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Collateral-What you put up in order to recieve money or a loan. ex: car or house
Character-History, how you take care of your money
Capacity-your capacity of income. What you can do with your money |
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| According to financial advisers, a family with monthly living expenses of $2,500 should maintain readily accessible savings of at least |
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| The best use of credit is probably to |
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| The ___ the APR the ____ the true cost of the credit |
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| Your continuing record of credit usage is called your credit |
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| Alender can legally discriminate in granting credit based on |
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| The U.S government measures inflation using |
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| _____ income is exempt from taxes in the current year but is subject to taxation in a later year |
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| Tax-Sheltered (Tax defered) |
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Which of the following is the best example of a well-stated financial goal?
a. Buy a $3,000 computer in 18 months
b. Purchase a 3 bedroom home in 5 years
c. Buy a $2,000 stereo
d Pay off your credit cards as soon as possible |
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| The first step in the budgeting process is |
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| The higher the income the higher the amount of tax is taken out of your income |
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Which of the following is classified as a tangible asset?
a. motorcycle
b. cash
c. Real estate investement
d. Pension Plan |
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| Everybody pays the same amount (hurts people with less of an income in a greater way) |
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| The formula for calculating net worth is |
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Which of the following taxes is progressive?
a. Federal income taxes
b. State sales tax
c. social security party
d. All of these |
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| Earned income is reported to the recipient on a |
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| The Federal Deposit Insurance Corporation (FDIC) insures accounts in |
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| ______________ typically pay the highest rates of interest on savings |
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| A check drawn on a financial institution, backed by the financial institutions finances, and made out to a specific payee is called a |
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| In general, you will recieve higher rates of interest on your certificate of deposit the ____ maturity and the _____ the dollar amount invested |
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| Which of the following is the best advice for people who want to start giving? |
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| When you use a debit card, funds are instantaneously removed from your account |
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| Fixed-time deposits specify a period of time that the savings must be left on deposit |
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| In general, the shorter the maturity time on a certificate of deposit the higher the rate of interest that will be paid |
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| Checks mailed to the bank for deposit should always be endorsed with a restriction endorsement |
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| The additional dollar cost for using credit is referred to as the APR |
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| Experian, Equifax, and TransUnion are the three largest national groups of credit bureaus |
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| The only truly free way to obtain your credit reports is through annualcreditreport.com |
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| By saving and investing, people are much more likely to have funds available for future consumption |
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| You cannot build financial security or wealth unless you spend less than you earn |
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| Tax exempt income is preferable to tax-sheltered income |
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| Compound interest will produce larger investement values than simple interest |
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| High-demand occupations tend to pay lower salaries |
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| Posting your resume on Monster.com is all you need to do to get a job |
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| After a job interview you should immediately send an email |
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| False- Send a hand written thank you |
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| Financial begins by what Examining one's values |
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| The major purpose of budgeting is to reach your financial goals |
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| Monetary assets include cash and near-cash items that can be readily converted to cash |
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| It is usually easy to reduce a fixed expense |
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| Liquidity is the speed and ease with which an asset can be converted to cash |
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| Keeping good records is a prerequisite for effective financial planning |
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| The Internal Revenue service is the agency that collects federal income taxes |
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| A progressive tax is one that demands a higher percentage of a person's income as income increases |
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| Tax avoidance is illegal whereas tax evasion is legal |
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| The person who receives the proceeds of a life insurance policy at the death of the person whose life is insured is the _______ |
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| Life insurance should be bought primarily |
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| To provide protection from financial losses |
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| One cannot rely on workman’s compensation to cover health care needs because it |
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Definition
| Covers only job-related injuries and illnesses |
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| The period of time each year when you can make changes in your selection of health care plans available from your employer is called an |
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| Which of the following types of insurance can be purchased only through a federal government program? |
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| The primary difference between a speculative risk and a pure risk is that there is a chance for ______ in a speculative risk but a chance for ______in a pure risk. |
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| Mortgage insurance protects |
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| An increase in the value of a home is called |
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| Needs and wants should all both be considered necessities |
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| A car’s sticker price is the manufacturer’s suggested retail price |
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| The sticker price on a new car is typically the final sales price |
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| You can estimate the trade-in value of your car on the websites for the National Automobile Dealers Association, Edmunds, or Kelley Blue Book |
