Economics Unit 6 (Chapter 13) #1

Inflation Risk

Occurs when prices increase over time, reducing purchasing power

Business Risk

The possibility that a company in which you invest will fail

Interest Rate Risk

The chance that interest rates will increase, reducing investment values

Liquidity Risk

Occurs when you cannot sell assets due to weak market conditions

Subjective Risk

Personally perceived risk, varies by individual

Objective Risk

Can be measured using probabilities

Savings

Money saved for emergencies, immediate needs, and short-term goals

Investments

Assets you purchase to reach long-term goals

Liquidity

How quickly you can convert an asset into cash

Real Rate of Return

Accounts for inflation’s effect on investment returns

*Higher Returns

Typically involve greater risk (positive correlation)

Emergency Fund

Should be liquid and easily accessible

Emergency Fund Ratio =

Shows if you have enough cash to survive an unexpected emergency

• Calculation: Monetary Assets / Monthly Living Expenses = Months your money will last

Recommended Emergency Fund Size

Ranges from 3-6 months of expenses

• Risk tolerance affects recommended emergency fund size (lower tolerance = larger fund)

Monthly Living Expenses

The minimum cash needed each month to pay for only your survival needs (all expenses - not needed expenses = Total cost of basic necessities)

Monetary Assets

Include cash, saving, and checking accounts (are already cash or quick conversion to cash)

Pure Risk

Results only in economic losses (no potential gain)

Median Job Search Duration

Approximately 5 months

Opportunity Cost

The loss of a benefit that you would have received by choosing another option

Visualization Techniques

Can help make future goals more tangible

Savings Account

Offers high liquidity, low returns, and FDIC/NCUSIF insurance

Money Market Savings Account

Combines benefits of savings and checking accounts

Certificate of Deposit (CD)

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