Personal Finance

Income Determinants

Factors that influence the level of income a person or household receives, including education, skills, experience, location, job type, and economic conditions.

Average Propensity to Consume (APC)

A measure of the proportion of income that a person or household spends on consumption rather than saving, calculated as consumption divided by income.

Goals of Financial Planning

To ensure long-term financial stability by managing resources effectively, including saving, investing, and planning for future needs like retirement, education, and emergencies.

Goal Setting / SMART Goals

A method for setting specific, measurable, achievable, relevant, and time-bound goals to enhance motivation and ensure clarity in financial planning.

50/30/20 Rule

A budgeting strategy where 50% of income is allocated to necessities, 30% to discretionary spending, and 20% to savings and debt repayment.

Utility-Happy Dollars

A concept from economics where money provides satisfaction or utility, and as you earn more, the additional satisfaction (or utility) diminishes with each additional dollar spent.

Compounding

The process where the value of an investment grows because earnings on an asset (interest, dividends) are reinvested to generate additional earnings.

Emergency Funds

Savings set aside to cover unexpected expenses or emergencies, typically 3-6 months' worth of living expenses.

Budgets

A plan for managing income and expenses over a specific period to achieve financial goals, balance spending, and avoid debt.

Balance Sheet

A financial statement that shows an individual's or organization's assets, liabilities, and net worth at a specific point in time.

Assets (Real, Liquid, Financial)

• Real Assets: Tangible items with intrinsic value like property or land.

• Liquid Assets: Cash or assets that can be quickly converted to cash without significant loss of value, like stocks or bonds.

• Financial Assets: Investments or financial instruments like stocks, bonds, or retirement accounts.

Liquidity

The ease with which an asset can be converted into cash without affecting its price.

Fair Market Value

The price an asset would sell for on the open market, based on its condition and location, assuming both buyer and seller have reasonable knowledge and are willing participants.

Liabilities

Financial obligations or debts that an individual or organization owes to others, such as loans, mortgages, or credit card balances.

Net Worth

The difference between an individual's or entity's total assets and total liabilities. It represents the value of what you own minus what you owe.

Solvency / Insolvency

• Solvency: The ability of an individual or organization to meet long-term financial obligations.

• Insolvency: When liabilities exceed assets, making it impossible to meet financial obligations.

Income Statement

A financial document that summarizes an individual's or organization's revenues, expenses, and profits/losses over a specified period.

Surplus / Deficit

• Surplus: When income exceeds expenses.

• Deficit: When expenses exceed income.

Progressive Tax Rates

A tax system in which the tax rate increases as income increases, meaning those with higher incomes pay a larger percentage of their income in taxes.

Marginal Tax Rates

The rate of tax applied to the last dollar of income earned, which may differ from the average tax rate.

Estimated Taxes (1040 ES)

Quarterly tax payments made by individuals who are self-employed or have significant income not subject to withholding. These payments are made using IRS Form 1040-ES.

Filing Status

The classification used by the IRS to determine tax rates and deductions based on an individual’s marital status and family situation. Common statuses include Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er).

Withholding (W-4)

The process by which an employer deducts a portion of an employee’s paycheck for federal, state, and local taxes based on information provided by the employee on Form W-4.

Gross Income

The total income earned by an individual or business before any deductions, taxes, or other expenses.

Included / Excluded from Gross Income

• Included: Wages, salaries, tips, rental income, investment earnings, etc.

• Excluded: Certain gifts, inheritance, or some employee benefits (e.g., employer-provided health insurance).

Capital Gains

Profits from the sale of assets or investments such as stocks, bonds, or real estate. Taxed differently depending on whether the gain is short-term (less than a year) or long-term (more than a year).

Adjustments to Income

Deductions allowed by the IRS to reduce gross income, such as contributions to retirement accounts or student loan interest.

Standard Deduction

A fixed dollar amount that reduces the income on which you are taxed, based on your filing status.

Itemized Deductions (Schedule A)

Deductions for specific expenses, such as mortgage interest, medical expenses, or charitable donations, that exceed the standard deduction.

Taxable Income

The amount of income that is subject to taxation after all deductions and exemptions have been applied.

Tax Credits

Amounts that directly reduce the amount of taxes owed, such as the Child Tax Credit or Earned Income Tax Credit (EITC).

Amending Taxes (1040X)

A process to correct mistakes on a previously filed tax return by submitting IRS Form 1040X.

