savings and investments

Savings, Investing, and Retirement Flashcards

1. What is the difference between saving and investing?

- Saving: Short-term, low risk, insured, includes savings accounts, checking accounts, and CDs.

- Investing: Long-term, higher risk, not insured, includes stocks, bonds, mutual funds.

2. How does inflation affect money?

- Inflation decreases purchasing power over time.

- Inflation is a rise in the cost of goods and services over time.

- Knowing the inflation rate helps you make better financial decisions.

3. What is the Time Value of Money?

- The relationship between time, money, and interest rate.

4. What is earned interest?

- Payment received for allowing a financial institution to use your money.

- The bank or corporation uses your deposited money to generate more money.

5. How do you calculate earned interest?

- Interest = Principal × Interest Rate × Time.

6. What is compound interest?

- Earning interest on previously earned interest.

- Compounding is said to be the “most powerful principle in personal finance.”

7. How does the Rule of 72 work?

- 72 ÷ Interest Rate = Years to Double Money.

- Example: If you invest $200 at 6% interest, it will take 12 years to double to $400.

8. What is the Financial Planning Pyramid?

- A tool to balance risk and reward in financial planning.

- The base includes safe, low-risk investments, while the top consists of higher-risk investments with higher return potential.

9. What are income investments?

- Savings accounts, CDs, bonds, money market accounts.

- Typically low risk and backed by the government.

10. What are growth investments?

- Stocks, real estate, collectibles, mutual funds.

- Higher potential return but increased risk.

11. Why is diversification important?

- Reduces risk by spreading investments across different assets.

- Ensures financial security by not depending on a single investment type.

12. What are the types of stock?

- Common: Voting rights, variable dividends.

- Preferred: Fixed dividends, no voting rights.

13. What are the major stock exchanges?

- NYSE: Largest, face-to-face trading, founded in the 1790s.

- NASDAQ: Electronic, tech-heavy, founded in 1971.

14. What are stock indexes?

- Dow Jones: 30 major companies, used to measure stock market activity.

- S&P 500: 500 large companies, a broader indicator of the stock market.

15. What is the Fortune 500?

- A ranking of the top 500 US companies by earnings.

16. What is the difference between a bull and bear market?

- Bull: Rising prices, investor optimism.

- Bear: Falling prices, investor pessimism.

17. Why save for retirement?

- Needed for financial security after employment ends.

- Social Security alone is not enough to cover expenses.

18. What are the three sources of retirement income?

- Social Security, Employer Plans, Personal Savings.

- Retirement should be approached like a three-legged stool.

19. What are retirement accounts?

- 401(k): Employer-sponsored, tax-deferred.

- 403(b): For non-profits.

- IRA: Individual savings account.

- Roth IRA: Tax-free withdrawals.

- Keogh & SEP Plans: Retirement savings for self-employed individuals.

20. What is Social Security?

- A government program providing retirement benefits.

- Benefits depend on contributions during working years.

21. What are military benefits?

- Pensions, tuition assistance, insurance, shopping privileges.

22. What is a reverse mortgage?

- A loan against home equity with monthly payments to the borrower.

- Loan must be repaid, usually through selling the home.

23. What is an annuity?

- A retirement income stream from an investment.

- Purchased through insurance companies.

24. What is estate planning?

- Preparing for asset distribution after death.

- Helps minimize taxes and ensure smooth transfer of assets.

25. What is a will?

- A legal document detailing asset distribution.

- The executor is responsible for carrying out the wishes of the deceased.

26. What are the advantages of credit?

- Builds history, convenient, useful in emergencies.

- Helps secure loans for big purchases like homes or businesses.

27. What are the disadvantages of credit?

- Debt, high-interest rates, risk of overspending.

- Missed payments can damage credit scores.

28. What are types of credit?

- Revolving: Credit cards, no set payoff date.

- Installment: Fixed payments, such as auto or mortgage loans.

- Cash Loan: Lump sum borrowing, repaid with interest.

- Service Credit: Bills paid after use (utilities, subscriptions).

29. What are the 5 C’s of credit?

- Capital: Money you already have.

- Capacity: Ability to repay the loan.

- Character: Credit history and past financial behavior.

- Collateral: Assets that secure a loan.

- Condition: Overall economic factors affecting repayment.

30. What is a credit score?

- A three-digit number assessing creditworthiness (300-850).

- Higher scores mean lower borrowing risk.

31. What are the major credit bureaus?

- Equifax, Experian, TransUnion.

32. What are key laws protecting borrowers?

- Equal Credit Opportunity Act: Prevents discrimination.

- Truth in Lending Act: Requires transparency in lending.

- Fair Credit Reporting Act: Regulates credit information collection.

- Fair Debt Collection Practices Act: Limits actions of debt collectors.

33. What are types of bankruptcy?

- Chapter 7: Liquidation, fast process.

- Chapter 13: Repayment plan over 3-5 years.

- Chapter 11: Business restructuring.

34. How long does bankruptcy affect credit?

- Stays on credit report for 10 years.

- Makes obtaining new credit difficult.

35. What are types of student loans?

- Federal (Stafford, Perkins), Parent (PLUS), Private.

- Federal loans typically have lower interest rates and more repayment options.

36. What are student loan repayment plans?

- Standard (10 years), Extended (12-30 years), Graduated (payments increase over time), Income-Based (tied to earnings).

- Some loans allow loan forgiveness after a set number of years in certain careers.

37. What is the impact of debt on financial health?

- High-interest debt can reduce financial flexibility.

- Managing debt responsibly leads to better financial stability and credit scores.

38. What is the importance of financial planning?

- Helps achieve financial goals and security.

- Reduces financial stress and prepares for unexpected expenses.