midterm Flashcards
outline of personal finance
- Assessment
- goal setting
- Planning
- execute
- Monitor and reassess
- summary
Net worth =
assets - liabilities
Keep non-home debt less than what percent of home income?
8%
what is the total value of all items owned by an individual?
wealth
what is the organizational planning model?
financial plans -> financial actions -> financial results
what is the six step financial planning process?
- Define financial goals
- develop financial plans and strategies
- implement financial plans and strategies
- periodically develop and implement budgets to monitor and control progress against goals
- use financial statements to evaluate results of plans and budgets, taking corrective actions as required
- redefine goals and revise plans and strategies as personal circumstances change
what is the amount of satisfaction derived from purchases versus costs?
utility
what are the major participants in the us economic system?
- government
- business
- consumers
what is the function of the government in the economic system?
-taxation and regulation
what does the fiscal policy do?
- controls levels of taxation
* set levels of government spending
what does monetary policy do?
- controls money supply
* Used to stimulate of contract economic growth
characteristics of the economic cycles
- stags related to employment and production levels
* growth is measured by changes in GDP
characteristics of inflation
- measured by changes in CPI
- affects purchasing power and interest rates
- affects financial plans and goals
what determines your personal income?
- demographic income
- education
- where you live
- career
what is the balance sheet equation
assets = liabilities + net worth
what is the income statement
a measure of financial performance over a given time period
what is the solvency ratio for?
- Net worth at a given point in time
* Indicates potential to withstand financial problems
what is the solvency ratio?
Net worth/total assets
what is the liquidity ration for?
measures the ability to pay current debts in event of income loss
what is the liquidity ratio?
total liquid assets/total current debts
what is the savings ration for?
• shows percentage of after-tax income saved during a period of time
what is the savings ratio for?
cash surplus/income after taxes
what is the debt service ration for?
allows you you make sure you can comfortably meet your debt obligations
what is the debt service ratio?
total monthly loan payments/monthly gross (before tax) income
What are 5 ways to use budgets?
- monitor and control finances
- allocate income to reach goals
- implement disciplined spending
- reduce needless spending
- achieve long-term financial goals
What is the rule of 72?
Number of years to double money= 72/annual compound interest rate
What is the future value formula?
FV= amount invested X future value factor
What is cash management?
The routine day-to-day use of liquid assets
What are examples of liquid assets?
- cash
- checking accounts
- savings accounts
- money market deposit accounts
What are depository financial institutions?
- commercial banks
- savings & loan associations
- savings banks
- credit unions
What are non-depository financial institutions?
- stock brokerage firms
* mutual funds
Characteristics of commercial banks
- largest type of traditional financial institution
- offer full array of financial services
- only financial institution to offer non-interest-paying
Characteristics of S&Ls
- not as prominent as they once were
- suffered financial loss due to a scandal in the 1980’s
- offer services similar to commercial banks
- may pay slightly more on savings deposits
- channel depositors’ savings into mortgage loans
Characteristics of savings banks
- located primarily in New England
- offer interest-paying checking accounts & rates similar to the S&Ls
- most are mutual associations
Characteristics of credit unions
•provide financial products and services to people with a common tie
•non-profit, member owned financial cooperative
-interest rates higher than other institutions
Characteristics of stock brokerage firms
- May offer MMMF’s
- margin loans
- credit card services
Characteristics of mutual funds
- investment companies
* owned by investors/members
The federal deposit insurance corporation insures what
- Accounts at banks
- savings banks
- S&Ls
The national credit union administration insures what
Credit unions
What is a characteristic of a checking account?
It demands a deposit.
If sufficient funds, banks must pay amount of check or ATM withdrawal
Characteristics of savings accounts
It’s a time deposit. Money is expected to remain on deposit for a longer time period
What are interest bearing checking accounts?
- include NOW, share draft, and money market deposit accounts
- offered by banks, savings banks, S&Ls, and credit unions
What are interest paying checking accounts?
