Personal Finance – FINAL

What is earnest money when buying a house? What happens with earnest money when the offer is accepted or when the offer is rejected? Earnest money when buying a house is a deposit made to a seller indicating the buyer’s good faith.When the offer is accepted, the earnest money goes toward the down payment. When the offer is rejected, you get your money back.
What are three factors that affect the mortgage payment? Amount borrowedInterest rateLength of loan
What is PITI? Know how to calculate PITI. PITI is Principal Interest Taxes Insurance, which are the four components of a mortgage.P[r(1+r)^N/[(1+r)^N – 1]P – principal amountr – monthly interest rateN – number of months
What is PMI? When do you have to pay it? PMI is private mortgage insurance.PMI must be paid until the borrower has paid enough principle towards the amount of the loan.
Impact of mortgage length or amount of down payment on the monthly payment? A shorter mortgage length results in higher monthly payments.A longer mortgage length results in lower monthly payments.
What is appreciation when discussing a house? Appreciation is the increase in a house’s value over time.It is calculated based on the fair market value of comparable homes.
What is equity when discussing a house? Know how to calculate equity. Home equity is the market value of a homeowner’s interest in their real property.AKA the difference between the home’s fair market value and outstanding balance of all lieus or debts on the property.Equity = current market value – mortgage balance
What is an escrow account used for? An escrow account is used to accumulate funds for specific disbursements.
When are some upfront costs associated with buying a house that are paid at closing? Down payment, point attorney’s fee, title search, title insurance for buyer and lender, loan origination fee, credit reports, home inspection fee, lot survey fee, home title transfer fee, notary fee.
When is renting a better idea than buying or vice-versa? What are the advantages and disadvantages of each? Renting is less expensive when it comes to short-term living.Advantages:Monthly rental costsLease agreementRestrictionsPay more (based on taxes and appreciation)Owning is less expensive when it comes to long-term livingAdvantages:Lots of optionsHOA feesPay less (based on cash flow)
How much do they recommend that your mortgage payments be as compared to your take home salary? Your mortgage should be 28% of your income.
What is a conventional mortgage? Conventional mortgage is a fixed, rate, term, and payment mortgage loan.
What is subleasing? If you sublease your apartment, are you still responsible for the payments if the new tenant doesn’t make them? Subleasing is an arrangement in which the original tenant leases the property to another tenant.You are still responsible for the payments if the new tenant does not pay.
When you rent, what are some initial costs? Damage/security deposits and monthly rent
What are points? Be able to calculate. Points are a fee equal to 1% of the total loan amount. Points are used to increase income return on loans.Calculation: (Loan amount)(0.01)
What are some tips that were given for choosing and buying a home?
What is risk? What are the basic approaches to handling risk? Can you eliminate risk? Risk is uncertainty about the outcome of a situation or event.The basic approaches to handling risk include:- Risk avoidance: Avoiding risk?- Risk retention: Accepting that some risks simply arise in the course of one’s life and consciously retaining that risk.- Loss control: Designing specific mechanisms to reduce loss frequency and loss severity- Risk transfer: Transferring your risk to an insurance company- Risk reduction: Includes mechanisms such as insurance that reduce the overall uncertainty about the magnitude of loss.You cannot eliminate risk.
What is the large-loss principle? The large-loss principle is a basic rule of risk management that encourages us to insure the risks that we cannot afford and retain the risks that we can reasonably afford.
Know the difference between a term life policy and a cash-value policy, and how much the beneficiary gets in each case. Which costs more? Term life insurance is “pure protection” against early death; pays benefits only if the insured dies within the time period (term) that the policy covers.Cash-value life insurance pays benefits at death and includes a savings/investment element that can provide a level of benefits to the policyholder prior to the death of the insured person.Cash-value life insurance costs 5-8 times more than term life insurance.
