personal finance midterm

401(k)

A workplace retirement plan with a limit of $23,500.

Rule of 72

A formula used to calculate the time needed to double your money or the interest rate needed to double your money.

Negative interest rates

Interest rates that can take money away from your savings, briefly experienced in Switzerland and Japan.

Consumer Price Index (CPI)

A measurement that compares the cost of a list of goods over different years, showing the purchasing power of a dollar.

Deflation

A situation where prices are decreasing, leading consumers to delay purchases and causing layoffs.

Utilization (credit score)

Counts for 30% of your credit score; refers to the percentage of your available credit that you are using.

Roth IRA

An investment account for retirement money, allowing tax-free withdrawals at retirement age.

High yield savings account

A savings account that typically offers a higher interest rate than regular savings accounts, recommended for short-term funds.

Three stools of a retirement stool

Social Security, Employer Pension, and Personal Savings.

Target date fund

An investment fund that automatically adjusts its asset allocation as the target date approaches.

Insurance for high yield savings accounts

Should be FDIC insured for protection up to $250,000.

Three things to finance

Education, Home, and Car.

Interchange fee

A fee (typically around 1.8%) paid by the restaurant to the credit card company when customers pay with credit cards.

Payment history (credit score)

Counts for 35% of your credit score; reflects your track record of paying bills on time.

Ways to lower credit utilization

Ask for a higher credit limit, make payments before your statement closes, get another card, or use your debit card.

Long term funds

Investments such as Roth IRA, Roth 401(k), or aggressively invested portfolios.

What should be in a high yield savings account?

3-6 months of fixed expenses.

Max contribution limit for Roth IRA

$7,000, with tax-free withdrawals.

Three-step process for Roth IRAs

Open a Roth IRA, fund it, and select investments.

Total market index fund

An all-equity fund that remains invested in stocks regardless of market conditions.

Charitable deductions

Tax reductions given for charitable contributions made to qualified organizations.

Short term funds

Assets such as cash or high-yield savings accounts.

Average rate of return before 1946

5%, with fluctuations during WW2 and a peak of 15% in 1986.

history of average rates

• Before 1946, the average rate was 5%, dipped in WW2, increased to 15% in 1986 

  • Because when the country is young, a ten year bet was risky so you get more interest for taking that rate 

• Why is money today more valuable than money tmrw? 

• Inflation 

• You can invest it 

• Unforeseen circumstances (war or death) 

What deductions are taken from pay stubs normally? 

• 1.45% goes towards medicare funding

• 6.2% is social security

• Federal income tax 

• State income tax 

Accounts that help save money

• 401(k) 

• High yield savings account 

• Roth ira 

• Also try raising saving 1% each month 

5 components of credit score

• 35 - payment history 

• 30 - utilization 

  • Want to only use 10% of your credit card 

• 15 - age of account 

  • Average age of all your credit cards 

• 10 - mix of credit 

• 10 - recent inquiries 

Paying on time counts for 35% of your FICO score. How can you ensure you always pay on time?

• Enable autopay for the statement balance 

• enable paper statements

Fill in the blank: Always pay your ____ balance by the __ ___

• “Statement” … “due date”

Utilization counts for 30% of your credit score. What are some ways to lower your utilization?

• ask for a larger credit line 

• make payments before your statement closes 

• get another card 

• use your debit card

What are some short term funds, intermediate funds, and long term funds

• Short term 

  • Cash 

  • High yield savings 

• Intermediate 

  • Brokerage, moderate investments 

• Long term 

  • Roth ira, roth 401(k), aggressively invested

What should you look for in a high yield savings account and how much should it contain

• 3-6 months of fixed expenses 

• FDIC insurance

what is a roth ira

• An investment account for retirement money 

• Max amount you can put in this is $7000

• When you take money out, you don’t need to pay taxes 

• Shouldn’t touch this money until you’re 60 years

What is the 3 step process of roth iras

• Open a roth ira (need earned income) 

• Fund the roth ira by moving cash into the account 

• Select investments in your roth ira 

  • Target date funds 

  • Total market funds

T/F All target date funds are inexpensive

False. Always check the fees. Ensure it says index

How to get exposure to S&P 500

purchase an index fund or an ETF

Usually peple have ___ US market stocks/funds and ____ international markets

2/3 and 1/3

When deciding which S&P index fund to invest look at …

• annual expense ratio

• front end load

• longest horizon annualized return (should be high)

what is an expense ratio

• cost to operate this fund

• try to keep it under 0.25%

Which class shares are loaded?

class a

what is the best investment for most investors

• low cost index funds

what is an index fund

a mutual fund that tracks an index. try to buy and hold these

what is a mutual fund

• it pools your money with other investors to buy stocks, bonds, and other securities

what are open ended mutual funds

• can by bought and sold directly from mutual fund companies

• activeyl managed fund hires a portfolio mananger who picks stocks, bonds, and other securities. they try to beat the market index

• much lower fees, better diverified

• lower trading costs

• focus on diversification and asset allocation (mix of different classes on investments

exchange traded funds (ETFs)

• they have a diversification and low charge fee

• they have a cost called the spread which is the difference between the price at which you can buy and sell a security

• for big companies, spreads are small

Funds tracking S&P 500 index or US bond indices have ___ expense ratios, while funds that track small stocks or foreign stocks charge ___ expense ratios

low, high

why is it hard to beat the market

money managers have to beat the spread so they need to find underpriced companies

what is the disposition effect?

tendency to sell assets that have increased in value, while holding onto assets that have decreased in value