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Unit 5 Personal Finance
Terms in this set (29)
What is the difference between saving and investing?
Saving you are putting money away to keep and use later. Investing you are putting money in, hoping that it will increase.
Define liquidity, interest, compound interest, opportunity cost, and trade-off.
liquidity- how easy it is to turn your money from the savings account into cash
interest- the cost of using someone else's money
compound interest- earning interest on interest
opportunity cost- the loss of potential gain from
other alternatives when one alternative is chosen
trade-off- giving one thing up for another thing
What does the phrase "pay yourself first" mean?
Put away money in savings before you spend any of it. This way you are "paying yourself" before you spend any of the money
What percentage of your net pay should be put into savings?
How many months of expenses do the experts recommend that an individual save in an emergency fund?
What are the three factors in the concept of the time value of money?
3. interest rate
List and define the five types of savings tools we discussed in class
checking account- account that provides an easy method for withdrawing and depositing money
savings account- account designed to hold money not spent on current consumption
money market account- account that usually has minimum balance requirements and tiered interest rates
certificate of deposit (CD)- account that is used for a fixed period of time and allows restricted access to the funds
Why are savings tools considered secure?
they hold your money in a bank where it is highly unlikely it will be stolen. Some savings tools even make it harder for you to use the money if they are meant to be more secure
What is the Federal Deposit Insurance Corporation (FDIC)?
preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000
Describe the relationship between liquidity and interest for the savings tools
the more liquid an account is, the less interest there is on it. For example checking accounts are the most liquid and they have the lowest interest rates, if they have one at all
What is a tiered interest rate?
it's when the amount of interest earned depends on the account balance
What is the formula for figuring the rate of return?
total return / amount of money invested
Define risk, principal, inflation, dividends, market price, financial risk pyramid, and portfolio diversification
risk- possibility of harm or damage on something that is insured
principle- original amount of money saved or invested
inflation- rise in the general level of prices
dividends- share of profits distributed in cash to stockholders
market price- the price of a commodity when sold in a given market
financial risk pyramid- shows the levels of risk among different tools. lowest to highest: bonds, mutual and index funds, stock and real estate, speculative
portfolio diversification- reduces risk by spreading money among a wide array of investments
List and define the six types of investment tools we discussed in class
bond- form of lending to a company or the government
stock- a share of ownership in a company
real estate- ownership of residential or commercial property or land
speculative investments- high risk investments that have the potential for significant fluctuations in return over a short period of time
mutual funds- when a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds
index fund- type of mutual fund designed to reduce fees by investing in the stocks and bonds that make up the index
Where do the six types of investments fall on the financial risk pyramid?
lowest to highest risk: bonds, mutual and index funds, stock and real estate, speculative investments
What is the relationship between risk and return in investing?
higher risk = higher return
Why would you want to invest in a diversified portfolio?
it reduces risk by spreading money on a wide array of investments
What is the formula for the Rule of 72?
72 / % = years to double
What are three important things to remember about the Rule of 72?
-its only an approximation
-it assumes the interest rate stays constant
-does not allow for additional payments to the original amount
-does not account for taxes
Who would a person contact to purchase stocks?
stockholder or shareholder (or brokerage firm)
What is the difference between full service brokerage firm and discount brokerage firm?
Full service brokerage firm offer investment transactions and a financial advisor while a discount brokerage firm only completes orders to buy and sell investments
List all six wealth accumulation investment tools from lowest to highest risk
bonds, mutual and index funds, real estate and stock, speculative
If you are a conservative investor seeking a diversified portfolio which savings and investing tools would you use? Why?
You would use a certificate of deposit for a savings tool, or another one with high interest and low liquidity. You would most likely invest in bonds or mutual/index funds since these are low risk
If you are an aggressive investor which savings and investing tools should you use and why?
you would use checking accounts as a savings tool because the money can be turned into cash very easily. They would also use a speculative investment tool because these are very high risk but have good returns
What does investing focus on?
long term goals, and making money by giving some now.
What does saving focus on?
keeping your money safe and financial security
Using the "Rule of 72" How many years will it take to double one's money at an interest rate of 5%?
Using the "Rule of 72" what rate of return is needed for one's money to double in 7 years?
If your total monthly expenses are $1,450, how much should you keep in liquid assets?
1450 x 6 = $8700
Standard Inc. has an annual interest expense of $40,000. If Standard's times-interest-earned ratio is 3.0, what is Standard's Earnings Before Taxes (EBT)?
In which comparative financial statements is each amount expressed as a percentage of a base amount?
Identify: "MMC failed to record payroll expense for the last payroll period of 2016."
Which style of resume usually has a position statement such as "professional goal" or "career objective"
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Krugman's Economics for AP*
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