Personal Finance Test 1 Flashcards
An agreement between you and lender that allows you to borrow money to purchase or refinance a home and gives lender right to take your property if you fail to repay money you’ve borrowed.
MORTGAGE
Money paid regularly at particular rate for use of money lent or for delaying repayment of debt.
LOAN INTEREST
Sum of money lent or invested on which interest is paid. The portion of a payment that goes toward product (house, car, property, etc.)
LOAN PRINCIPAL
A right to keep possession of property belonging to another person until debt owed by that person is discharged/paid in full.
LIEN
Processing fees you pay to your lender when you close on your loan (usually 3-6% of your total loan balance).
LOAN CLOSING COST
Part of your monthly loan payment is deposited to cover some of the costs associated w home ownership.
LOAN ESCROW
Fee that some lenders charge if you pay off all or part of your mortgage early.
PRE-PAYMENT/PRE-PAYMENT PENALTY
The grantee/loan institution may subsidize loan (such as FHA loan) so that interest rate is lowered (ex. lowering from 5% to 3%) thereby lowering mortgage payment.
SUBSIDIZED LOANS
The (FHA) Federal Housing Administration is part of HUD (US Housing & Urban Development) - the federal government insures/backs loan reducing risk of default, so your lender/bank can offer you better deal.
FHA LOAN
MAKING A PLAN
Problem 1) you need more money
Problem 2) you need to reduce your debt
Problem 3) you need to change how you spend
Financial issues that can affect individual
PERSONAL FINANCE
Process of planning every aspect of your personal finances (detailed road map - spending/financing)
PERSONAL FINANCIAL PLANNING
1) career decisions, 2) look for growing jobs/salaries, 3) state/local taxes 4) credit scores (impacts ability to borrow money
STEPS TO PERSONAL FINANCIAL PLANNING
Apartment/electricity/car/phone/gas/food
EXPENSES
Cost of pursuing one option instead of another expressed as value of activity you gave up
OPPORTUNITY COST
Anything owned, such as cars, motorcycles, homes
ASSETS
What we owe; debt
LIABILITIES
Assets minus liabilities = _____
NET WORTH
Act of resisting impulse to take immediately available reward in hope of obtaining more-valued reward in future.
DELAYED GRATIFICATION
What do you want? Car/house/own business goal must be achievable
STEP 1: ESTABLISH YOUR FINANCIAL GOALS
Within next year goals
SHORT TERM GOALS
Within 1-5 years goals
INTERMEDIATE-TERM GOALS
More than 5 years goals
LONG-TERM GOALS
What are in Step 1 + definitions
1) Short-term goals - 1 year
2) Intermediate goals - 1-5 years
3) Long-term goals - 5+
STEP 2: EVALUATE YOUR CURRENT FINANCIAL POSITION + what are in here
1) FORECAST - projection about what will happen in future
2) EXPENSES - anything on which we spend money
3) FIXED EXPENSE - expenses with remain same from period to period
4) VARIABLE EXPENSE - expenses that may change from one period to the next
STEP 3: Identify and evaluate options for accomplishing your goals
There are multiple roads that reach the same destination. The same is true for financial goals (ex. roommate, work extra hours, etc.)
Step 4: Pick the best plan + what it includes
RISK - possibility of financial loss
STEP 5: Periodically Evaluate Plan
make sure you’re on the right track.
STEP 6: Revise Financial Plan as Necessary
make changes if necessary.
STEP BY STEPS:
1) Establish your financial goals
2) Evaluate your current financial position
3) Identify and evaluate options for accomplishing your goals
4) Pick the best plan
5) Evaluate plans periodically
6) Revise financial plans if necessary.
Proven step-by-step procedure to lead to correct solution (mathematical formula)
ALGORITHM
Mental strategy that may or may not work in certain situations. Unlike algorithms, heuristics do not always guarantee the correct solution. However, this strategy allows people to simplify complex problems.
HEURISTICS
Trying a number of different solutions and ruling out those that don’t.
TRIAL AND ERROR
When you realize you can solve problem based on something similar you’ve dealt with in the past.
INSIGHT
People make assumptions about constraints and obstacles that prevent solutions.
ASSUMPTIONS
Tendency to view problems in customary manner (prevents people from seeing all diff options)
FUNCTIONAL FIXEDNESS
It is important to distinguish info that is relevant to the issue vs irrelevant data. When a problem is complex, it is easy to focus on misleading info.
IRRELEVANT/MISLEADING INFO
Tendency to only use solutions that have worked in past vs. alternate ideas.
MENTAL SET
9-Digit number printed in bottom left corner of each check (first set at bottom) - bank’s specific number
ROUTING NUMBER
(10-12 digits) and second set on bottom
ACCOUNT NUMBER
Lower right and upper right corner
CHECK NUMBER
Check that has been written but it hasn’t been cashed-deposited by bank or otherwise cleared by the bank.
OUTSTANDING CHECK
Summary of banking business activity that reconciles an entity’s bank account w its financial records. The statement outlines the deposits, withdraws, and other activities affecting bank # in certain period.
BANK RECONCILIATION STATEMENT
To make one account consistent with another especially by allowing for transactions begun but not yet completed.
RECONCILE
Having taken more money out of bank account than the account contained.
OVERDRAWN ACCOUNT
Lets you borrow money through your current account by taking out more money than you have in the account. There is no charge for this. Also a type of loan.
OVERDRAFT
investment style that mimics an index or matches a benchmark
passive
type of mutual fund that tracks benchmark or index
Index Fund
possibility of losses compared with the probablility of expected return on investment
risk
amount that revenues exceed expenses; profit
surplus
government watchdog entity for investments and securities (abbreviation)
SEC
fee charged to an investor by broker to trade a security
commission
document setting forth income and spending used for planning
budget
standard used to measure performance of investment
benchmark
ownership in an asset
equity
legal precedure involving an entity unable to pay debts
bankruptcy
investment vehicle comprised of securities using funds pooled from many investors
mutual fund
debt investment wherein one party lends money to another
bond
spreading investments in different securities/asset classes
diversification
payment to an employee based on hours or days worked
wage
amount earned on an investment expressed as %
return
index fund that trades like a security
FDIC, NCUA, inflation, wants and needs, principal balance, APR, money value, captal market, money market, thrift (credit union not to make money but to cut profit margin), financial compensation
all 15 on doc
traditional IRA, educational 529, statement account (of principal and interest earnings), interest earning checking account (draws interest), CDs, simple interest, compound interst, bonds, mutual fund
government entity that insures bank deposits (abbreviation)
FDIC
investment vehicle comprised of securities using funds pooled from many investors
mutual fund
debt investment wherein one party lends money to another
bonds
calculated on original amount of loan
simple interest
accumulated interest on previous accounts
compound interest
amount paid in cash for asset from third party
money value
