacted requiring money lenders to be explicit about the true costs of credit transactions. also outlaws the use of threatened or actual violence to collect debts

Consequence of paying the minimum payment due on a credit card bill or paying a bill late:

impacts credit score if paid late. If you are only paying minimum payment each month you will take a much longer time to pay off balance – you will greatly increasing the total amount paid back due to APR charged per month. This can lead to increased debt due to interest accumulation and potentially higher payments over time.

How does the degree of risk influence the interest rate charged for credit:

if you have a low credit score, it demonstrates you are a poor credit risk, and you will pay a much higher interest rate on loans to compensate lenders for the increased likelihood of default. Conversely, a higher credit score indicates a lower risk, resulting in lower interest rates.

Debt to Credit Ratio

the amount of available credit you have relative to the amount of debt you carry.    

Credit Reports:

is a number representing the creditworthiness of a person, and the likelihood that person will pay his or her debts. Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers.

Three leading credit reporting agencies

Equifax, TransUnion, Experian

Consequence of a lost or stolen credit card:

if unauthorized charges are made with your credit card before you report it lost or stolen, the maximum amount you can be liable for is $50. If the charges are made after you report the card lost or stolen, you have no liability. If you don’t report card after it is lost or stolen, you have full liability to pay back charges. 

The length of debt repayment and impact on cost:

the longer you take to pay back a loan, the more you will pay in interest and principal overall. 

What to do if a person thinks he/she is a victim of identity theft:

contact banks and cancel all credit card/debit cards, review bank accounts to see if there are recent charges/purchases on accounts, contact all 3 credit bureaus to report identity stolen, apply for new social security card 

Collateral (secured vs. unsecured loans)

_____________ loans use an item (house, car, appliances, etc…) to guarantee the loan. An ____________ loan is a personal loan – secured only by someone’s good credit score. 

Pawnshop

the loan is collateralized/secured by the item (musical instruments, jewelry, etc…) you bring in order to get a loan from the ________. You pay interest on the loan and a type of fee. 

 

How insurance works—Transfer of Risk 

Insurance policies transfers all or some of the financial impact of unexpected events. Insurance exists to help individuals recover from the financial consequences of these events by pooling the resources of a large group to pay for the losses of a small group. 

Insurance deductible:

the amount that the insured has agreed to pay before the insurer is obliged to pay anything on a covered claim. The higher the ________ the lower the monthly premium (payment) – the lower the ________ the higher the monthly premium (payment). 

Collision coverage

_________ on your car insurance policy that will repair damages to your vehicle when something collides with your vehicle. Consumers terminate/cancel the policy when the value of the car is less than the replacement pay out by insurance company.

Term life insurance:

an ___________ that will pay a lump-sum benefit to your family or another beneficiary of your choice, if you die while the policy is in effect. Is not a permanent life insurance policy. 

Whole life insurance:

a policy that is also a way to invest money. It is referred to as a permanent life insurance policy because, as long as you pay your premiums, the policy is yours for life, providing your loved ones with a guaranteed benefit upon your death. 

Health insurance

insurance against the risk of incurring medical expenses among individuals. By estimating the overall risk of health care and health system expenses, among a targeted group, an insurer can develop monthly premium to ensure that money is available to pay for the health care benefits specified in the insurance agreement.

Renters Insurance:

is insurance you buy to protect you furniture, belongings, etc. in case of a burglary, fire, or some natural disaster. Also covers liability/injury to others.

Disability Insurance:

cover your bills while you are disabled or cannot work, with an injury or illness for a certain amount of time. Doesn’t replace income.

How to reduce the cost of auto insurance:

get good grades, no accidents, good credit, and drive a certain type of car. 

Securities/equities:

investments like stocks that generate gains or losses through price changes and dividends. High risk can lead to high returns. They are traded in primary markets (where stocks are first sold via underwriting) and secondary markets (e.g., NYSE, NASDAQ, where investors trade existing stocks). Example: Twitter’s IPO first sold shares to institutional investors (primary market) before trading publicly (secondary market).

 bull market (remember u in bull --- market goes UP)

a financial market that experiences an extended period of growth above the historical averages. 

bear market:

financial markets that are experiencing a prolonged period of contraction or loss. 

