Unit 4 Study Vocab - EPF
Budgeting
1. Fixed Expense
Definition: A cost that remains the same each billing period (e.g., monthly rent, car payment).
Why It Matters: Helps you plan your budget because the amount is predictable.
Example: Monthly rent of $800 that does not change over a lease term.
2. Gross Income
Definition: Total income earned before any deductions (taxes, insurance, etc.) are taken out.
Why It Matters: Forms the basis for tax calculations and helps determine eligibility for loans.
Example: An annual salary of $50,000 before taxes.
3. 50/30/20 Rule
Definition: A budgeting guideline where 50% of income goes to needs, 30% to wants, and 20% to savings/debt.
Why It Matters: Provides a simple structure for allocating income effectively.
Example: If you earn $2,000/month after taxes, you’d spend $1,000 on needs, $600 on wants, and $400 on savings or debt payments.
4. Needs vs. Wants
Definition: Distinguishing essential expenses (e.g., housing, utilities) from non-essential expenses (e.g., entertainment).
Why It Matters: Helps prioritize spending and avoid overspending on discretionary items.
Example: Rent (need) vs. dining out (want).
5. Lease (Apartment)
Definition: A contractual agreement to rent an apartment for a specified period and payment amount.
Why It Matters: Legally binds you to monthly rent payments and defines responsibilities (maintenance, utilities, etc.).
Example: Signing a 12-month lease at $900 per month.
6. Lease (Car)
Definition: A contract to use a vehicle for a set period in exchange for monthly payments, with mileage and wear limitations.
Why It Matters: Lower monthly payments compared to buying, but you do not build ownership equity.
Example: Leasing a new car for 36 months with a 12,000-mile annual limit.
Additional Budgeting Terms
Net Income
Definition: Income after all taxes and deductions (a.k.a. “take-home pay”).
Why It Matters: Reflects the actual amount you have available to spend or save.
Variable Expense
Definition: An expense that changes from month to month (e.g., groceries, utilities).
Why It Matters: Requires careful tracking to avoid overspending.
Credit
1. Minimum Payment
Definition: The smallest amount you must pay on a credit card balance each month to remain in good standing.
Why It Matters: Avoids late fees and damage to credit score, but carrying a balance can lead to high interest costs.
Example: $25 minimum payment on a $1,000 credit card balance.
2. Credit Limit
Definition: The maximum amount of credit a lender extends to a borrower on a credit card or line of credit.
Why It Matters: Exceeding your limit can lead to fees and credit score penalties.
Example: A $5,000 limit on your credit card.
3. APR (Annual Percentage Rate)
Definition: The yearly interest rate charged on borrowed money (credit cards, loans), inclusive of fees.
Why It Matters: Higher APR means higher cost of borrowing if you carry a balance.
Example: A credit card with a 20% APR will charge roughly 20% in interest per year on unpaid balances.
4. Introductory APR
Definition: A temporary, lower-than-usual interest rate offered to new customers for a set period.
Why It Matters: Can save money on interest in the short term; once the intro period ends, the APR increases.
Example: 0% APR for the first 12 months on a new credit card.
5. Credit Score
Definition: A numerical representation of your creditworthiness, based on your credit history (typically 300–850 range).
Why It Matters: Affects your ability to get loans, credit cards, and favorable interest rates.
Example: A score of 750 is considered good and helps secure lower interest rates.
Additional Credit Terms
Credit Utilization Ratio
Definition: The percentage of your available credit that you’re currently using.
Why It Matters: High utilization can lower your credit score; keeping it below 30% is generally recommended.
Debt-to-Income (DTI) Ratio
Definition: The percentage of your monthly income that goes toward debt payments.
Why It Matters: Lenders use this to gauge your ability to manage monthly payments and repay debts.
Insurance
1. Liability
Definition: Coverage that protects you from costs if you’re legally responsible for someone else’s injury or property damage.
Why It Matters: Required in many states for car insurance; protects personal assets from lawsuits.
Example: Auto liability insurance covers damage to another driver’s car if you cause an accident.
2. Co-Payment (Co-Pay)
Definition: A fixed fee you pay for a covered health care service, typically at the time of service.
Why It Matters: Helps share health care costs between you and your insurance.
Example: $20 co-pay for a doctor’s office visit.
3. Deductible
Definition: The amount you must pay out of pocket before your insurance coverage begins to pay.
Why It Matters: A higher deductible usually lowers your premium, but increases out-of-pocket costs.
Example: Paying the first $500 in car repairs after an accident before insurance covers the rest.
4. Co-Insurance
Definition: The percentage of costs you share with your insurance after you’ve met your deductible.
Why It Matters: Determines how much you pay vs. your insurer after the deductible.
Example: 80/20 plan where insurance covers 80% of costs, and you pay 20%.
5. Claim
Definition: A request to an insurance company for payment of covered services or losses.
