Personal Finance
the process of planning your spending, financing, and investing to optimize your financial situation
Personal Financial Plans
a plan that specifies your financial goals and describes the spending, financing, and investing plans that are intended to achieve those goals
Opportunity Cost
what you give up as a result of a decision
Budget Planning
the process of forecasting future expenses and savings
Assets
what you own
Liabilities
what you owe
Net Worth
the value of what you own minus what you owe
Liquidity
access to funds to cover any short-term cash deficiencies
Money Management
decisions regarding how much money to retain in a liquid for and how to allocate the funds among short-term investment instruments
Credit Management
decisions regarding how much credit to obtain to support your spending and which sources of credit to use
Insurance Planning
determining the types and amount of insurance needed to protect your assets
Risk
uncertainty surrounding the potential return on a particular investment
Retirement Planning
determining how much money you should set aside each year for retirement and how you should invest those funds
Estate Planning
determining how your wealth will be distributed before or upon your death
Personal Cash Flow Statement
a financial statement that measures a person's cash inflows and cash outflows
Net Cash Flows
cash inflows minus cash outflows
Budget
a cash outflow statement that is based on forecasted cash flows for a future time period
Personal Balance Sheet
a summary of your assets, your liabilities, and your net worth
Liquid Assets
financial assets that can be easily sold without a loss in value
Household Assets
items normally owned by a household, such as a home, car, and furniture
Bonds
certificates issued by borrowers to raise funds
Stocks
certificates representing partial ownership of a firm
Annuity
a series of equal cash flow payments that are received or paid at equal intervals in time
Compounding
the process of earning interest on interest
Future Value Interest Factor
a factor multiplied by today's savings to determine how the savings will accumulate over time
Discounting
the process of obtaining present values
Present Value Interest Factor
a factor multiplied by a future value to determine the present value of that amount
Annuity Due
a series of equal cash flow payments that occur at the beginning of each period
Timelines
diagrams that show payments received or paid over time
Future Value Interest Factor for an Annuity
a factor multiplied by the periodic savings level to determine how the savings will accumulate over time
Economic Growth and Tax Relief Reconciliation Act
2001 tax cut package designed to provide short-term economic stimulus through tax relief for taxpayers
Jobs and Growth Tax Relief Act
2003 act that accelerated much of the tax relief resulting from 2001
FICA
taxes paid to fund the Social Security System and Medicare
Medicare
a government health insurance program over age 65
Personal Income Tax
taxes imposed on income earned
Gross Income
all reportable income from any source
Interest Income
interest earned from investments
Dividend Income
income paid on shares of stock or mutual funds
Adjusted Gross Income
adjusts for contributions to IRAs, alimony payments, interest paid on student loans and other special circumstances
Capital Gain
income earned when an asset is sold at a higher price than it was paid for
Short-Term Capital Gain
a gain on assets that were held less than 12 months
Long-Term Capital Gain
a gain on assets that were held 12 months or longer
Capital Gains Tax
the tax that is paid on a capital gain earned
Personal Exemption
an allowable amount by which taxable income is reduced for each person
Tax Credit
specific amounts used to directly reduce tax liability
Depository Institutions
financial institutions that accept deposits from individuals and provide loans
Commercial Banks
financial institutions that accept deposits and use funds to provide business and personal loans
Savings Institutions
financial institutions that accept deposits and provide mortgage and personal loans to individuals
Credit Unions
nonprofit depository institutions
Securities Firm
nondepository institutions that facilitate purchase or sale of securities (investments and brokerage services)
Financial Conglomerates
financial institutions that offer a diverse set of financial services to individuals or firms
Certificate of Deposit (CD)
an instrument that is issued by a depository institution and specifies a minimum investment, interest rate, and maturity
Monetary Policy
actions taken by the Federal Reserve (the Feds) to control money supply