Fin Lit (Strand 3)

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Federal Reserve Bank
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Terms in this set (64)
Federal Reserve Bank
the central bank of the United States; controls the money supply in the United States
What are the 5 types of financial institutions?
1. Bank, 2. Credit Union, 3. Investment/Brokerage Firm, 4. Insurance Company, 5. Loan Agency
Characteristics of a BANK
For Profit.
Owned by shareholders.
Higher Fees
Characteristics of a CREDIT UNION
Nonprofit
Owned by "members" (people who bank there)
Lower fees
Advantages of online banks
Lower fees/higher savings rates.
24/7 access to transactions.
Banking done by an app.
Disadvantage of Online Bank
No physical location
How do banks make money?
Loan your deposited cash to other customers and charge them interest.
Federal Deposit Insurance Corporation (FDIC)
the government agency that insures customer deposits if a BANK fails
National Credit Union Administration (NCUA)
the government agency that insures customer deposits if a CREDIT UNION fails.
$250,000
Amount of money that is insured at a federal bank. Your deposits are safe up to this amount in case the bank goes out of business.
Investment/Brokerage FirmA company that helps you buy/sell stock, bonds, crypto.How does an investment/brokerage firm make money?They charge you fees on each transaction, i.e. you buy stock and they charge you $7 to facilitate the purchase.Insurance CompanyA company that exchanges risk for a premiumLoan AgencyA company that loans money in exchange for interest.Cash management toolAn account used to help you with daily cash managementbank reconciliationThe process of matching your checkbook register with the bank statement; catches errors and fees that bank chargesNon-sufficient funds (NSF) handlingSome banks charge this when you try to use your debit card OVER the available cash balance. They STOP the transaction.Overdraft FeeSome banks charge this to temporarily cover (mini loan) for using your debit card OVER the available cash balance. The transaction GOES THROUGH.NSF vs. OverdraftDepends on your bank. Both will charge you fees, but in NSF the charge is STOPPED while in overdraft the charge GOES THROUGH.ChexSystemsa credit report on you from banks. Shows all accounts, bounced checks, etc. It hurts/helps your credit (ability to get a loan).Bounced checka check written for an amount more than in your accountPay Yourself First (PYF)BEFORE you pay anything else, contribute money to your long-term financial goals.10% of your incomeThe amount you should pay yourself first (PYF) (usually in a 401k, IRA, etc.)Goal of savingsProtect your cash (emergency/"rainy day" funds)Goal of investingIncrease ("grow") your cashHow much should you have in savings?3-6 month of living expenses.PrincipalThe base money put into savings or investments.Certificate of Deposit (CD)An interest-earning deposit that requires the funds to remain deposited for a fixed term. Withdrawal of the funds before the term expires results in a financial penalty.Time Value of Money (TVM)money grows "exponentially" over time.4 types of investments1. retirement planning, 2. long term investments, 3. short term investments, 4. dividend reinvestment plansRetirement Planningdetermining how much money you should set aside each year for retirement and how you should invest those funds; money you need after you quit working401(k)Employer sponsored tax deferred; pay taxes when you are old.403(b)NONPROFIT employer sponsored 401(k); pay taxes when you are oldIRA (Individual Retirement Account)YOU (not employer) set it up; pay taxes when you are old.Roth RAYOU (not employer) set it up with after-tax dollars; you pay taxes now.Long term investmentMore than a year; lower risk.Short term investmentLess than a year; higher risk.Mutual FundAn investment that pools money from many investors and invests in many stocks.DiversificationSpreading risk among a variety of types of stocksDividendMoney a company pays each stockholder as a profit distributionDividend Reinvestment PlanDividends are automatically used to purchase more shares.Rule of 72The number of years it takes for an amount to double in value. 72 divided by its annual rate of interest.Risk managementYou pay a small payment and the insurance company protects you from a large loss.Premiuman amount you pay for an insurance policy; sometimes every month, every 6 months, or yearly.PolicyThe contract with the insurance company. Defines what's covered and excluded.Grace PeriodLate payments can be made in this time and you still keep your insurance; losses are covered.Limits of coverageMaximum amount of insurance per year.DeductibleYour share of the loss. Must be paid before the insurance will pay anything.Lifetime LimitA cap (maximum) for all insurance over all time.Auto InsuranceCovers you and the "other car" in an accident. Required by law.Liability CoverageIf you are sued for damages from a car wreck, this coverage pays for your lawyer and the settlement/judgement.Collision Coveragecovers your vehicle for damage caused by impact with an object other than another driver.Uninsured motoristYour auto insurance pays you for your injuries if the other person does not have insurance.Underinsured motoristType of insurance that pays for any amount the other driver's insurance doesn't coverAge, gender, GRADESInfluence the cost of your insurance policyHealth InsurancePays for medical bills if you or your family members get sick or injured. REQUIRED by law.Disability InsuranceProvides payment to replace earnings during times when workers cannot work due to illness or injuryProperty InsuranceA type of insurance that covers damage to a home. Also covers loss/damage to the contents inside.Property Liability InsuranceInsurance that protects you if you are sued for injury/damage caused while on your property.Renter's InsuranceCovers contents only.Life Insuranceinsurance paid to named beneficiaries when the insured person diesTerm Life InsuranceLife insurance that pays a death benefit if the policyholder dies within a specific time period but has no remaining value at the end of this time.Whole Life Insurancelife insurance that pays a benefit on the death of the insured and also accumulates a cash value you get after the term expires... really bad investmentBeneficiaryThe person or people who you define will receive your life insurance money.