Chapter 1 Flashcards
Define personal finance planning.
The process of managing your money to achieve
personal economic satisfaction.
People in their 20s and 30s should: (2)
Start saving regularly and invest long-term; have adequate health and property insurance,
but less life insurance
People in their 40s and 50s should: (4)
Max out retirement contributions; Plan for adequate children’s college funds; Use stocks and equity funds for most long-term investments; Have adequate insurance (all six types)
People 50+ should: (5)
Not preserve all wealth for others; Not retire too young; Maintain earnings potential; Not put all funds in fixed-income, low risk, low earnings
CDs and bonds; Consider long-term care policy
What is the six-step procedure for financial planning?
determine current financial situation; develop your financial goals; identify alternative courses of action; evaluate alternatives; create and implement your financial action plan; review and revise the financial plan
Define opportunity cost.
What you give up when you make a choice
What are five types of risk?
inflation risk; interest-rate risk; income risk; personal risk; liquidity risk
What is inflation risk?
rising prices cause lost buying power
What is interest-rate risk?
changing rates affect your costs and earnings
What is income risk?
un- or underemployment
What is personal risk?
factors creating undesirable situations (e.g. health, safety)
What is liquidity risk?
difficulty converting asset to cash without loss in value
Types of financial goals can be influenced by: (2)
the time frame in which you want to achieve your goals; the financial need that drives your goals
How long is a short-term goal? Give examples.
<1-2 years — vacation, pay small debt
How long is an intermediate goal? Give examples.
2-5 years — down payment on car
How long is a long-term goal? Give examples.
5+ years — down payment on house, IRA
Give examples of consumer products.
food, clothing, entertainment
Give examples of durable products.
auto, A/C system, refrigerator
Give examples of intangible products.
health, education, leisure, relationships
Goals should be (what acronym)?
SMART
What does SMART stand for?
specific, measurable, action-oriented, realistic, time-based
What is our central banking system?
Federal Reserve System
What does the Fed do (4)?
influences dollars available for spending in the economy; sets reserve requirements; sets discount rate; buys/sells government securities
Define economics.
study of how wealth is created and distributed
High demand for money results in
interest rates going up
What is inflation?
rise in the general level of prices
What is the Rule of 72?
determines when something will double
Describe consumer spending: (2)
total demand for goods and services in the economy; influences employment and income
Define money supply.
dollars available for spending in our economy
Define unemployment.
% of people willing and able to work who cannot find employment
Define housing starts.
of new houses being built
Define gross domestic product.
total value of all goods and services produced within our borders
Define trade balance.
exports minus imports
Define stock market indexes.
(e.g. NYSE, S&P 500, NASDAQ) — relative value of stocks represented by an index
Give three examples of personal opportunity costs.
time, effort, health
Give three examples of financial opportunity costs.
interest, liquidity, safety
Describe the time value of money.
increases in an amount of money as a result of interest earned
What three amounts are needed to calculate TVM?
principal (how much); interest rate (what rate); time (how long and how frequently)
What is the formula to compute simple interest?
(principal) * (annual ir) * (time period)
What is FV?
future value — the amount to which current savings will increase, based on a certain interest rate and a certain time period
What is another term for FV?
compounding (earning interest on previously-earned interest)
What is an annuity?
an FV computed for a series of deposits
What is present value?
the current value of a future amount, based on a certain interest rate and a certain time period
What is another term for PV calculations?
discounting
What is true about the relationship between PV and FV?
The PV of the amount you want in the future will always be less than the FV
What are 5 methods for computing TVM?
formulas; TMV tables; financial calculators; spreadsheet software; TVM websites and apps
What is a financial plan? (3)
formalized report that 1) summarizes current financial situation; 2) analyzes financial needs; 3) recommends future financial activites