Bonds–purpose; how they work; interest feature; tax free feature of municipal bonds

a financial instrument that gives its holder/owner the right to collect interest payments from the company or organization that has borrowed money. A __________ is a _______ that is issued by a city or some type of governmental agency. Government bodies usually issue tax-free ________ bonds to fund large capital expenses and improvements, like parks, downtown restorations, schools or airports. 

Investment portfolio:

A _________ is a diversified (hopefully) set of investments held by an individual or institutional investor 

Diversification:

is when an investor has different type of investments (stocks, bonds, mutual funds, Treasury Bills, etc..) it reduces risk of investing – not putting “all your eggs in one basket” 

Dividends:

the earnings given to the people who are shareholders of the company stock. 

Treasury Bills:

short-term loans sold to operate the U.S. government. Amounts invested range from $1,000 to $5 million per investor. (Also known as T-Bills.) 

 

examples of assets

(equity in a house, investments,savings, etc..)

net worth

(total assets – total liability = _______) 

liabilities

(mortgage, auto loan, student loans, credit cards, etc…) 

Pensions

A ________ plan is a retirement plan which is sponsored by an employer. 

401k plans:

an account that an employee uses to save for retirement. This account allows the worker to defer current income taxes on the saved money and interest earnings until he or she withdraws the money. 

Traditional Individual Retirement Accounts (Traditional IRA)

An IRA is an individual retirement account. A ______ IRA is tax deductible, and you can contribute $5000 a year to it. You will pay taxes on the money when you withdraw it in retirement. 

Roth Individual Retirement Account (Roth IRA)

a type of IRA that does not give you a tax benefit for contributing like a traditional IRA does. Instead the money in the account grows tax free and can be withdrawn at retirement without paying any taxes. 

Who suffers in inflation?

creditors, people living on fixed income, and people trying to save.

Who benefits from inflation:

people who owe significant debt. 

Deflation:

is when the cost of consumer goods is actually declining. This may seem like a good thing, but if there is a prolonged period of deflation, companies will begin to suffer as will the overall economy. Consumers benefit from ______

Inflation

The general increase in goods and services

Depression:

a period of time in which the economy has reached the lowest point possible. Production and consumption decreases drastically, and unemployment rises. 

graduated income taxes

is considered a progressive tax. Progressive tax is a rate that increases as the amount of taxable income or funds go up. 

 

The SEC:

the ________. It is a board with five members. They regulate the offer of and sale of securities among the public (stock shares from corporations). 

Federal Reserve

the central banking system of the United States. The _____ uses monetary policies to regulate the money supply. 

Discount Rate

(the interest rate the Fed charges commercial banks for short-term overnight loans). By decreasing the _______, banks lend more, which increases the money supply. By increasing the __________, banks lend less, which decreases the money supply. 

Reserve Requirement Ratio

(percentage of deposits a bank is required to have in reserves-or "on hand"). By decreasing the ___________, banks lend more, which increases the money supply. By increasing the ____________, banks lend less in order to meet the requirement, thus the money supply decreases.  

Open market operations (MOST POPULAR POLICY TODAY)

This is when the Fed buys and sells treasury bonds. If the Federal Reserve buys treasury bonds, it "free-ups" the bonds a bank must have on hand, thus they are able to lend out more reserves and it increases the money supply. If the Feds sell treasury bonds, they decrease the money supply. 

FDIC (Federal Deposit Insurance Corporation):

insurance covers all deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

The Consumer Financial Protection Bureau (CFPB)

is an independent federal agency that holds primary responsibility for regulating consumer protection with regard to financial products and services in the United States. 

co-pay

A _____ is the amount of money you pay out-of-pocket for a covered medical service. _____ are typically a flat dollar amount for a doctor's office visit, prescriptions or lab tests. 

Securities

A broad term for any tradable financial asset. umbrella term for investments you can buy, sell, or trade.

equities

A type of security that represents ownership in a company.
Also known as stocks or shares.
Holders may receive dividends and have voting rights in some cases.

mandatory federal payroll deductions that are typically withheld from an employee’s paycheck?

Social Security, Medicare, and Federal income taxes. 

payday loan

A short term, high interest loan typically due on the borrower’s next payday. 

Total Compensation

the complete pay package an employee receives for their work — not just their salary

balanced budget

Total expenses + savings = total income