Unit 5 Personal Finance

What are three important things to remember about the Rule of 72?

-its only an approximation -it assumes the interest rate stays constant -does not allow for additional payments to the original amount -does not account for taxes

What are the three factors in the concept of the time value of money?

1. money 2. time 3. interest rate

If you are an aggressive investor which savings and investing tools should you use and why?

you would use checking accounts as a savings tool because the money can be turned into cash very easily. They would also use a speculative investment tool because these are very high risk but have good returns

What percentage of your net pay should be put into savings?

10%

Using the "Rule of 72" How many years will it take to double one's money at an interest rate of 5%?

14.4 years

If your total monthly expenses are $1,450, how much should you keep in liquid assets?

1450 x 6 = $8700

How many months of expenses do the experts recommend that an individual save in an emergency fund?

6-9 months

What is the formula for the Rule of 72?

72 / % = years to double

Using the "Rule of 72" what rate of return is needed for one's money to double in 7 years?

about 10%

List and define the five types of savings tools we discussed in class

checking account- account that provides an easy method for withdrawing and depositing money savings account- account designed to hold money not spent on current consumption money market account- account that usually has minimum balance requirements and tiered interest rates certificate of deposit (CD)- account that is used for a fixed period of time and allows restricted access to the funds

What is the relationship between risk and return in investing?

higher risk = higher return

Why would you want to invest in a diversified portfolio?

it reduces risk by spreading money on a wide array of investments

Define liquidity, interest, compound interest, opportunity cost, and trade-off.

liquidity- how easy it is to turn your money from the savings account into cash interest- the cost of using someone else's money compound interest- earning interest on interest opportunity cost- the loss of potential gain from other alternatives when one alternative is chosen trade-off- giving one thing up for another thing

What does investing focus on?

long term goals, and making money by giving some now.

Where do the six types of investments fall on the financial risk pyramid?

lowest to highest risk: bonds, mutual and index funds, stock and real estate, speculative investments

What is the Federal Deposit Insurance Corporation (FDIC)?

preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000

Who would a person contact to purchase stocks?

stockholder or shareholder (or brokerage firm)

Why are savings tools considered secure?

they hold your money in a bank where it is highly unlikely it will be stolen. Some savings tools even make it harder for you to use the money if they are meant to be more secure

What is the formula for figuring the rate of return?

total return / amount of money invested

What does the phrase "pay yourself first" mean?

Put away money in savings before you spend any of it. This way you are "paying yourself" before you spend any of the money

What is the difference between saving and investing?

Saving you are putting money away to keep and use later. Investing you are putting money in, hoping that it will increase.

If you are a conservative investor seeking a diversified portfolio which savings and investing tools would you use? Why?

You would use a certificate of deposit for a savings tool, or another one with high interest and low liquidity. You would most likely invest in bonds or mutual/index funds since these are low risk

What is a tiered interest rate?

it's when the amount of interest earned depends on the account balance

What does saving focus on?

keeping your money safe and financial security

Describe the relationship between liquidity and interest for the savings tools

the more liquid an account is, the less interest there is on it. For example checking accounts are the most liquid and they have the lowest interest rates, if they have one at all

What is the difference between full service brokerage firm and discount brokerage firm?

Full service brokerage firm offer investment transactions and a financial advisor while a discount brokerage firm only completes orders to buy and sell investments

List and define the six types of investment tools we discussed in class

bond- form of lending to a company or the government stock- a share of ownership in a company real estate- ownership of residential or commercial property or land speculative investments- high risk investments that have the potential for significant fluctuations in return over a short period of time 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 index fund- type of mutual fund designed to reduce fees by investing in the stocks and bonds that make up the index

List all six wealth accumulation investment tools from lowest to highest risk

bonds, mutual and index funds, real estate and stock, speculative

Define risk, principal, inflation, dividends, market price, financial risk pyramid, and portfolio diversification

risk- possibility of harm or damage on something that is insured principle- original amount of money saved or invested inflation- rise in the general level of prices dividends- share of profits distributed in cash to stockholders market price- the price of a commodity when sold in a given market financial risk pyramid- shows the levels of risk among different tools. lowest to highest: bonds, mutual and index funds, stock and real estate, speculative portfolio diversification- reduces risk by spreading money among a wide array of investments