Personal Financial Planning
Arranging to spend, save, and invest money to live comfortable, have financial security, and achieve goals.
Goals
Things you want to accomplish.
Needs
Something you must have to survive.
Wants
Something you desire or would like to have or do.
Opportunity Cost
It is what is given up when making a choice instead of another option.
Principal
The original amount of money on a deposit.
Interest
Price that is paid for the use of someone else's money.
Interest Rate
Percentage paid for the use of someone else's money
Future Value
The amount your original deposit will be worth in the future based on earning a specific interest rate over a period of time.
Values
Beliefs and principles you consider important, correct, and desirable.
Inflation Risk
If you wait to buy something until a certain amount of time, you are aware that the price may increase.
Increase Rate Risk
Interest rates go up or down, you may affect the cost of borrowing, or the profits when you save/invest.
Income Risk
You may lose your job due to unexpected health problems, family problems, or change in your field of work.
Liquidity Risk
The ability to easily convert financial assets into cash without loss in value. Some long-term investments, such as a house, can be difficult to convert quickly.
4 Financial Specialists
1. Accounant
2. Banker
3. Financial Planner
4. Insurance Agent
4 Sources of Financial Information
1. Technology
2. The Media
3. Financial Institutions
4. Education
Current Financial Situation
1. Savings
2. Income
3. Goals
Obtain
Obtain financial resources by working, making investments and/or owning property.
Plan
The key to achieving your financial goals and financial security is to plan how you will spend your money.
Spend Wisely
Spending as much as you can afford while achieving financial security.
Save
Saving will allow you to pay your bills, make major purchases, and cope with emergencies.
Borrow Wisely
Borrowing what you can pay back to a credit card company or another person.
Invest
Increasing increases current income and help achieves long-term growth.
Manage Risk
To protect your resources in case of injury or death. Will need insurance coverage to protect you and those who depend on you.
Plan for Retirement
Considering the age you would like to stop working full time, where you want to live, and how you will spend your time.
Form 1040EZ
A simple federal tax return form designed for use by single and joint filers with no dependent is...
1 1/2 times the regular rate
The overtime pay rate for hours worked above 40 hours in one week must be at least...
Commission
A percentage of a sale paid to a salesperson is called a...
Profit
The amount left after all expenses are deducted from the revenues of a business is called...
1. Health insurance
2. Sick leave
3. Paid Vacation
A benefit often received by a full-time worker is...
Can benefit the company because the worker has better skills
Programs that reimburse employees for education costs...
1. Pays medical and disability benefits to workers who are injured on the job
2. May pay benefits to a worker's family if the worker is killed on the job
Workers' compensation insurance...
1. Money shared with stockholders when a corporation makes profits
2. A form of unearned income
A dividend is...
Transfer payments
Money and benefits people receive from local, state, or federal governments are called...
Food stamps
Type of in-kind transfer payment
Disability insurance
Insurance that provides payments to replace income lost when illness or injury (non job-related) prevents an employee from working is called...
Federal income tax
Payroll deduction required by law
Form I-9
Form workers have to complete so an employer scan verify that they are eligible to work in the U.S.
Social security tax
Provides a system of old-age, survivors, and disability insurance
Retirement plan contributation
Optional payroll deduction
Income tax
What's a progressive tax?
Property tax
What's a tax based on assessed value?
These goods are free (cost nothing)
What is NOT true about public goods?
1. Everyone benefits
2. No one can be excluded from the benefits
3. Those who benefit most usually pay less
What's true about public goods?
The owned performs many different tasks to keep the business running
What is a disadvantage of owning a business?
Interest
What is a form of unearned income?
Entrepreneur
A person who takes the risks of being self-employed and owning a business
Net pay
The amount of a paycheck after deductions
Sick leave
Paid time away from work due to illness
Transfer payments
Money and benefits received from governments
Benefits
Forms of pay other than salary or wages
Minimum wage
The lowest pay rate allowed by law
Gross pay
The total salary or wages earned during a pay period
Exemption
A person claimed as a dependent on a tax return
Use taxes
Taxes based on the use of goods and services provided by the government
Interest
Money earned on savings accounts and other funds
Credit
Money that a lender makes available to a borrower with the understanding that the borrower will repay the money in the future.
Credit Bureau
Organizations that collect credit information about individual consumers.
Credit Report
Summarizes an individual's existing and past credit history, including applications for credit of any kind, payment record for bills, whether you have paid late fees, and other public information.
