45 terms

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

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