financial literacy - exam review

trade-offs

making a decision where you have to give up one thing to do another

scarcity

not enough to go around for everyone

wants

something desirable

needs

necessary for survival

entrepreneur

a person who owns their own business and take a risk

importance of competition

more products, prices go down, quality improves

opportunity cost

value you to place on your next alternative; best alternative that’s given up when a decision is made

factors of production

things you need to create something = land, labor (paying people to do things), and capital (physical = machines performing tasks and human = skills workers bring to a job)

profit incentive

motivation for businesses to increase profitability

rule of 72

72/annual rate of return = years it takes to double investment

compound interest (how to calculate it)

amount = PCI (principal) + (rate/# of times)^n times in years*rate

ex-dividend

to receive a dividend, you must own a stock before the ex-dividend date. any new buyer will not receive the upcoming dividend. the stockholder is entitled to a dividend

investment analysis

evaluating investment opportunities to determine the profitability and risks. things to look at when evaluating investments: does the chart move up and to the right in the long term, P/E ratio, growing EPS, does the stock issue a dividend, is the company a leader in its industry, does the company have a competitive advantage

volume

how many shares have been bought and sold in a period of time

diversification

spreading out one’s investments among many different sectors of investment to reduce risk. not “putting all your eggs in one basket” to ensure that if something goes wrong, you will have other investments to keep you stable

bonds

buying a company or government debt. on a certain date in the future, you’ll get money back + interest

high risk/high reward

lottery/gambling, collectibles/antiques, cryptocurrency

moderate risk/moderate reward

real estate, stocks, mutual funds

low risk/low reward

liberty bonds, certificates of deposits (CDs), collections of businesses

certifications of deposits (CDs)

a savings account where you deposit a fixed amount of money for a set period of time in exchange for a fixed interest rate. taking out the money before the deadline usually results in a withdrawal penalty

mutual funds

collection of stocks that when you buy into the fund, you end up directly owning

volatility

how much price has changed from average in a year

importance of keeping a budget

keeping track of your money

health insurance premiums

amount you pay for a month for healthcare. the higher the premium, the less out of pocket expenses

renters insurance

covers personal property in a home that you rent

disability insurance

insurance that covers your income for time that you are physically or mentally unable to work. long term: permanent disability, will never be able to work. short term: covers limited time, 6 months to a year, temporary disabilities. ex: pregnancy

emergency fund

must be enough to cover 3-6 months worth of expenses, and only used in times of need

liability

covering any expenses when people sue you if they get hurt on your property

fixed expenses

expenses are expenses with a fixed, unchanging amount

liability, collision, comprehensive, personal injury protection, and uninsured/underinsured motorist coverage

what are the types of auto insurances?

liability

covers damage you cause to someone else

collision

covers damage on your property

comprehensive

covers damage out of your control

personal injury protection

will pay for your injuries/expenses

uninsured/underinsured motorist coverage

protects you

managing debt responsibly

borrowing only what you can afford to pay, making payments on time, avoiding unnecessary interest, and prioritizing high-interest debt to maintain financial health

mortgages

a loan used to buy a home

adjustable-rate mortgage

a home loan with an interest rate that can change periodically after an initial fixed-rate period

federal depository insurance corporation (fdic)

agency that insures deposits and protects savings, up to $250,000 per account

p2p payment features

the practice of transferring funds digitally between 2 individuals

interest

it is the cost of borrowing money. can also be money you get back for saving money with a bank

secured loan

a loan backed by an asset you pledge as collateral (ex: in order to get a loan to buy a house, you must put the house up as collateral)

credit scores

a 3-digit number that predicts your likelihood of repaying debt based on information in your credit report

annual percentage rate (apr)

covers interest rate and additional fees, gives a comprehensive view of a loan cost

defaulting on a loan consequence

failing to repay the loan as agreed, leading to severe financial consequences such as damaged credit, collateral damage, lawsuits, and lost eligibility for future aid

building a credit history

being added on to your parents credit card as an authorized user. establishes credit through parent credit

savings

money that you keep for emergency. gains interest the longer you do not touch it

education, buying a home, or car

what are some of the good reasons to take out a loan?

paying for unnecessary expenses like a vacation

what are some of the bad reasons to take out a loan?

secured credit card

financial tool used to establish a line of credit, low risk, and majority of the time helps people get a good credit score/credit history

subsidized loans

when government pays interest while you are in school

unsubsidized loans

you are responsible for that interest when you graduate from college

discretionary spending

allows government to spend money how they wish

borrowing for college

do not borrow more than you need. lots of people make the mistake of borrowing too much

earned income

the money you earn from your job

w-4 form

this form of tax declares withholdings on your income taxes. you receive it before your first paycheck or after a major change in income

progressive tax

the more you make the more you should pay in taxes. ex: income taxes

regressive tax

the more money you make, the less money you pay. this is a form of taxation

proportional tax

everyone pays the same percentage no matter the amount of income. ex: sales tax (same percent on every good you buy)

ability to pay principle

if you have the ability to pay, you should

benefits received principle

if you are receiving benefits, you should pay taxes. ex: mandeville people paying the toll for the causeway

net cost of college

the estimated amount a student and their family will pay for one year of college after grants and scholarships from the total cost of attendance