Credit Score
A numeric score that uses your credit history to assess your creditworthiness.
Identity Theft
When someone uses your personal information without your permission for personal gain.
Installment Credit
Used for specific purchases but allows the borrower more time to repay the money.
Interest
Fees charged by a lender on borrowed money.
Non-installment Credit
Credit that is extended for a short term, such as 30 days or less.
Principal
The total amount of money outstanding on a loan.
Revolving Open-Ended Credit
Allows consumers to borrow up to some preset maximum amount. An example would be a credit card.
1. make large purchases sooner than if you had to save up
2. simplifies your finances (no need to carry cash or checks)
3. can help establish a good credit history
Advantages of using credit...
1. Often easier to get credit than it is to pay it back.
2. Special danger - tempted to purchase things today we should save and pay for in full.
Disadvantages of using credit...
The Credit Card Accountability, Responsibility, and Disclosure Act (also called the Credit Card Act)
Ensures that consumers who pursue credit card services are treated fairly and have access to complete information about the fees and other provisions of the credit agreement.
The Equal Credit Opportunity Act
prohibits discrimination in the granting of credit on the basis of such factors as race, skin color, or sex.
The Fair Credit Billing Act
Sets up procedures requiring creditors to promptly credit your payments and correct billing mistakes and allows you to withhold payments on defective goods.
The Fair Credit Reporting Act
Sets up a procedure for correcting mistakes on your credit record.
The Financial Reform Act (also known as the Dodd-Frank Wall Street Reform and Consumer Protection Act)
Designed to prevent deceptive practices in the credit granting process. The Consumer Financial Protection Bureau (CFPB) was created as part of this legislation.
The Truth in Lending Act
Gives you three days to change your mind about certain credit transactions that use your home as collateral. It also limits your risk on lost or stolen credit cards.
Fair Isaac Corporation
Created a model on which credit scores (FICO scores) are calculated.
1. Pay your bills on time.
2. Keep credit card balances low.
3. Pay off debt rather than move it around.
How to improve your credit score:
Good credit means having a credit history that is generally free of credit problems, such as unpaid or late bills.
What are the elements of "good credit"?
Your credit history and what you owe now.
What are the most important factors in figuring your credit score?
The Federal Trade Commission estimates that as many as 9 million Americans have their identities stolen each year.
How many Americans have their identities stolen each year?
Shoulder Surfing
Occurs when someone in a public place steals your personal information by overhearing your conversation or viewing your personal information.
Skimming
Involves copying your credit or debit card numbers from your cards.
Pretexting
Occurs when someone improperly accesses your personal information by posing as someone who needs data for one reason or another.
Phishing
When pretexting occurs online.
Pharming
Uses email viruses to redirect you from a legitimate website to an official-looking website designed to obtain your personal information.
1. non-installment
2. installment
3. revolving open-ended credit
What are the three types of credit?
If someone is expecting to have cash soon.
When would non-installment credit be useful?
larger purchases
When would installment credit be useful?
Situations where a person wants to pay one bill rather than multiple bills - for example, for buying gas regularly.
When would revolving open-ended credit be useful?
The person might want to be able to conserve cash for other purposes.
Why might someone be willing to pay interest on a purchase rather than pay it all in cash?
1. Identifying information about the report
2. Identifying information about the applicant
3. Public record information
4. Information on unpaid accounts
5. Information on all other accounts
6. Information about people who have inquired about the applican
What are the six major areas of information that may be included on your credit report?
Sometimes incorrect and harmful information makes its way on your credit report.
Why is it important to check the information on your credit report regularly?
35% - credit history
30% - how much of your available credit you are using
35% - other information in your credit report
What factors determine your credit score?
Lower your debt, increase your income, or correct any mistake in your credit report.
What are some steps you can take to improve your credit score?
There is no interest charged on the loan if it is paid back within a very short time.
Why might a person decide to take advantage of a non-installment credit offer?
Take advantage of the store's non-installment credit option so she does not have to pay any interest on the loan.
A person finds the computer she needs on sale for $900. She can pay for the computer using her credit card and pay the amount borrowed over the course of many months, or she can take advantage of the stores offer for her to pay for the computer within 30
He is offered a job that requires him to have a car, which he can only afford to buy with a loan.
Under what circumstances would it make financial sense for a person to make a purchase with an installment loan?
the credit card company is loaning him up to $2,000 to make purchases. He can pay the entire credit card balance each month or pay part of the bill and pay interest on the rest.