Tax Filing Methods/Software

The ways to file taxes, including traditional paper filing, online IRS e-file, or using tax preparation software such as TurboTax or H&R Block.

Audits

An official examination of a taxpayer's financial records by the IRS or state tax authority to ensure accurate reporting of income and taxes.

Truth in Savings Act

A federal law that requires banks to provide clear, concise, and accurate information about deposit account terms, including interest rates and fees.

Money Market Deposit Account (MMDA)

A type of savings account offered by banks and credit unions that typically offers higher interest rates in exchange for higher minimum balances and/or limited withdrawals.

Money Market Mutual Fund

A type of investment fund that invests in short-term, low-risk securities, offering a higher return than a traditional savings account but with some market risk.

Credit Unions

Non-profit financial cooperatives that offer similar services as banks, including savings and loan products, but often with better interest rates and lower fees.

Compounding

The process where interest on an investment is calculated not only on the initial principal but also on any accumulated interest from previous periods.

Effective Rate of Interest (APY)

The annual percentage yield (APY) reflects the real rate of return, taking into account the effect of compounding over one year.

Nominal/Stated Rate (APR)

The annual percentage rate (APR) is the interest rate on a loan or investment expressed as a yearly cost to the borrower or return to the investor, not accounting for compounding.

Certificate of Deposit (CD)

A time deposit offered by banks with a fixed interest rate and maturity date. Early withdrawal typically incurs penalties.

Overdrafts

A situation where withdrawals from a bank account exceed the available balance, potentially resulting in fees or interest charges.

Holds on Bank Accounts

Temporary restrictions placed on a portion of funds in an account, typically due to checks, deposits, or credit card transactions that are being processed.

Cashier's Checks

A check issued by a bank, guaranteeing payment from the bank's own funds rather than from an individual's account.

FDIC Insurance

Insurance provided by the Federal Deposit Insurance Corporation to protect depositors in case a bank fails, covering up to $250,000 per depositor per bank.

Stop Payment

An instruction given to a bank to prevent a check from being processed or cashed.

Good and Bad Uses of Credit

• Good Uses: Using credit to finance assets that appreciate over time (e.g., home, education).

• Bad Uses: Using credit to purchase depreciating items or for unnecessary consumer spending.

5 C’s of Credit

Factors lenders evaluate when assessing a borrower's creditworthiness:

1. Character: The borrower's reputation and reliability.

2. Capacity: The borrower's ability to repay the loan.

3. Capital: The borrower's net worth or assets.

4. Collateral: Property or assets pledged to secure the loan.

5. Conditions: Economic or market conditions affecting the borrower.

Debt Safety Ratio

A measure used to assess how much of your income is going toward debt repayment, typically recommended to be no more than 36% of gross income.

Secured Credit Cards

Credit cards backed by a cash deposit made by the cardholder, typically used to build or rebuild credit.

Credit Bureau

Organizations that collect and maintain consumer credit information and provide credit reports to lenders (e.g., Experian, Equifax, TransUnion).

Credit Freeze

A security measure that prevents a credit bureau from releasing your credit report to potential lenders, making it harder for identity thieves to open accounts in your name.

Credit Scoring

A numerical representation of an individual’s creditworthiness, typically calculated by scoring models like FICO, based on credit history and other factors.

Minimum Monthly Payments

The smallest

amount a borrower must pay each month to remain in good standing with a lender, typically on credit card debt.

Fees on Credit Cards

Charges that can apply to credit cards, such as annual fees, late payment fees, foreign transaction fees, and cash advance fees.

Truth in Lending Act

A federal law requiring lenders to disclose the terms and costs of loans and credit, including the APR, total finance charges, and payment schedule.

Fair Debt Collection Practices Act (FDCPA)

A law that regulates how debt collectors can interact with consumers, prohibiting harassment and other unfair practices.

The Card Act of 2009

A law that protects consumers from unfair credit card practices, such as excessive fees, interest rate hikes, and complicated terms.

Fair Credit Reporting Act (FCRA)

A law that promotes fairness, accuracy, and privacy of consumer information in the credit reporting process.

Equal Credit Opportunity Act (ECOA)

A law that prohibits discrimination in credit lending based on race, color, religion, gender, marital status, age, or national origin.

Bankruptcy

A legal process for individuals or businesses that are unable to repay their outstanding debts, providing them with a fresh start by discharging certain debts or reorganizing financial obligations.