Savings

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Terms in this set (...)

70-20-10 Rule
spend 70%, save 20%, invest 10%
How many months of income do financial experts say you should have saved up in case of emergency?
3-6 months
Savings
Portion of current income not spend on consumption
How liquid is a savings account?
Second to highest
How does a person access funds deposited into a checking account?
Check, ATM, or debit card
Compound Interest
Earning interest on interest
What are factors affecting the time value of money?
Time, amount invested, and interest rate
What does it mean to "pay yourself first?"
Taking out a portion of a paycheck for saving or investing before using any of the check for spending
Using rule of 72, how many years will it take for Emma to double her month if she is earning a 6% rate of return?
12 years
Using the rule of 72, what rate of return is needed for Jimmy to double his investment in 18 years?
4%
Different types of cash management tools?
Checking account, savings account, money market deposit account, certificate of deposit, and savings bond
Cash management tools in order of liquidity (least liquid to most)
Savings bond, CD, money market, savings account, checking account
Cash management tools in order or interest rate/rate of return (lowest to highest)
Checking account, savings account, MMDA, CD, saving bond
Describe the safety of cash management tools
There is a low risk
Difference between simple and compound interest
Simple: interest earned on principal investment
Compound: interest earned on interest
Inflation
Steady rise in the general level of prices
Interest
Price of money
What do we assume about Rule of 72? Can we pull interest out? Is it an exact estimate?
We assume its an estimate, interest rate is fixed, and we're not adding or taking away and money. No. No
Cash management
Daily routine of handling money to take care of an individual's or family's needs by keeping enough available for living expenses, emergencies, savings, and investing while minimizing interest earnings
Cash management tool
Financial account used to assist with daily cash management including checking accounts, savings accounts, MMDA, CD, and savings bonds
Certificate of deposit
Insured interest earning savings instrument with restricted access to funds
Checking account
Tool used to transfer funds deposited into the account to make a cash purchase
Financial risk pyramid
Illustration which represents the trade-offs between risk and rate of return for a number of investments
Fixed interest rate
Interest rate will not change for the lifetime of the investment
Future value
Value of an asset projected to the end of a particular time period
Interest rate
Percentage rate paid on the money saved or invested expressed as an annual percentage rate
Investing
Purchase of assets with the goal of increasing future income
Liquidity
The speed and ease with which an asset can be converted into cash
Money market deposit account
Government insured account offered at most depository institutions
Number (N)
Time, number of payments or compounding periods
Payment (PMT)
Amount paid for each pay period. PMT enters the payment amount in annuity calculations and loan calculations
Present value
Current value of an asset received in the future
Principal
Original amount of money invested or saved
Rate of return
Annual return on an investment including appreciation and dividends or interest
Risk
Uncertainty the yield on an investment will deviate from what is expected
Rule of 72
Formula for figuring the number of years it takes to double the principal using compound interest. Divide percent by 72
Saving
Portion of current income not spent on consumption
Savings account
Account to hold money not spent on consumption
Savings bond
Discount bond purchased for 50% of the face value from the US government
Savings plan
Strategy for putting a portion of money from current income aside, which will not be spent on consumption, to reach a specified goal
Simple interest
Interest earned on the principal (original) investment
Tax-deferred
Taxes will be paid until a person takes the money out of the investment
Taxes
Compulsory charges imposed by the federal government on its citizens and their property
Tiered interest rate
Amount of interest earned depends on the account balance
Time value of money
Calculations which adjusts for the fact that dollars to be received or paid out in the future are not equivalent to those received or paid out today because of compounding interest