Personal Finance, Unit 5.0 - 5.03
Why should you save for short-term goals and expenses?
Pay for items that are not part of a typical spending plan.
Savings
Portion of income not spent on consumption (purchase of goods and services.)
Interest?
Price paid for using someone else money.
How does interest rate affect the time value of money?
Save as highest interest rate
How does money affect the time value of money?
Save as long as possible, often
How does time affect the time value of money?
Save for as long as possible.
What is pay yourself first?
Saving for the future by putting money aside.
Savings tools?
Secure and liquid accounts offered by depository institutions assisting in the management of a savings fund.
What does higher interest rates are a trade-off for lower liquidity mean?
If you choose an account with a higher interest rate to earn more money, it is less of a chance for liquidity.
Why should trade-offs be considered when saving?
They are realistic
Why is it important to understand the features of a savings tool?
To determine the savings tool most appropriate for reaching a financial goal.
Index funds?
Type of mutual fund designed to reduce fees by investing in the stocks and bonds that make up the index. (Lending)
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. (Owning)
By saving money _____ you will have financial security in the ______.
today, future
Why save for financial security?
Lower stress and lower negative emotions.
What type of asset is saving?
Monetary asset that contributes to net worth.
Why is time value of money important to saving?
Motivates to save early and often.
What are two reasons why savings tools are ideal for storing emergency savings?
*Secure -Accounts must stay within coverage limits *Liquid -Generally quick and easy to withdraw money
Savings tools: highest interest to lowest interest?
Certificate of deposit, money market deposit account, savings account, checking account.
Examples of savings tools:
Checking account, savings account, money market account, certificate of deposit (cd)
Savings tools: most liquid to least liquid?
Checking account, savings account, money market deposit account, certificate of deposit
Why is setting a financial goal an important part of the saving process?
Determines realistic amount you can save during a specific time period.
How does compounding interest work?
Earning interest on interest.
Three ways money can be saved
Eliminate your debt, set savings goals, pay yourself first
Bonds?
Form of lending to a company or the government. (Lending)
Stocks?
A share of ownership on a company. (Owning)
Saving
Accumulation of excess funds by intentionally spending less than you earn.
What are five factors to consider when determining which savings tool is most appropriate for meeting a financial goal?
Amount of funds available, liquidity, interest, purpose of money saved, when money is needed.
How much should be saved in savings?
At least 6 months worth of expenses in emergency savings.
How can you make the pay yourself process automatic?
Automatic transfers, payroll deduction
Liquidity?
Can quickly and easily be converted into cash.
What are emergency savings?
Cash set aside to cover the cost of unexpected events.