If a person has a credit card with a limit of $2,000, it means...
the person's potential employers, landlords, and lenders
The information collected by credit bureaus such as Experian is accessible to...
check credit bureau personal credit reports regularly and keep Social Security card and PIN information in a safe place
The best way to protect against identity theft is to...
Cash inflow
Money received.
Cash outflow
Money spent.
Expense
Anything on which money is spent.
Fixed expense
An expense that remains the same from period to period
Variable expense
An expense that changes from one period to the next.
Short-term goals
Those you plan to accomplish within the next year.
Middle-term goals
Those you aim to meet within the next one-five years
Long-term goals
Those that will take more than five years to accomplish
Cash inflow is money that you receive from all sources. Cash outflow is money that you spend.
What is cash inflow and cash outflow?
1. Establish goals
2. Evaluate current financial position
3. Identify and evaluate the options for reaching goals.
4. Pick the best plan.
5. Evaluate plan periodically
6. Revise plan as necessary.
What are the steps of financial decision making?
A fixed expense is the same amount every period; a variable expense an be different or vary each period.
What is the difference between a fixed expense and a variable expense?
Short term goals are goals you can complete within one year; long-term goals take five or more years to complete.
What is the difference between a short-term goal and a long-term goal?
Bond
A promissory note to repay a certain amount of money at some future point.
Budget
A list of planned expenses and revenue.
Forecast error
The difference between the actual value and the predicted value for the corresponding period.
Investment
Something acquired with the goal of making money.
Market value
The current quoted price at which investors buy or sell a share of common stock or a bond at a given time.
Mutual fund
Sells shares to investors in order to collect a pool of money that is then used to buy various investments.
Personal balance sheet
Lists current assets such as cash in checking accounts and savings accounts, long-term assets such as loan debt and mortgage debt due or overdue, and long-term liabilities such as mortgage and other loan debt.
Real estate
Buildings and land.
Stock
A fractional share of ownership in a company.
Household Assets
Typically owned by a household - for example: cars, houses, and furniture.
Current liabilities
Debts that must be paid off within one year.
Long-term liabilities
Debts that will take longer than one year to pay off.
Associate's Degree
An undergraduate academic degree awarded by colleges upon completion of a course of study lasting two years
FAFSA
a form that is completed annually by current and prospective college students to determine their eligibility for financial aid
Good Debt
a money myth that portrays student loans as the only financial option when it comes to funding one's college education
Grant
A form of federal or state financial aid that does not need to be repaid
Mentorship
a developmental partnership through which one person shares knowledge, skills, and perspective to foster the personal and professional growth of someone else
Scholarships
A merit-based form of financial aid that does not need to be repaid; usually offered on the basis
of academic, athletic, or other achievements
Trade School
a type of higher learning school that focuses on job skill training for specific career fields rather than academics
Work Study
a program that allows students to work part time while continuing their studies
true
T/F our culture thinks student loan debt is normal and that it's an acceptable way to pay for college
false
T/F a four-year degree is necessary regardless of what career you're pursing
1 trillion
the total estimated student loan debt outstanding (unpaid) in the US
asking your parents to take out a loan
What is not a good option when it comes to paying for your education?
60%
What percentage of people take out loans to help pay for college?
read books
What is a way to invest in yourself?
the average of the five people you hang out with the most
What will your net worth be?
Have a mentor
What is a good way to have success?
$27,000
What is the average student loan debt for an undergraduate degree?
It has increased at a faster rate
What has happened to tuition compared to other goods and services?
four times faster than inflation
How much faster has tuition increases compared to inflation?
439%
How much has the price of tuition increases since 1982?
grants, scholarships, work studies, and student loans
What is included in a financial aid award package?
30%
What percentage of student loan borrowers drop out of school?
6 months after you graduate
How soon do you have to start paying student loans after your graduate?
66% or 2/3
What percentage of college students graduate with student loans?
Cash flow (pay as you go) the education
What is an option to help pay for college besides
student loans?
85 billion
How much of the outstanding student loan debt is past due?
63%
What percentage of borrowers had a hard time paying back student loans?
50%
What percentage of borrowers at two-year-for-profit schools never finish?
41%
What percentage of borrowers fall behind on their student loan payments in the first five years?
get good grades
What is a way to cash-flow your college education that you can do right now?
46%
What percentage of students feel like they have the financial resources to stay in school?
on a first come, first serve basis
How are the funds for FAFSA rewarded?
no
Do you have to pay grants back?