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| Sellers are the only source of financing for big tickets |
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| To be most successful in negotiating, one must be willing to walk away from the deal |
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| Buying a home represents the largest expenditure most people will ever make |
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| A lease typically protects the landlord but not the renter |
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| A housing unit that is detached from other units is called a single-family dwelling |
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| The actual transfer of ownership of real estate occurs at the closing |
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| The abbreviation PITI stands for principal, interest, real estate taxes, and investment |
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| When the purchase contract is signed, the seller keeps the earnest money as a deposit against the purchase price |
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| Property insurance protects you from financial losses resulting form the damage to or destruction of your property or possessions |
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| Deductibles are requirements that the insured pay an initial portion of any loss |
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| Independent agents typically represent more than one insurance company |
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| Uninsured motorist coverage provides protection for the driver and passengers in a car that is hit by an uninsured driver |
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| Earthquake insurance is covered under the standard homeowner’s insurance policies |
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| The federal government administers the National Flood Insurance Program |
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| A group health care plan is sold collectively to an entire group of persons rather than individuals |
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| Group life insurance would be especially beneficial for persons who: |
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| The advantage of term insurance is: |
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| More coverage per premium dollar |
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| Ratings of the financial strengths of insurance companies are available from: |
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| Standard & Poors and A.M. Best Company |
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Definition
1.Establish household goals
2. Recognize a problem or opportunity
3. Evaluate the alternatives
4. Make the purchase decision
5. Purchase the good or service
6. Conduct a post purchase evaluation |
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| Make more money, RETIREMENT |
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| Defined Contribution plan |
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Definition
| Get from your company, the more you put in the more you get out when you retire |
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Definition
| Want the highest possible interest rate or rates of return |
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| Open enrollment periods are common in group health care plans |
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| Medicad pays for the costs of custodial nursing home care |
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| A student who has lost health care coverage under his or her parents employer group plan is eligible for coverage through COBRA |
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| Life insurance is insurance that protects against financial losses resulting from death |
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| The largest potential financial loss resulting from premature death is lost income- |
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| Term life insurance costs far more than cash-value life insurance |
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Definition
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| When purchasing a term life policy, it is generally best to purchase a guaranteed renewable policy |
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| Once a insurance policy is issued, the insurance company cannot refuse to pay death benefit- |
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| The time limit specified on a suicide clause is generally 5 years |
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| Parents with minor children almost always need life insurance |
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| Independent agents sell insurance for more than one insurance company |
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Of these four items, which is most aptly described as a need?
Shelter
A new house
Home ownership
A condominium |
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| Carl Purcell has found an apt that has a monthly rent payment of $950 and requires a one month’s security deposit and a $500 damage deposit. In order to move in, Carl will probably be required to pay |
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Definition
950 (deposit)
500 (damage deposit)
+950 (1st month)
=2400 |
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| A form of housing ownership where the owner holds legal title to a specific housing unit and a proportionate interest in the common grounds and facilities is |
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Definition
72/Rate of Return = Number of years to double your money
Class Example:
A 20 year old is given $1000 as a Christmas gift. If he reinvests the money at a 12% interest rate, how much will the investment be at age 68?
Formula: 72/12 = 6 years to double
Age Amount
20 $1000
26 $2000
32 $4000
38 $8000
44 $16,000
50 $32,000
56 $64,000
62 $128,000
68 $256,000 |
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Definition
We’re living longer; longer retirement = larger nest egg
Personal incomes are not rising very rapidly; salaries expected to increase at rate of inflation…therefore, if you wish to increase std of living, invest.
The labor market is changing; average person will change jobs 4 or 5 times in career…about 25% of workforce will be unemployed for periods of time, therefore investments will help you “weather” bad luck
Self-directed retirement plans are now the norm; traditional defined benefit plans (pensions) are going away replaced by defined contribution plans (401K). |
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| Steps in the Investment Process |
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Definition
Before you begin investing, you should complete the following tasks:
Set short-term and long-term personal goals
Prepare current financial statements (income statement and balance sheet)
Develop and follow a realistic budget
Establish a regular savings plan
Properly manage credit (paying off 18% interest = earning 18% interest risk free)
Obtain adequate insurance coverage in all major areas (home, auto, disability, etc.)
Begin contributing to your employer’s retirement plan (tax deferred and/or deductible AND employer match) |
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| Steps in the Investment Process #1-4 |
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Definition
1. Set investment goals
Should reflect your financial plan
What do you want to accomplish? Retirement? Vacation home?
Carefully assess current and expected financial situation (income levels)
2. Assess Risk and Return
How long will you hold the investment? (age related issues; rule of thumb—the longer you hold the investment, the more aggressive you can be)
What level of expected return is necessary to meet your objectives? (Stocks are higher..maybe around 6 to 8 percent; CDs lately have been paying 1 to 2 percent)
How much risk are you comfortable with? (income and age play a role in risk tolerance…as do security needs; can you sleep at night?)