- NOW accounts
- money market deposit accounts
- money market mutual funds
What are NOW accounts?
Interest paid, may have minimum balance
What are money market deposit accounts?
Convenient, safe, federally insured
What are money market mutual funds?
Pools investors funds to purchase high-return, short-term, marketable securities
What are asset management accounts?
Comprehensive deposits account combining checking, investing, and borrowing activities offered by brokerage firms and mutual funds
What bank service provides investment and estate planning advice?
Trust services
What are cashier’s check?
Drawn on the bank
What are travelers check?
Used for making purchases worldwide
What are certified checks?
Drawn on account but guaranteed by bank
Characteristics of certificate of deposit (CD)
- funds remain on account for a given time period
* early withdrawals incur on interest penalty
Characteristics of U.S. Treasury bills
- debt securities issued by U.S. Treasury
- sold at discount ; $100 minimum
- mature in 1 year or less
Characteristics of EE bonds
- purchased by payroll deduction historically
- also sold at banks, S&Ls, credit unions
- issued by U.S. treasury
- fixed rate of interest, adjusted at 6 month interval
- purchased at discount
- accrual type-security with interest pis when cashed in
- new bonds must be held 1 year
- income taxes at be avoided in needed for educational purposes
Characteristics of I saving bonds
- sold at face value
* combine fixed rate with an inflation rate component
What should be done when buying an automobile?
- Research your purchase thoroughly
- Select based in needs and preferences
- Negotiate price
- Maintain & repair after purchase
What are two car leasing processes?
Closed-end lease and open-end lease
What is a closed-end lease?
- “walk away” from car when lease is over
* most popular
What is a open-end lease?
- payment based on car’s residual value
* upon return, pay difference if car’s worth is less than estimated
What are leading payment calculations based on?
- capitalized cost (price) of the car
- forecasted residual value at end of lease
- many factor (financing rate) on lease
- lease term
What are 5 dumb car leasing mistakes?
- paying too much money upfront
- forgetting gap insurance
- underestimating your mile driven
- not maintaining the car
- leasing for too long
Characteristics of cooperative apartments
- retracts own shares in nonprofit corporations that owns building
- assessed fees based in space occupied
What are some benefits of owning a home?
- personal satisfaction
- tax shelter
- inflation hedge
What are some of the costs of home ownership?
- down payment
- points and closing costs
- mortgage payments
- property taxes and insurance
- maintenance and operating expenses
What amount is usually the down payment on a house?
5%-20% of purchase price
If the down payment is less than 20% . . .
Lender may require a private mortgage insurance (pmi), which protects lender of buyers defaults
What are points?
- premium paid for obtaining lower mortgage rate
- one time fee charged by lender
- from 0-3 points assessed on mortgage
- essentially, prepaid interests
What can be some closing costs?
- loan application fee, organization fees
- points
- title search, insurance
- attorney fees
- appraisal fees
The mortgage payment is divided into what three areas?
- principal
- interest
- taxes
- insurance
What is the affordability ratio for monthly mortgage payment?
25-30% of monthly gross income
What is the total of all monthly installment loan payments?
33-38% of monthly gross income
Most realtor agents belong to what?
Multiple listing service (MLS)
What are types of listing agreements?
- Exclusive right to sell
- Exclusive agency agreement
- Open agreement
- Net listing agreement
What is an exclusive right to sell agreement?
The agent receives a commission no matter who sells the property
What is an exclusive agency agreement?
The agent has an exclusive right to market the home
What are sources of mortgage loans?
- commercial banks
- thrifts institutions
- mortgage banks
- mortgage brokers
What are different types of mortgage loans?
- fixed rate mortgage
- adjustable rate mortgage
- FHA mortgage
- VA loan
What is FHA mortgage?
- payments insured by federal housing administration
* lower down payment, interest rates, closing
What is a VA loan?
•payments guaranteed by Veterans Administration