University for academics or athletics, community like Boy Scouts, local business for promoting organizations, private donators like relatives or other people, student-specific for pretty much anything, unique like hobbies or talents.
What are some types of scholarships?
financial trouble
What do 8/10 of college dropouts say their reason was?
go to the financial
aid office
What do you do if your financial situation has changed and you can no Ionger pay for some things at college?
students who work up to 20 hours a week
Who have the highest GPAs of any student in college?
78%
What percentage of college freshman plan to work?
to continue your education and to stay out of debt
What should your two goals be as a young adult?
student loan debt
What is the only type
of debt that has grown since the peak of consumer debt in 2008?
a zero-based budget
What is a great way to manage your money in college?
spending, saving, giving
What three categories should you make sure to have in your zero-based budgets?
10 years on minimum payment
What is the average repayment period for a student loan?
$10,000
What is the average cost of room and board at public and private universities combined?
trade schools, certifications, self-education, on-the-job training, associates degrees, the military, starting your own business
What are some alternatives to college?
Adjusted Gross Income
Income calculated by taking total income and subtracting allowable amounts that include contributions to certain retirement accounts, alimony payments, interest paid on student loans, and other expenditures that are identified by the IRS.
Capital Gains
A taxable gain that occurs when you sell an asset for more than what you paid for it.
Gross Income
Total amount of a person's income from (almost) any source.
Itemized Deduction
Specific expenses that, under tax law, can be deducted from income to reduce the amount of income subject to income tax.
Payroll Taxes
Federal and state taxes withheld from a person's paycheck and sent to the government by his employer.
Standard Deduction
Fixed amount all people are allowed to deduct form their AGI to reduce their tax liability.
Tax
Money collected by a government from its citizens for the purpose of operating the government.
Tax Return
A formal report to the IRS that contains all the information relative to a person's income taxes for a specific year.
Beneficiary
A person who receives payment from a life insurance provider when the policyholder dies.
COBRA
It allows an individual temporarily to continue health insurance coverage at group rates.
Coinsurance
The share of costs for covered insurance services that an individual is required to pay out of pocket. Often called a co-pay.
Deductible
The amount of money that a policyholder must pay before an insurance policy will begin to cover a claim.
Disability Insurance
Insures the beneficiary's earned income against the risk that sickness or injury will make working (and therefore earning) impossible.
Fraud
A deliberate deception intended to secure an unfair or unlawful gain.
Group Plan
One insurance policy that covers a group of people.
Health Insurance
Provides payment to people who suffer a financial loss as a result of illness or injury.
HIPPA
The act prohibits insurance companies from denying new employees access to coverage based on their health or preexisting conditions.
Insurance
A contract by which an insurance company (the insurer) promises to pay a sum of money or give something of value to another (either the insured or the beneficiary) to compensate for a specified loss.
Liability
What is owed (debt).
Life Insurance
Insurance that provides death benefits to the survivors of the insured.
Medicaid
A public assistance program designed to provide healthcare to poor Americans.
Medicare
A federal health-insurance program that covers U.S. residents over the age of sixty-five. The costs are met by a tax on wages and salaries.
Policyholder
A person who buys an insurance plan; the insured.
Preexisting Condition
An illness or disorder of a beneficiary that existed before the effective date of insurance coverage.
Premium
A specific sum of money paid by the insured to the insurance company in exchange for financial protection against loss.
Term Insurance
Life insurance that provides protection for a specific period of time.
Universal Life Insurance
Insurance in which a yearly premium is paid and, besides providing money for one's family at death, a cash value accumulates.
Whole Life Insurance
Provides coverage for as long as the policyholder continues to pay the premium.
Baby Boom
A period of high birthrates that occurred between 1946 and 1964
Business Cycle
The economic pattern of alternating periods of shrinking and expanding
Consumer Price Index
The formal measure of prices used to calculate inflation that tells us whether things overall are more expensive now than in the past
Demographics
The study of human populations
Depression
A severe recession
Economics
The production, distribution, and consumption of goods and services. Economists seek to understand ways that individuals and businesses make decisions, the factors that influence their choices, and the impact these decisions have on others
Economy
The system related to the production, distribution, exchange, and consumption of goods and services in which individuals, businesses, governments, and the world interact
Global Economy
The world in which economies of all countries interact and depend on each other
Gross Domestic Product
The total dollar amount of all final goods and services purchased domestically in a given year
Inflation
A sustained increase in in the general level of prices. During a time of inflation, most things become more expensive and purchasing power of money decreases.
