Week 1 Terms: F.I. , Savings Rate, Net Worth, Inflation Flashcards
What is the role of a financial mission statement in personal finance?
A financial mission statement gives you a purpose and momentum for your spending habits so you can avoid becoming a consumerist and ultimately live financially independent. Helps you know your why.
Fi Number and Calculation
The amount of money you need to be financially independent is
The calculation is 25 times the total amount of annual expenses
Behavioral Habits that lead to FI
- Know your why
- maximize your income
- minimize expenses
- wisely invest difference
5.track your spending
FIRE acronym
Financial, Independence, Retire, Early
Savings Rate and calculations
savings rate is the percentage of income you’re saving
Calculation is ((Gross income - expenses)/ gross income) x 100
Financial Independence definition
Having enough income to pay for one’s living expenses and live the life you want without having to be employed or dependent on an support entity.
Consumers vs consumerist
Everyone is consumers, but not everyone is consumerist.
A consumer is one who buys goods and services, however, a consumerist is one who consistently buys the newest products and lives a rat lifestyle– living paycheck to paycheck.
Net worth meaning
assets (entities of value) minus liabilities (debts)
Examples of better debt
Mortgage (equity counters)
Student loans (personal investment)
Small business expenses
Examples of bad debt
credit card debt (interest rates are high)
auto loans (car depreciates over time)
personal loans
Equity and home equity meaning
ownership
Home equity= The amount of equity in a house fluctuates over time as more payments are made on the mortgage and market forces impact the property’s current value.
median income and net worth in the United States
Median income: 63,000
Median net worth: 97,000
compound interest
money that grows exponentially the longer you save (years) because the interest you earn in one-year gains interest the next.
Compound interest is amazing because in comparison to simple interest, where your money grows at a constant interest rate, you will make more money in that account over time.
Inflation definition, positives, and negatives.
Inflation is when it costs more to buy the same goods and services
Inflation can be good for a consumer’s prudence and economic growth when it is kept at its target rate. However, inflation is unpredictable and come sometimes grow at a large rate, which can be detrimental to an individual’s savings. [Bonus: sometimes, high inflation can bring COLAs– cost of living adjustments– that increase your paycheck and benefits to keep up with the rising costs of goods and services]
Consumer price index
An indicator of inflation, tracking it over time
measurement of average change in prices of a “basket of goods” over time.
Three kinds of inflation and their definitions
Cost Push Inflation– costs of businesses increase and thus businesses raise their prices
Demand Inflation– increase in demand of goods but the supply has decreased
Printing Money– government increases gov debt, or increases the loans that banks can hand out.
Zero Based Budgeting Definition and Concepts
Naming where every dollar goes so you can know where money went yesterday, today, and will go tomorrow.
- Debit/expenditure: money going out of your account (rent)
-Credit/Deposit: money going into your account (paycheck)
What are the three categories for zero based budgeting
Giving, Saving, Spending
What is the target inflation rate
2.3%
What is Know Your Why?
Know why you save, spend, invest, and give.
Types of risk
High of risk, high reward= entrepreneurship
Medium risk, medium reward= stock investments
Small risk, small reward= savings/ savings account
Spending Categories
Rent, entertainment, food
Giving Categories
Religious
Make a Wish
Financial Aid Institutions
Saving Categories
Retirement: 401k
Certificate of Deposit (CD)
