Personal Finance Test 2
Terms in this set (55)
List Dave Ramsey's "Lucky Seven: Basic Rules of Negotiating."
1) Always tell the absolute truth. 2) Use the power of cash. 3) Understand and use "walk away" power. 4) Shut up! Don't talk too much. 5) "That's not good enough" 6) Good guy, bad guy. 7) "If I" take-away technique.
Dave Ramsey suggests looking for bargains from individual sellers. Why might an individual be willing to sell something for less than a business would?
The private sellers aren't trying to make a sale for the profit and are just trying to get some money for things they don't need or want anymore and are more willing to give it to you at a better cost than someone who has to make money off of it.
Auto leases are comprised of 3 financial components.
The _______capitalized_________ cost is the agreed upon starting value of the car. The ______residual________ value is the value of the car at the end of the lease. And the ____interest________ ___rate____ is the financing charge the dealer adds to the deal.
cost is the agreed upon starting value of the car.
is the value of the car at the end of the lease.
is the financing charge the dealer adds to the deal.
Name and briefly explain the 2 common types of bankruptcy proceedings:
Chapter 7: This is a liquidation and is the most common form of personal bankruptcy because all eligible debt is wiped away. The person in debt will turn all of their assets over to a bankruptcy trustee that is assigned by the court. He will then sell off your assets and distribute it to your creditors. Most of your debts will be wiped clean. This process can take about 3-6 months. Chapter 13: This is a reorganization that can take 3-5 years but you get to keep your property. You file with the court a reorganization of how you are going to pay off what you owe and the time. The judge can then accept the plan or propose a different one. If this is accepted, you can pay it off for the next 3-5 years.
Mortgages are comprised of 3 components.
Principle, Term, Interest
is the amount you borrowed.
is the length of the loan.
is the financing charge the bank adds.
rate mortgages have the same principal and interest payment throughout.
When shopping for a house it is a good idea to know what a bank is willing to lend you. You have two options. You can be___ where a bank does a brief review of information you provide, but does not require you to provide documentation of your income and other items. Or, you can seek a___ where you go through the whole process of providing documentation and in exchange the bank states that they have agreed to lend you up to a specific amount.
Home buyers who put less than 20% down on a conventional mortgage will be required to purchase_____________as a protection for the lender against their default on the loan.
Private mortgage insurance
can add $3000 or more to the home purchasing process.
When it comes to home loans, what are points? Why would someone consider paying point(s)?
points are percentages of the fee that you owe the lendor for providing the loan. The fewer points you pay, the higher the interest rate you're charged. If you know that you're going to own a home for a long time, it is smarter to pay a higher percentage in the point because in the long run, you will be paying less of an interest fee and will save money. You'll have to make a payment up front, but if you have to pay it off for a long time, it is better to the amount at the beginning and save money that interest rate would charge you in the long run.
Dave Ramsey gives 3 reasons homeownership is a great investment. What are they?
1) It's a forced savings plan. 2) It's an inflation hedge. 3) It grows virtually tax free.
protects you as a home buyer from someone who might make an ownership claim on the property you are buying.
getting a ___of the property you are buying helps avoid exaggerated property lines or structures built within easments or on other people's property.
your lender will likely require and ___ appraisal
to establish the market value of the home you are buying. This is done to ensure that you are not paying more for it than it is worth.
The primary purpose of insurance (any type) is to
an___is the amount you pay periodically to have the policy in place.
you insurance ___ is the amount you pay in the event of a loss before the insurer pays anything.
the ____ is the maximum amount the insurer would pay out for a covered loss.
With a health insurance policy, you may have _____ s for certain common services and products like office visits and prescriptions. These are set amounts you pay for these specified services/items.
the _____ or ___are the maximum amount you would have to pay before the insurer begins paying 100% of costs. These are typically found with health insurance policies.
out-of-pocket limit // Stop- loss
With a health insurance policy, after you have paid (met) your deductible your policy may have_____where the insurer pays a large share (commonly 80%) and you pay the remainder.
insurance pays you the price to purchase your lost goods new even if it is more than the coverage limit.
Insurance that pays the depreciated value of a lost item is referred to as
actual cash value
Raising the deductible on an insurance policy (keeping everything else the same) will cause the premium to be more / less (choose one).
life insurance is the simplest form that guarantees payment of the face value of the policy if the insured dies during the timeframe of the policy. These policies are cheaper than alternate options for the same level of coverage.
life insurance pairs life insurance with a savings or investment plan. These policies commonly carry a premium 4-8 times higher than their term coverage counterparts.
One area of debate is how much life insurance a person should carry. Name and describe briefly 2 different determination methods.
