Chapter 1 Flashcards
Personal Finance Basics and the Time Value of Money
The cost of money and the cost of borrowing credit; the return on $ when saved or invested.
Interest
The ability to readily convert financial resources into cash without a loss in value.
Liquidity
The chances of losing something of great value (step 4 in the Financial planning process).
Risk
Increases in an amount of money as a result of interest earned
Time Value of Money
The amount to which current savings will increase based on a certain interest rate and a certain time period; also referred to as compounding.
Future value
The current value for a future amount based on a certain interest rate and a certain time period; also referred to as discounting.
Present value
The process of managing your money to achieve personal economic satisfaction.
Personal financial planning
The use of knowledge and skills for earning, saving, spending, and investing money to achieve personal, family, and community goals.
Financial literacy
Three components to personal financial activities
Spending
Saving
Sharing
The financial planning process
Determine current financial situation
Develop your financial goals
Identify alternative courses of action
Evaluate alternatives (risk assessment)
Create and implement your financial action plan
Review and revise the financial plan
What a person gives up by making a choice
Opportunity cost
The stages in the family situation and financial needs of an adult
Adult life cycle
The ideas and principles that you consider correct, desirable, and important
Values
The study of how wealth is created and distributed
Economics
A rise in the general level of prices
inflation
Divide 72 by the annual inflation rate to find out how fast prices are rising
Rule of 72
The legal status of a person who is not able to pay debts owed.
bankruptcy
A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities
financial plan
A series of equal deposits or payments
annuity
SMART Goals
Specific
Measurable
Action-oriented
Realistic
Time-based
Published by the Bureau of Labor Statistics, is a measure of the average change in the prices urban consumers pay for a fixed “basket” of goods and services
Consumer price index (CPI)
A decline in prices
Deflation
Total value of goods and services produced within a country’s borders, including items produced with foreign resources
Gross Domestic Product (GDP)
Demand for goods and services by households and individuals
Consumer spending
A financial instrument that represents debt or equity
security
Such as bonds, represent money borrowed by companies or governments
debt securities
(stock, mutual funds, CDs, commodity futures) represent ownership in a corporation
equity securities
The most common personal opportunity cost
time