Macroeconomics
The study of broad economic issues that impact the economy as a whole
Microeconomics
The study of individual choices or decisions made by small units
Recession
Period of time in which the economy is shrinking
Annual fee
Charged by credit cards companies for the privilege of using their card.
Bankruptcy
A legal process in which a court takes over some of the finances of a person who is unable to pay his or her bills.
Cash advance
The ability to use a credit card to withdraw cash from a bank or ATM (rather than just purchasing a good or a service).
Credit card
Provides individuals with revolving open-end credit, which they can draw from repeatedly up to some pre-set limit.
Credit check
Performed by potential creditors to access a person's credit report to examine the individual's credit history and the ability to repay.
Credit provider
An entity, such as a bank, that agrees to make a certain amount of credit available to a cardholder.
Debt consolidation
Combining several small accounts into a one larger account that may be able to be financed at a lower rate.
Grace period
Time in which credit card companies do not charge interest on purchases. Typical grace periods are 20 days from the time of the statement is "closed", or the bill is calculated and mailed.
Overdraft protection
A feature that allows a person to "overdraft," or exceed the credit limit. (Overdraft protection is also a feature of checking accounts, where it protects someone in the event that a check is written for more money than is in the account.)
Pawnbroker
Holds items in exchange for loans that run for 30 days to as much as three months.
Payday lending
A lender provides cash advances at high cost to customers who provide a check dated for some time in the future.
A consumer can purchase goods and pay for them later -- even over time.
What can a consumer do with a credit card?
The pizza cost Reese $30.39!
$15.39 (pizza) + $15 (fees) = $30.39 (total)
Reese charged a pizza on her MasterCard. When she got her bill she was shocked. The pizza cost only $15.39, but the charge put her over her credit limit. Assume the company charges her a $15 over the limit charge.
How much did the pizza actually cost Rees
Jose's uncle will receive $521.36.
98% = 0.98 x $532 = $521.36
Jose just made a $532 credit sale in his uncle's electronics store. The customer paid with a Visa card. Assuming Jose's uncle receives 98% of the sale after paying a 2% fee.
How much will he actually receive from the sale?
- credit limit
- over-draft protection
- annual fee
- incentives
- prestige cards
- grace periods
- cash advances
- finance or interest charges
Identify FIVE key features of a credit card...
Twila would be paying 180% a year in interest if she did this same withdrawal every 20 days!
Solution: The $40 advance cost her $4 for 20 days. This amounts to 4/40 or 10% for 20 days use of the money. Assuming there are 18 20-day periods in a year, Twila
Twila used her credit card to get a $40 cash advance at a local ATM. She intended to pay the balance in full when the bill came in. Twila paid the $40 advance back and also paid $4 in fees ($2 for the ATM and $2 for the credit card company) when the credi
Since savings accounts typically pay very low interest rate, you are certain to do better financially by using savings to pay down credit card debt.
Leave $1,250 in savings alone:
2% average annual return = $25.00 in total interest earned by the end of on
Suppose you have $1,250 in a savings account and an existing credit card debt of $1,000.
Should you use your savings to pay off the debt or let it be?
- payday lending
- pawnbroking
- tax refund lending
- cell phone plans (leases)
What are some examples of risky types of credit?
Bankruptcy is a process in which the courts provide protection for a person who is unable to pay off his or her debts. The courts will help a bankrupt person propose a plan to repay at lest a portion of his or her debts.
What happens when a person declares bankruptcy?
The process of combining several small accounts into one larger account that you may be able to finance at a lower rate at a bank or with another lender.
What is meant by debt consolidation?
A cash advance from a payday lender involves writing a post-dated check in exchange for a cash advance that is less than the amount of the check. The payday lender will deposit the check on the date it becomes valid.
A pawnbroker advances a small loan bas
What is the difference between a cash advance from a payday lender and money received from a pawnbroker?
- carry less cash
- pay for purchases all at once
- avoid interest charges if used properly
- keep records of spending
What are advantages of using credit cards?
- costly
- easily abused
What are disadvantages of using credit cards?
Availability of credit is always there with a credit card, and there is no need to apply for credit on every purchases as with a personal loan.
How does credit from a credit card differ from a personal loan?
Creditors are looking for people who have the right balance of inflows and outflows to suggest that they will repay borrowed money.
What kinds of information are creditors looking for?