What are types of insurance that are NOT typically part of standard homeowner’s insurance? Water damageNeglectCollapseMoldDeteriorationMore…
What is a peril? Exposure? Physical hazard? Give examples of each. Peril: any event that can cause a financial loss -*Fire, wind, theft, vehicle collision, illness, deathExposures: sources of risk; these include the items you own and the activities in which you engage that expose you to potential financial loss*Owning and/or driving an automobilePhysical hazard: a particular characteristic of the insured person or property that increases the chance of loss*High blood pressure in a person covered by health insurance
Can insurance be a part of risk reduction? Insurance consists of two basic elements:The reduction of riskThe sharing of lossesWhen you buy insurance, you exchange the uncertainty of a potentially large financial loss for the certainty of a fixed insurance premium, thereby reducing your risk.
What is a deductible, coinsurance, and copay? Deductible: an initial portion of any loss that must be paid before the insurance company will provide coverageCoinsurance: a method by which the insured and the insurer share proportionately in the payment for a lossCopay: requirement in a health care insurance policy each time you have a specific covered expense item, such as to a doctor’s office and for prescription drugs
Are life insurance proceeds taxable to the beneficiary? no
How can you lower the costs of insurance? Pay the first dollars of a loss yourselfPay a share of any loss yourselfReduce the chances that a loss will occurReduce the dollar amount of a loss
Life insurance is to protect who? One insured or the beneficiary? Life insurance is to protect the beneficiary.
What is liability insurance? Liability insurance is protection from financial losses suffered when you are held liable for others’ losses.
What are the steps in the risk-management process? First, identify your risk exposure.Second, estimate your risk and potential losses.Third, choose how to handle your risk of loss.Fourth, implement your risk-management program.Fifth, evaluate and adjust your program.
Susan has health insurance policy with $1000 deductible and 20% co-insurance. If Susan has $5,000 in medical expenses, how much will her policy pay? Be able to calculate similar scenarios. Formula: R = (1- CP)(L-D)Susan: R = (1.00 – 0.20)(5000 – 1000) = $3,200
What steps would you take if you’re in an auto accident? First, file an insurance claim.Second, report the accident to the DMV.Third, get your car repaired.
What demographic usually has to pay higher auto insurance rates? Teenage boys
Understand the investment pyramid – what is located at the bottom and top? Bottom: savings bonds, certificates of deposit, insured bank accounts, and treasury securitiesTop: futures contracts
What types of stock provide the highest potential for fast growth? Growth stock(this might be wrong).
What are the different ways to lose money with investments? There are 3.
What is a dividend? Dividend: a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves).
What is diversification and the best way to do it? Diversification is the process of reducing risk by spending investment money among several different investment opportunities.
Stock Stock: share of ownership in a business corporation is assets and earnings
Bond Bond: a debt instrument issued by an organization that promises repayment as a specific time and the right to receive regular interest payments during the life of the bond
P/E Price Earnings Ratio P/E (price/earnings ratio): the current market price of a stock divided by earnings per share (EPS) over the past four quarters; used as the primary means of valuing a stock
Beta Beta: a measure of stock volatility; that is, how much the stock price varies relative to the rest of the market
Bull market Bull market: market in which securities prices have risen 20% or more over time.
Bear market Bear market: market in which securities prices have declined in value 20% or more from previous highs, often over the course of several weeks or months.
Load funds Load funds: mutual funds that always charge a “load” or sales charge upon purchase; the load is commission used to compensate brokers
What is the relationship between risk and return on investment? The higher potential return of an investment, the higher the risk. There is no guarantee that you will actually be accepting more risk though.
What is the relationship between liquidity and return on investment? Negative relationshipThe more liquid an asset, the less of a return.
What are the benefits offered by mutual funds? (At least 5) DiversificationConvenienceLiquidityLow transaction costsUncomplicated investment choicesMore… (page 468)
What is a grace period? A grace period is the period of time a creditor, such as credit card company, gives you to pay your new charges without having to pay interest on the new balance.
What is the relationship between your credit score and the amount you pay for credit?
What are the stages of the economic cycle? Which is the preferred stage? What are some of the indicators of each stage? Expansion (preferred stage)PeakContractionTrough
What are Dave Ramsey’s “Baby Steps”? Save $1,000Pay off debt3-6 month emergency fundInvestCollegePay off houseGive
Review the notes sheets from the Ramsey videos.
