Chapter 2 Flashcards
What are the 5 foundation steps?
- Save for Emergency Fund $500
- Get out of Debt
- Pay cash for your car
- Pay cash for college
- Build wealth and give
sinking fund
Saving money for a purchase and letting interest work for you and not against you.
What is a negative savings rate?
Spending more money than you make and accumulating debt
What two factors have the most influence over the principle of saving?
Time - the more time you have money invested the better the return on your money
Rate of return - (interest) the higher the interest rate the better the return on your money
When the purchase power of your money today is different then the purchase power of the same amount of money in the future, due to opportunity to earn interest and inflation, what is it called?
Time value of money
What are key ideas to saving money?
- Focus
- Making saving a habit and a priority
*Discipline
What are three basic reasons for saving money?
To have an emergency fund
For large purchases
To build wealth
Why is having a fully funded emergency fund so important when it comes to your financial well-being?
The purpose of an emergency fund is to set money aside for unexpected financial emergencies and to provide a sense of financial security.
Saving is about what two things?
contentment and emotion
Why should interest earned not be a factor with your emergency fund?
The emergency fund is not intended to grow wealth.
What is the first thing you should save for?
Emergency fund
How do Americans typically rate when it comes to saving money?
Poorly, pattern of negative savings rate
How should you determine how much you should save each month?
guidelines on spending and saving indicate 10-15% of net income
What is a SMART Goal?
Goal Setting strategy for writing well planned out goals- SMART
S - specific
M - measurable
A - attainable
R - realistic
T - timely
How will your emergency fund change as you get older?
Will need to increase to 3-6 months of expenses
What is an interest-bearing account?
account that generates interest on available balance
When should you start saving for retirement?
Once you have paid off your college loans
What 2 things do you need to consider when evaluating the time value of money?
inflation interest rate (rate of return)
What are the essential elements of wealth building?
Discipline, time and compound interest
What is PYF? Explain
Pay Yourself First
Putting money into a savings and it should be considered a monthly fixed expense.
What is the formula for compound interest?
FV = PV (1 + r/m) mt FV = future value
PV = present value
r = interest rate
m = number of times each year money is compounded (monthly, annually, etc.)
t = the number of years
Example $1000 at 10% annually for 5 years
FV = $1000 (1 + ..10/1) 1*5
$1,645.31
What is an emergency fund?
Money set aside and left alone for a “rainy day.”
What is a sinking fund?
Saving money over time for a large purchase.
What is interest rate?
Percentage paid to a lender for the use of borrowed money, or the percentage earned on invested principal
What is time value of money?
Money today has different buying power than the same amount of money in the future
What is compound interest?
Interest paid on interest previously earned
What is savings rate?
Compares after-tax income to the money people spend on a variety of items
What is wealth building?
When a person intentionally invests money in a place where it can earn more money.
What is inflation?
The persistent rise in the cost of goods and services.