The maximum amount you can borrow using a credit card.
What is a credit limit?
The credit limit may have little relationship to how much debt you can handle at one time.
How can you use the credit limit to determine how much credit you can safely use?
Overdraft protection protects you from borrowing beyond your credit limit.
What is the purpose of overdraft protection?
This feature may protect you from the consequences of having credit denied, but it might cost you money and potentially lead to debt problems.
Explain how using overdraft protection may both help and hurt you.
A grace period is the time during which the credit card company does not charge you interest after having billed you.
What is a grace period?
If you always pay within the grade period, you can avoid paying interest charges on the amount of credit you pay off.
How can the grace period enable you to use a credit card at no direct cost to you?
NO. Their use and features vary.
Are all credit cards the same in their use and features?
Paying the bill in full helps protect you from interest charges.
What is paying your credit card balance in full important?
You should seek to pay off credit card debt as quickly as possible -- by stopping additional charges, using savings, and borrowing from others if necessary.
What should you do if you can't avoid credit card debt?
A credit scheme in which a borrower receives cash in return for a promise - the writing of a postdated check - of paying off a significantly larger amount at some point in the future.
What is payday lending?
A high-interest loan based on the expectation of receiving a tax refund.
What is a tax refund loan?
Cell phone plans typically require a year-long lease.
How does the financial obligation of consumers to cell phone plans differ from that to landline telephone service?
Breaking a cell phone lease can be reported to the credit bureaus and harm your overall credit rating.
What, besides money, is the major threat from misuse of a cell phone plan?
credit card
A financial tool that provides people with revolving open-end access to funds that they can draw from repeatedly up to some preset limit is known as a...
an easy way to establish a personal credit history
The greatest advantage of using a credit card is that it provides...
Credit card companies receive 2%-4% of the purchase price of every good or service that is sold to a cardholder.
How do credit card companies benefit when cardholders pay their bills in full each month and never have to pay interest on balances?
overdraft fees can be high (although they cannot exceed the amount of the purchase that caused the overdraft)
Even though a person has overdraft protection on her credit card, she should avoid using this feature because...
buy a less expensive coat that she can pay for immediately
A person knows that she cannot afford to pay $400 for a coat that she really wants. The financially wise action for her to take is to...
The credit card company expects that the person will continue to make purchases and carry a balance after the introductory period when interest charges go back to normal rates.
Why would a credit card company offer a person the opportunity to open a credit card account that will charge 0% interest on purchases or balance transfers for 12 months?
The person can purchase items up to the limit on the cash card without paying any interest.
What is the advantage to a consumer of having a prepaid cash card?
contact each credit card company with which she has an account and try to negotiate new terms such as a lower interest rate.
If a person has mounting credit card debt and cannot pay it down, the first thing she should do is...
Check
A written order from an individual to a bank that instructs the bank to pay money to another party.
Checking account
An account into which a person deposits money and from which a person withdraws money by writing checks or using a debit card.
Credit union
Functions similarly to a bank, but has nonprofit status and is owned by its members.
Debit card
Enables one to withdraw cash from an ATM or to pay directly for goods or services at stores and restaurants.
Federal Deposit Insurance Corporation (FDIC)
A major federal insurer that provides deposit insurance on the first (1st) $250,000 deposited in a bank account.
Federal Reserve System
The central bank of the United States
Fiat money
The money currently used in the United States. It has value because the government orders that it must be accepted as payment.
Monetary policy
The raising or lowering of the money supply to achieve some goal.
National Credit Union Savings Insurance Fund
(NCUSIF) A major federal insurer that provides deposit insurance on the first (1st) $250,ooo deposited in a credit union account.
Depository Institutions
Financial institutions that provide traditional checking and savings accounts for individuals and businesses; also provide loans. Include commercial banks, savings banks, and credit unions.
Nondepository Institutions
Institutions that provide certain financial services but do not accept traditional deposits. Include insurance companies, finance companies, and securities firms and investment companies.
Automatic Teller Machines (ATMs)
Provides banking customers with access to financial transactions in a public space without the need for a bank teller.
Negotiable order of withdrawal (NOW) accounts
Function much like checking accounts except they pay a small amount of interest on money in the account. Require a minimum balance in order to earn interest.
Personal Identification Number (PIN)
Usually four-digit numbers you need to memorize in order to use your debit card.
Check Register
Small ledger for keeping track of your account balance.
They enable you to carry less cash, keep records, and mail payments securely.