Rule of Thumb is the basic method that you need life insurance between 5-10 times your annual salary. Then you have Income Replacement. It estimates that you need to replace at least some level of income, whether it be an entire salary or just a portion of it, over a certain amount of years. This is good if you have no special needs to finance or a few financial assets to finance. The other is the Financial Need which takes into account the various expenses that your income would provide and you save up and put that money aside.
is a type of insurance that covers the contents or possessions of someone who lives in a dwelling owned by someone else.
policies provide a layer of protection over the top of other liability policies (like homeowners or auto) in the event of a liability greater than those polices will cover.
Most states require drivers to carry___coverage in order to drive a car.
___coverage pays to fix your car when you are in a wreck that is your fault.
_____coverage pays to fix your car for damage caused by something other than an accident.
When might it make sense for a driver to drop collision and/or comprehensive coverage on a car?
Drop the comprehensive when your car isn't even worth you paying for it because if your car is only worth $2,300 and you pay $1,000 in insurance, you're going to start losing money rather than it actually helping you.
_________provide an alternate approach to health insurance by pairing a high-deductible insurance plan with a tax-advantaged savings vehicle.
health savings account
_______replaces income if you are injured or otherwise medically unable to work.
Proverbs 22:7 says that "the borrower is slave to the lender." Explain how being in debt to someone changes the nature of the relationship.
When you bring money into a relationship, it automatically changes the relationship. With already having a personal relationship with them they may sometimes feel more comfortable with you and either forget to pay you back and so you have the burden of having to be reminding them, or, they or you will constantly remember that they owe you that $1,000 and it will change the way you guys interact. When you eat alongside each other, it will be the slave eating next to the master because the person owes the money to the other.
Dave gives 5 steps to getting out of debt, list them:
1.Quit borrowing money
2.You must save money
3.Prayer really works
5.Get to work
What are the 4 steps in the Debt Snowball?
1. List all of your debts from smallest to largest based on payoff balance, not interest rate.
2. Work down the list and knock them out in that order
3. Pay minimums on everything except the smallest one and throw everything you've got at it.
4. When the first is gone, move to the next and keep going until they are all gone.
When someone borrows, they amount they borrow is referred to as____ while the amount the lender charges them for lending the money is referred to as_____
Different sources would differ on whether there is such a thing as "good debt". However, most would agree that certain types of debts are worse than others. What are some examples of particularly bad types of debt? Why are these worse than things like a home mortgage?
Bad debt is anything that wouldn't generate income or hold it's value: things like meals, vacation, and toys. A home brings values throughout the years and will still be worth something wheras when you spend money on toys or vacation, you are not putting towards anything that holds value.
Both authors recommend getting a copy of your credit report periodically. Why do they say this is important?
It is important to keep on record just in case there are any questions if something is not accurate. People make mistakes and you need to be keeping track and making sure that your credit score is correct.
What are the components of the FICO credit score and what % of the calculation does each comprise?
The FICO credit scores are mainly based solely on debt and do not indicate anything about your assets or handling of money outside of debt. 35%: Debt History, 30%: Debt Levels, 15%: Duration of the Debt, 10%: Type of Debt, 10%: New Debt.
For people who find themselves with poor credit, what are some steps that can help them improve it over time?
Begin paying your bills consistantly on time, reduce your outstanding balance, pay off your debt rather than shift it onto other cards, never apply for store-branded credit cards just to get the immediate discount, don't apply for new credit cards if you don't need them, and don't cancel your oldest card.
Negative information remains on a credit report for___ years
As Dave Ramsey explains, Debt Collection proceedings can get nasty. Why is it important to understand you rights when you find yourself in that situation?
You need to learn to act with integrity, courage, and confidence by knowing your rights under the law. You need to set your priorities for your family and make sure that you take care of the four walls first: food, shelter, transportation, and clothing and take care of these necessities first no matter what. You need to know your rights that way you can have the courage and confidence to stand.
As it relates to interest accrual while a student is in school, student loans fall into two major categories.____ loans are ones where the government (typically federal) pays the interest for the student while they are in school - thus the student pays nothing until after they finish school. ____loans are ones where the student is responsible for paying the interest while they are in school. They may choose to let it be_____ which means that rather than pay it while in school it gets added to the original principal of the loan.
subsidized... unsubsidized... capitalized
Once a student is out of school for____months, their student loans typically enter_____. Schedules during this period can have the same payment amount throughout, this is referred to as_____repayment. The alternative is known as____repayment and is set up so that payments start small and get larger over time. Both methods will lead to full repayment within 10 years.
6, repayment, standard, graduated
When a person who has student loans can apply for a ______period if they find themselves in financial hardship or return to school. During this time no principal payment is required.
_____debts are tied to the asset that the debt was used to purchase. Things like homes and cars typically fall in to this category. debts, on the other hand, are not tied to any particular asset and include things like credit card debt.