Why It Matters: Initiates the process of receiving insurance benefits.
Example: Filing a claim for damages after a car accident.
6. Coverage Limit
Definition: The maximum amount an insurance policy will pay for a covered loss.
Why It Matters: You’re responsible for any costs above the coverage limit.
Example: A $200,000 coverage limit on a homeowner’s insurance policy.
7. Out-of-Pocket Maximum
Definition: The most you’ll pay during a policy period (usually a year) before your insurance covers 100% of costs.
Why It Matters: Protects against catastrophic health care expenses.
Example: If your out-of-pocket max is $6,000, after paying that amount, the insurer pays all further covered costs.
8. Medicare
Definition: A federal health insurance program primarily for people aged 65+ and certain younger individuals with disabilities.
Why It Matters: Provides coverage for hospital and medical expenses in retirement.
Example: Part A covers hospital stays, while Part B covers doctor visits.
9. Medicaid
Definition: A federal and state program that helps with medical costs for people with limited income and resources.
Why It Matters: Offers health coverage to eligible low-income individuals and families.
Example: May cover doctor visits, hospital stays, and long-term medical care.
Additional Insurance Terms
Premium
Definition: The amount you pay (monthly, quarterly, or annually) to maintain an insurance policy.
Why It Matters: A key factor in total insurance costs.
Beneficiary
Definition: The person or entity designated to receive benefits from an insurance policy or financial account (e.g., life insurance).
Why It Matters: Ensures the right person(s) receive benefits in case of a claim.
Taxes
1. W-2
Definition: A form employers send to employees and the IRS detailing annual wages and taxes withheld.
Why It Matters: Used to file your income tax return accurately.
Example: You’ll receive a W-2 if you’re a full- or part-time employee.
2. W-4
Definition: A form you complete for your employer indicating how much federal income tax to withhold from your paycheck.
Why It Matters: Determines whether you owe taxes or receive a refund at year’s end.
Example: Adjusting allowances/exemptions if you get married or have a child.
3. 1040
Definition: The standard IRS form for individuals to file annual income tax returns.
Why It Matters: Main form for reporting income, claiming deductions/credits, and calculating tax liability.
Example: You’ll file Form 1040 by April 15 (or the official tax deadline) each year.
4. 1099
Definition: A form reporting income not earned as an employee (e.g., freelance, contract, or investment income).
Why It Matters: Must be included in your tax return to avoid underreporting income.
Example: Receiving a 1099-NEC for freelance design work.
5. I-9
Definition: A form used to verify an employee’s identity and authorization to work in the United States.
Why It Matters: Employers must keep an I-9 on file to comply with immigration law.
Example: Providing a driver’s license and Social Security card to prove eligibility to work.
6. Deductions/Contributions
Definition: Deductions reduce taxable income; contributions often refer to amounts put into retirement or other accounts (which may be tax-deductible).
Why It Matters: Can lower your tax liability and help you save for retirement.
Example: Contributing to a 401(k) or IRA can reduce your taxable income.
7. FICA (Social Security)
Definition: Federal Insurance Contributions Act tax withheld from paychecks for Social Security and Medicare.
Why It Matters: Funds government programs that provide retirement and disability benefits.
Example: A percentage of every paycheck is taken for Social Security and Medicare.
Additional Tax Terms
Tax Bracket
Definition: Income ranges taxed at different rates; the higher your income, the higher the rate on that portion.
Why It Matters: Understanding brackets helps you plan for how additional income is taxed.
Tax Credit vs. Tax Deduction
Definition: A credit directly reduces taxes owed; a deduction reduces taxable income.
Why It Matters: Credits typically provide a bigger benefit than deductions of the same dollar amount.
Other Relevant Personal Finance Terms
Savings Account
Definition: A bank account that earns interest and is used for storing money for short-term or emergency needs.
Why It Matters: An accessible place to keep emergency funds or short-term savings.
Interest Rate
Definition: The cost of borrowing money or the return for saving, expressed as a percentage of the principal.
Why It Matters: Impacts the total amount paid on loans and earned on savings.
Compound Interest
Definition: Interest calculated on the initial principal and on accumulated interest from previous periods.
Why It Matters: Allows investments or debts to grow faster over time.
401(k) / 403(b)
Definition: Employer-sponsored retirement plans allowing employees to save pre-tax money (401(k) for private sector, 403(b) for nonprofits).
Why It Matters: Often includes employer matching contributions and tax benefits.
IRA (Traditional/Roth)
Definition: Individual retirement accounts with different tax treatments (Traditional: pre-tax contributions; Roth: after-tax contributions).
Why It Matters: Key tools for long-term retirement savings.
Mortgage
Definition: A loan used to purchase property, with the property itself as collateral.
Why It Matters: Usually repaid over 15–30 years; understanding interest and terms is crucial.