Why are checking accounts useful?
Money Orders
Functions similarly to a cashier's check. It is purchased for cash so that the recipient can trust its worth.
Traveler's Checks
Checks paid for in advance and written by a large financial institution with no payee specified.
Cashier's Check
A type of check that is written to a specific payee but charged against a bank instead of an individual account.
Safety Deposit Box
Small containers located inside a bank vault used to store valuable paperwork such as wills and legal documents and small objects such as jewelry and rare coins.
Bank Drafts
Used to authorize someone to withdraw money from a bank account automatically to satisfy some financial obligation.
Electronic Funds Transfer (EFT)
Authorization for someone to access a bank account for payment or deposit.
Services include safety deposit boxes, cashier's checks, money orders, and traveler's checks.
Besides checking accounts, what services are typically offered by banks?
If people lose confidence in the safety of their deposits, they may withdraw money in a panic, and that can damage even healthy banks.
Why is it important to give people confidence in the safety of their deposits?
Price Level Stability
A goal of the Federal Reserve System to ensure that inflation or deflation does not occur.
Inflation
A sustained increase in the general level of prices. During a time of inflation, most things become more expensive and the purchasing power of money decreases.
Discount Rate
The interest rate the Federal Reserve System charges to banks when it loans them money.
The Fed changes the money supply.
What is the main tool the Fed uses to influence the economy?
A sustained increase in the overall level of prices. Inflation erodes the purchasing power of your money and makes it cost more to buy the things you normally buy.
Describe inflation.
A credit union functions similarly to a bank. But, unlike a bank, a credit union has nonprofit status and is owned by its members.
How does a credit union differ from a bank?
Bank drafts are an authorization to take money out of your bank account automatically to satisfy some financial obligation. Bank drafts are an example of an electronic funds transfer. An EFT occurs when you authorize someone to access your bank account fo
What is the difference between a bank draft and an electronic funds transfer?
401(k) / 403(b)
Popular types of defined-contribution retirement plans. They allow employees to contribute into their accounts, which may feature a range of investment options.
Annuity
A situation in which there are equal cash flows occurring at equal intervals for a fixed period of time.
Certificate of deposit (CD)
A contract between an individual and a financial institution that specifies the time that the individual will leave a certain amount of money deposited in the account and the interest rate earned.
Demand deposit
Money put into a checkable account that can be withdrawn at any dime.
Individual Retirement Account (IRA)
A type of savings account created by the government to encourage people to save for retirement.
Money market deposit account
Has some features of a checking account or a savings account. These accounts require an individual to maintain a minimum balance, have no maturity date, pay interest, and offer limited check-writing privileges.
Pension plan
A defined-benefit plan under which an employer makes contributions to the plan on the employee's behalf.
Vesting
The process of earning eligibility for an employer benefit.
Brokerage
A firm that provides access to the stock markets
Dividend
The distribution of cash to sharholders
Treasury bond
Issued by the US Treasury to finance the debt of the government
Shareholders
People who own stock in a company
Diversification
The process of investing in multiple investments
Commission
Fee charged by a brokerage firm for carrying out a transaction
Securities and Exchange Commission (SEC)
A government agency that regulates and monitors the stock market
IPO
Initial Public Offering--when a company first becomes popular
NYSE
New York Stock Exchange--floor where people id for stocks
NASDAQ
The name of an organized stock exchange that is an electronic network of dealers who buy and sell stocks
How long should you keep your money in the stock market to see financial growth and overcome dips?
5-10 years
High liquid , low risk investments offer relatively ___ interest rates
low
Stock
A certificate that represents pieces of ownership in a company
Primary Market
The market level in which the IPO first appears and companies first receive money
Secondary Market
When a company is said to be "publicly traded
Junk Bonds
bonds from companies with hte highest risk of defaulting on their bonds
Maturity Date
If you try to cash in a bond before the ____ ____ you may experience a loss of value as well as fees
Blue chip
This is poker slang for the large, safe companies often offered on the NYSE. They are typcally not cheap, but thaey are going ot be reliable and slow gorwing...maybe not offering huge gains
discount brokerage
offers a reduced level of service, reduced costs and often you can make the trades yourself online
full service brokerage
offers a complete service including advising, executing trades for you, and often charges higher fees or commission
Estate Planning
The process of developing a plan to administer and distribute our assets after death in a manner consistent with your wishes and the needs of your survivors, while minimizing taxes.
