Personal Finance Ch. 1-9

Personal Financial Plan specifies your financial goals & describes the spending, financing, & investing plans that are intended to achieve these goals.
Opportunity Cost what you give up as a result of a decision
Budgeting set goals by estimating income & expenses on a monthly basis to determine how much to save & spend.
Assets what you own
Liabilities what you owe (debt)
Net Worth value of what you own (assets) minus the value of what you owe (liabilities)
Insurance Planning determining the types & amount of insurance needed to protect your assets
Estate Planning determining how your wealth will be distributed before/upon your death
Good Goals define an amount & a time period
Long Term Goal 5+ years
Short-Term Goal within the next year
Financial Plans should be… monitored and updated annually
Personal Cash Flow Statement measures a person’s cash inflows & cash outflows
Net Cash Flow cash inflows minus cash outflows
Cash Inflow Income
Cash Outflows Expenses
Budgeting Tips Don’t over or under estimate cash flows Compare actual w/ budgeted cash flows for accuracy
Liquidity Access to funds to cover any short term cash deficiencies
Liquid Assets Cash Checking & Saving Accts Home Car Furniture Bonds StocksMutual Funds Real Estate
Mutual Funds Min. Investment: $500-$3000Value can be found in periodicals (Wall St. Journal)Managed by portfolio managers
Short-Term Loan paid off within the near future (within one year)
Long-Term Loan paid off over a period beyond one year
Best representation of Financial Position net worth which is shown on a balance sheet
Changes in Cash Flow & Net Worth Spend less & Save more
Higher Interest Rates mean: Higher accumulation of money
Lower Interest Rates mean: lower accumulation of money
Compounding Accumulation of interest over time
Time value of money based on earning interest
Dollar received today… …is worth more than a dollar received tomorrow
All financial decisions involve opportunity costs
Marginal Tax Rate tax rate imposed on any additional income earned
Progressive Tax any tax in which the rate increases as the amount subject to taxation increases
Gross Income All reportable income from any source
Adjustable Gross Income calculated by adjusting your gross income for contributions to IRAs, alimony payments, interest paid on loans, & other circumstances
Taxable income equal to AGI minus deductions & exemptions
Itemized Deductions specific expenses that can be deducted to reduce taxable incomes
Standard Deductions a fixed amount that can be deducted from the AGI to determine taxable income
Contribution to IRA for qualified individuals, this is an adjustment to gross income.
Long-Term Gain a gain on assets that were held for 12 months or more
Short-Term Gain a gain on assets that were held for less than 12 months.
Interest Income interest earned from investments in various types of: savings accounts, debt securities, or providing loans to others.
FICA (employed) 7.65% of income & employer pays 7.65%
FICA (self-employed) 15.3% (both parts)
Planning an Investment Strategy best to use many different investments w/ many different maturities & risk characteristics to diversify your risk
Interest Rates affect: cash inflows & outflows
Impact of Rising Interest Rates increases amount of interest paid on deposits but also increase the amount of interest charged on loans
Why Interest Rates Change -shift in monetary policy -shift in govt. demands for funds-shift in business demands for funds-
Yield Curves typically upward sloping, meaning that annualized interest is higher for debt securities w/ longer terms to maturity
Relationship of Risk & Return higher the risk, higher the return lower the risk, lower the return
Risk Free Rate a return on an investment that is guaranteed for a specific period
Risk Premium an additional return beyond the risk free rate that can be earned from a deposit guaranteed by the govt.
Factors for choosing a Financial Institution -convenience -deposit rates -deposit insurance-fees
Credit Card Purchases made on credit; billed at the end of a cycle & charged interest
Debit Card used to make purchases charged against a checking acct
Depository Institution financial institutions that accept deposits from individuals & provide loans
Examples of Depository Institution -commercial banks-savings institutions -credit unions
Non-depository Institutions do not offer federally insured deposit accts but provide various other financial services
Examples of Non-depository Institutions -finance companies -securities firms -insurance companies -investment companies
Insurance at Commercial Banks deposits are insured up to $100,000 per depositor by the FDIC
Credit Risk risk that the borrower will not repay on a timely basis
Interest Rate Risk risk that the value of an investment could decline as a result of a change in interest rates
Liquidity Risk the potential loss that could occur as a result of converting an investment into cash
Checking Acct deposit funds into the account to write checks or use a debit card to pay for the various purchases
Savings Acct Pay a higher interest rate than NOW accts
NOW Acct type of deposit that provides checking services & pays interest
Asset Management Acct combines deposit acct w/ a brokerage acct that is used to buy & sell stocks
Money Market Funds investments for short term funds
Investments used in Money Market Funds -Checking accts -NOW accts -Savings deposits -Certificate of deposits -Money Market deposit account-Treasury bills -money market funds-asset management acct
Characteristics of CD’s specifies a min amount to be deposited, a maturity date, & an annualized interest rate.
Evaluation of Checking Accts -overdraft protection-stop payment plans -fees -no interest
Money Management a series of decisions made over a short-term period regarding cash inflows & outflows
Who to Contact about Identity Theft -local police dept -FTC-FACTA -Major crediting report agencies -All creditors –
Benefits of Reviewing your Credit Report -make sure report is accurate -shows the information that lenders may consider -indicates what info might lower your score/report -eliminate deficiencies & improve score
Information obtained in identity theft -credit card #s-ssn -name, address, phone numbers
Duration of Credit problems stay on report for up to 7 years
Duration of Bankruptcy stay on report for 10 years
Factors in FICO -Payment History (35%)-Credit Utilization (30%)-Length of relationship w/ creditors-Recent Credit Inquiries
Three Primary Credit Bureaus -Equifax -Experian -TransUnion
Obtaining a high credit score -make timely payments -maintain a low level of debt
Causes of low credit score -late payments -lots of outstanding debt -bankruptcy
Advantages of Credit -build a good credit score-future access-eliminates need for cash/checks
Disadvantages of Credit -difficulty paying back-temptation
Factors for comparing credit cards -Acceptance by merchants -annual fee -interest rate-maximum limit-basic provisions
Cash Advances extend cash early; charge interest; very costly
APR annual percentage rate; measures the finance expenses (including interest & all other expenses) on a loan annually
Characteristics of Student loans -financial aid office -may be federal govt. or financial institution -pays for portion of student expenses
Advantages of Leasing a car -don’t need a substantial down payment -return car @ end of lease
Disadvantages of Leasing a car -no equity investment -responsible for maintenance costs -charged for damages -(some) additional charges
Trading in A Car -attempt to negotiate new car’s price
Cosigner someone w/ stronger credit history who becomes responsible for any unpaid balance if the borrower doesn’t repay
Collateral assets of the borrower that back a loan in the the event of the borrower defaulting

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