3. Select the Right Investments
Stocks—represent ownership of a company (equities)
Bonds—represent lending money to a company, government, or organization (maturity varies, redeemable at face value, although the bond is purchased at a discount or premium based on current interest rates; high rates = discounts; low rates = premium)
Money Market Instrument—lending to a business or government… predetermined interest rate; matures in one year (more liquid); T Bills = lending to US government…savings account = lending to your local bank
4. Managing Your Investments
Passive approach = buy and hold
Active approach = regular evaluation and adjustment; active management can result in higher returns, but typically higher transaction costs (charges by brokerage to execute orders) |
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Term
Types of Investments
Stocks |
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Definition
| Shares of ownership in a company. When you purchase a stock, you are literally purchasing a part of the company and you share in the profits or losses of that company. Stocks are initially issued by a company, but are traded in the market which can affect the price of a share. Some stocks in large companies are desired for the dividends they produce (dividends represent the earnings of a company and are independent of the stock price). Strong portfolios of dividend-producing stocks are typically a large part of a retirement investment strategy. |
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Types of Investments
Bonds |
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Definition
| Money you loan to a company (also called “debt” to the company). This is often how a company will obtain funding to manage long-term growth (building a factory, expanding into new markets, etc.). The bond will be sold at a discount (TVM calculation) and is paid back at face value. Bonds can also be sold and traded in the market which affects the value of the bond. |
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Term
Types of Investments
Mutual funds |
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Definition
| Some investment companies bundle together groups of stocks and bonds to produce a diversified portfolio to achieve particular investment goals (minimize risk, increase returns, maximize income, etc.). |
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Types of Investments
Real Estate |
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Definition
| Some investors put their money into land and structures permanently attached to that land. Examples: commercial properties, rental housing, etc. |
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Types of Investments
High Risk investments |
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Definition
| Alternative investments that have significant fluctuations in return over short time periods. Examples: collectibles (baseball cards, sports jerseys, antiques), precious metals and stones, and options and futures contracts. |
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Definition
| Uncertainty exists over what an investment’s actual return will be at some point in the future. If return is one side of the investment coin, risk is the other side. |
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Term
Types of Investment Risk
Random Risk |
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Definition
| The risk of owning only one type of investment (just stock in one company). If it does poorly, you lose everything. If you own stock in several companies it is called diversification (reducing risk by spreading the risk across several different options). |
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Term
Types of Investment Risk
MArket risk |
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Definition
| Diversification cannot remove all risks because stocks and bonds tend to move up and down over time. Normally, not all markets will decline at the same time, but sometimes it does, like the massive declines during the 2007-2009 period (the Great Recession). So even a well-diversified portfolio is subject to the whims of the market. |
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Term
Types of Investment Risk
Business failure risk (or default risk). |
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Definition
| This is the potential that a company you invest in can fail (bankrupt). If this happens, you lose your money. |
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Term
Types of Investment Risk
Inflation risk (also called purchasing power risk). |
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Definition
| The danger that your investment will not grow at a sufficient rate to keep up with inflation (historically averages about 3% annually in the US). Historically, one would balance inflation risk with investments that tend to appreciate over time (real estate, for example), but during the years of 2007-2011, real estate declined between 30% and 50%, so investors in real estate experienced deflation risk. |
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Term
Types of Investment Risk
Time horizon risk |
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Definition
| The sooner you get your money back from an investment, the less likely something negative will happen to it. The converse is true, the longer your money is tied up in an investment, the more likely something adverse may happen that jeopardizes your return. Therefore, the longer the investment, the higher the risk. This is why investors expect (and typically receive) higher returns for longer term (thus riskier) investments. |
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Term
Types of Investment Risk
Business Cycle Risk |
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Definition
| Economic growth does not follow a steady path but has peaks and valleys. The profits of most companies follow the same pattern with the larger economy. Some industries do not follow the same patterns because demand remains fairly steady even in an economic downturn. Examples are gasoline retailers, supermarkets, and utility companies. |
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Term
Types of Investment Risk
Market-volatility risk. |
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Definition
| Investments are all subject to occasional sharp fluctuations in price as a result of changes within the company (a change in leadership, or the company failing to meet their profitability numbers) or some psychology in the market. These wild swings are often temporary and the long-term investor need not be terribly concerned about them because over a longer time frame, stocks generally have better returns. |
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Types of Investment Risk
Liquidity risk |
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Definition
| Because every stock sale needs a buyer, you may not be able to easily sell your stock at the price you want quickly enough to avoid a loss or make the profit you desire. |
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Term
Types of Investment Risk
Marketability risk |
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Definition
| When you have to sell an investment quickly, you may have to take a loss in order to make the sale. |
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Term
Types of Investment Risk
Reinvestment risk |
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Definition
| The risk that the return on a future investment will not be the same as the original investment. |
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