Probate Estate
The real and personal property owned by a person that can be transferred at death.
Gross Estate
All property that might be subject to federal estate taxed on a person's death.
Will
A written and legally enforceable document expressing how a person's property should be distributed on his or her death.
Testator
The person who makes a will that provides for the disposition of property at his or her death.
Codicil
A document that legally modifies a will without revoking it.
Letter of Last Instructions.
An informal memorandum that is separate from a will and contains suggestions or recommendations for carrying out a decedent's wishes.
Probate Process
The court-supervised disposition of a decedent's estate.
Executor
The personal representative of an estate designated in the decedent's will.
Administrator
The personal Representative of the estate appointed by the court if the decedent died intestate.
Durable Power of Attorney for Financial Matters.
Legal document that authorized another person to take over someone's financial affairs and act on his or her behalf.
Living WIll
A document that precisely states the treatments a person wants if he or she becomes terminally ill.
Durable Power of Attorney for Health Care
A written power of attorney authorizing an individual to make health care decisions on behalf of the principal when the principal is unable to make such decisions.
Ethical WIll
A personal statement left for family, friends, and community that shares your values, blessings, life's lessons, and hopes and dreams for the future. (legacy statements)
Right of Survivorship
The right of surviving joint owners of property to revive titile to the deceased joint owner's interest in the property.
Joint Tenancy
A type of ownership by two or more parties, with the survivor(s) continuing to hold all such property on the death of one or more of the owners.
Tenancy by the Entirety
A form of ownership by husband and wife, recognized in certain states, in which property automatically passes to the surviving spouse.
Tenancy in Common
A form of co-ownership under which there is no right of survivorship and each co-ownership under which there is no right of survivorship and each co-owner can leave his or her share to whomever he or she desires.
Community Property
All marital property co-owned equally by both spouses while living in a community property state.
Trust
A legal relationship created when one party transfers property to a second party for the benefit of third parties.
Grantor
A person who creates a trust and whose property is transferred into it. Also called settlor, trustor, or creator.
Trustee
An organization or individual selected by a grantor to manage and conserve property placed in trust for the benefit of the beneficiaries.
Beneficiaries
Those who receive benefits--property or income--from a trust of from the estate of a decedent. A grantor can be a beneficiary of his own trust.
Living (Inter Vivos) Trust
A trust created and funded during the grantor's lifetime.
Revocable Living Trust
A trust in which the grantor reserves the right to revoke the trust and regain trust property. The grantor can serve as the initial trustee.
Irrevocable Living Trust
A trust in which the grantor gives up the right to revoke or terminate the trust.
Pour-Over Will
A provision in a will that provides for the passing of the estate--after debts, expenses, taxed, and specific bequests--to an existing living trust.
Testamentary Trust
A trust reated by a decedent's will and funded through the probate process.
Irrevocable Life Insurance Trust
An irrevocable trust in which the major asset is life insurance on the grantor's life.
Gift Tax
A tax levied on the value of certain gifts made during the giver's lifetime.
Estate Tax
A tax levied on the value of property transferred at the owner's death.
Unified Rate Shedule
A graduated table of rates applied to all taxable transfers; used for both federal gift and estate tax purposes.
Applicable Exclusion Amount (AEA)
Credit given to each person that can be applied to the amount of federal estate tax owed by that person at death.
Annual Exclusion
Under the federal gift tax law, the amount that can be given each year without being subject to gift tax.
Gift Splitting
A method of reducing gift taxes; a gift given by one spouse, with the consent of the other spouse, can be treated as if each had given one-half of it.
Unified Tax Credit
The credit that can be applied against the tentative tax on estate tax base.
Asset Allocation
The process of spreading your investments among asset classes in order to diversify your investments.
Time Value of Money
The fact that money received today is worth more than money received next year or the year after.
Future Value
The projected value of a sum of money at some point in the future.
Compounding
Earning interest on the principal and the interest earned in the past.
Present Value
The value of a sum of money at the present time.
Simple Interest
Interest earned only on the original amount or principal.
Different asset classes perform differently at different times and under different circumstances. Having a variety of investments in a variety of classes helps protect the investor from excessive risk.
Why is diversification an important part of managing your portfolio?
If you start earlier in life, you can take advantage of the power of time to achieve greater results.
Why is it better to begin planning for retirement at age 20 than at age 30?
It can ensure that your wishes are followed in the future and it can relieve a burden from your loved ones.
Why is it worthwhile to engage in estate planning today?