What is the fundamental concept behind an economic system?
What is a budget? What does it do? What is a budget surplus? A budget consists of records both planned plus actual income and expenditures over a period of time.It answers the question: what is my spending/savings action plan?A budget surplus is the amount remaining after all budget classification deficits are subtracted.AKA extra
What is disposable income? What is discretionary income? Disposable income: amount of income remaining after taxes and withholdingEstimates funds available for debt repaymentDiscretionary income: money left over after necessities such as housing and food are paid forWhat is a standard deduction? What are itemized deductions? Can they both be taken?
what is a standard deduction? What are itemized deductions? Can they both be taken? Standard deduction: fixed amount that all taxpayers may subtract from their adjusted gross income.b. Itemized deduction: Tax-deductible expenses such as medical and dental expenses, taxes you paid, interest you paid, charitable donations, casualty and theft loss (not paid by insurance), job expensesonly one can be taken (im not even sure if this is right)
what is Itemized deduction tax-deductible expenses
What are some signs of over-indebtedness? Not knowing how much you oweUsing debt to pay debtPaying minimum payments onlyGarnishment; court order; income set asideRepossession/foreclosurePay late/skip paymentsNew cards/higher limitsRunning out of moneyTaking add-on loans
What do credit bureaus do? Credit bureaus collect and keep records of borrowers’ credit history.
What’s the difference between progressive and regressive taxes? Progressive income tax: tax rate increases as taxable income increasesRegressive income tax: as income increases, the tax demands decrease proportion of income
What are teaser rates? A teaser rate is a temporarily low initial interest rate to entice borrowers to apply for a new credit card.
What do secured loans require? Secured loans are backed by collateral or a cosigner.
What are some credit card costs? Annual feeBalance transfer feeLate payment feeCash advance fee
Can a lender legally discriminate? Lenders can legally discriminate based on credit history.What is tax evasion? Give some examples.Tax evasion is cheating the government out of taxes owed.Hiding income from the IRSFalsely claiming deductions
What is average tax rate? What is the marginal tax rate? Average tax rate: proportion of total income paid in income taxesMarginal tax rate: last dollar earned is taken
What is earned income? What is unearned income? Be able to identify each. Earned income: salary or wagesUnearned income: investment returns in the form of rents, dividends, capital gains, or royalties.What type of income is excluded from gross income? What is included? Be able to identify.Gross income: all income, both earned and unearned received in the form of money, goods, services, and property.Required to report to IRSExclusions: income not subject to federal taxation
What are the life stages? Which have the highest discretionary income? Which have the lowest? BachelorNewly marriedMarried with young kidsMarried with teensEmpty nestRetired
What are the two primary types of command economic systems? CommunismSocialism
Know how to calculate net worth. How can you increase your net worth? Net worth = Assets – Liabilities
Increase net worth… Decrease spendingIncrease assetsIncrease incomeDecrease liabilitiesDecrease debt
What is a balance sheet? Cash flow statement? What’s another name for the cash flow statement? What are the balance sheet and cash flow statement used for? Balance sheet/net worth statement: snapshot of assets, liabilities, and net worth on a particular date; current status reportCash flow statement/income and expense statement: summary of all income and expense transactions over a specific time period; answers the question of where the money goes
What does how we spend our money reflect about us? How we spend out money reflects out trust in God and defines our priorities.
According to Larry Burkett, what are the primary reasons individuals encounter financial problems? Ignorance of financial principlesIndulgence of unrestricted gratificationLazy thinking
What are monetary assets? Tangible assets? Investment assets? Capital assets? Which are used for living expenses? Monetary/liquid assets: assets that can be used as cashTangible assets: personal property used to maintain everyday lifestyleInvestment assets: tangible and intangible items acquired for their monetary benefitsCapital assets: investments and assets
What is an asset? What is a liability? Give examples. Asset: everything you own that has monetary valueLiability: what you owe
What are the six biblical purposes of money? Tithe first fruitsProvide for familyTaxesSavings/emergency fundPay debtsBe generous

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