personal finance midterm

  • 401(k) is a workplace retirement plan that has a limit of $23,500

  • Rule of 72 

    • Used to calculate either the time needed to double your money or the interest rate needed to double your money 

    • 8% rate of return → 72/8% = 9 years 

  • Negative interest rates take your money away (swiss and japan briefly did this) 

  • 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) 

  • CPI 

    • Consumer price index 

    • Comparison across different years of the cost of a list of goods 

    • Shows the purchasing power of a dollar in different time periods

  • Why is deflation not good? 

    • When people think prices are going down, they wait to buy stuff so they can reduce even more. When people do that, workers get laid off 

  • 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 to help save money 

    • 401(k) 

    • High yield savings account 

    • Roth ira 

    • Also try raising saving 1% each month 

  • What are the only three things you should finance 

    • Education 

    • Home 

    • Car 

  • What is an interchange fee (1.8%) 

    • When you eat at a restaurant, the restaurant pays 2% to the credit card 

  • 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 are the three stools of a retirment stool 

    • Social security 

    • Employer pension 

    • Personal savings 

  • 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 for roth ira’s

    • 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

  • How does a target date fund differ from a total market index fund 

    • Target data funds follow a glide path, meaning they will get more conservative over time 

    • Total market index fund is all-equity all the time so it will remain 100% stock 

  • T/F All target date funds are inexpensive

    • False. Always check the fees. Ensure it says index 

  • To get exposure to S&P 500, one could purchase an index fund or an ETF

  • Usually people have ⅔ US markets and ⅓ international markets