Personal Finance Chp. 8

Federal Reserve

The central (federal) banking system of the United States

Risk

The risk return ratio is used by investors to compare the expected return of an investment to the amount of risk they take to get the return. This ratio is calculated mathematically by dividing the amount you stand to lose if the price goes down (risk) by the amount of profit you expect to make (return). With virtually all investments, as the _________ goes up, so does the potential return.

Emergency Fund

These are great for your ____________________ _______ due to their liquidity (accessibility) and stability.

Day Trading

This is the buying and selling of stock purchases each day through the practice of speculation. Evidence shows the vast majority of investors lose money in ______ ______________.

Earned Income

When it comes to IRA's, everyone with an ___________ _____________ is eligible.

Ownership

When you buy stock, you are buying a small piece of ___________________ in the company.

D

Which of the following? A. Gold B. VIaticals C. Futures D. Mutual Funds

C

Which statement is true about liquidity? A. the less liquid the investment, the less return B. the more liquid and investment, the more return C. the more liquid an investment, the less return D. both A and B

79

While ___________% of American millionaires use brokers for guidance, they make their own investment decisions.

Cash, investment

You should have lots of ____________ before using real estate as an _____________________.

Return

Your ____________ comes as the value of the fund is increased.

Value

Your return comes as the company increases in ____________ or pays you, its owner, some of the profits (dividends).

Interest

Your return is the fluctuation in price and the _______________ rate paid.

Pre Tax Contributions

_____-_______ __________________________ are taken from your gross income before taxes. Taxes are due upon withdrawal.

401 K

________ is a retirement savings plan offered by a corporation to its employees.

After Tax Contributions

____________ -_______ ________________________ are taken from your net come after taxes. No taxes are due iupon withdrawal.

Fixed

_____________ annuities have a low interest rate of around 5%; they have high fees and are a bad investment option.

Variable

________________ annuities are mutual funds sheltered by the annuity, which allows the mutual fund to grow tax deferred.

Diversification

__________________________ is a risk-management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique is that having a variety of investments will yield higher returns and lower risk.

Treasury Bonds

a bond issued by the U.S. government that bears fixed interest

Portfolio

a list of your investments

Share

a piece of ownership in a company, mutual fund, or other investment

401 K

a retirement savings plan offered by a corporation to its employees; the employee contributes money from his/ her gross pay, and the money grows tax deferred

Simplified Employee Pension Plan

a self-employed person may deduct up to 15% if their net profit on the business by investing in a SEP

Future Contracts

an agreement to buy or sell a commodity at a specific date in the future at a specific price

Commodities

are agricultural or mining products. It is a bad investment because they result in price distortions and are highly volatile.

Risk

degree of uncertainty of return on an asset, in business, the likelihood of loss or reduced profit

Dividend

distribution a portion of a company's earnings, decided by the board of directors, to a class of its shareholders; generally distributed in the form of cash or stock

Gold

has a 50 year track record of 4.1% returns. That's about the rate of inflation

Savings Bond

in the United States, a bond that can be bought from the federal government

Rule of 72

is a quick way to calculate the length of time it will take to double a sum of money. Divide 72 by the expected interest rate to determine the number of years

Annuity

is a savings account sold by an insurance company, designed to provide payments to the holder at specified intervals, usually after retirement

Real Estate

is usually held as part of a larger portfolio and is generally considered an alternative investment.

Tax Favored Dollars

money that is invested, either tax deferred or tax free within a retirement plan

Roth IRA

named for Sen. William Roth of Delaware, who authored this section of the Taxpayer Relief Act of 1997

Mutual Fund

pool of money managed by an investment company and invested in multiple companies

Speculative

purchasing risky investments that present the possibility of large profits, but also post a higher-than-average possibility of loss

Real estate, mutual funds, savings account

put (real estate, savings account, and mutual funds) in order from least to highest liquidity

Liquidity

quality of an asset that permits it to be converted quickly into cash without loss of value; least ------> highest is real estate, mutual funds, savings account

Risk Return Ratio

relationship of substantial reward compared to the amount of risk taken

Stocks

securities that represent part ownership of equity in a corporation

IRA

tax-deferred arrangement for individuals with earned income; individual retirement arrangement: individual retirement account

Tax Deferred

the key advantage of stashing money in a ________ ___________________ retirement accounts isn't just that you'll pay less to the government this year, but that your investments will compound faster than a taxable account. The result is usually a larger retirement nest egg even after the funds are taxed upon withdrawal.

Diversification

the practice of dividing the money a person invests between several different types of investments in order to lower risk

Investing

the process of setting money aside to increase wealth over time for long-term financial goals such as retirement

Viaticals

this when someone with a terminal disease sells his life insurance policy for less than face value. The buyer then cashes in the full amount at the original owner's death. There are a lot of scam artists surrounding this type of investment, and investors often incur legal risks.

Education Savings Plan

(529 plan) a savings plan operated by a state or eduational institution designed to help families set aside funds for future college costs.

Federal Deposit Insurance Corporation

(FDIC); The US federal agency that insures deposits in commercial banks. It was created to restore public trust in banks after the 1929 stock market crash. FDIC replaced the former Federal Savings and Loan Insurance Corporation in 1989.

Guaranteed Investment Contract

(GIC) Do not use a _______________________ _______________________ _________________ or bond funds to fund your plan. This is like a CD inside of your 401 (K). You will only make about 3-4%, and it will not help you win long term.

Internal Revenue Service

(IRS); A U.S. federal agency responsible for collecting taxes and for the interpretation and enforcement of the Internal Revenue Code (laws)

US Securities and Exchange Commission

(SEC); the government agency responsible for regulating the stock market. It was created in 1934 to increase public trust after the 1929 stock market crash and the years of the Great Depression.

War Bonds

(also known as defense bonds) the last time the United States issued war bonds was during World War 2. Issued by the U.S. government, they were named _____ __________ after the Japanese attack on Pearl Harbor, Dec 7, 1941. The purpose of war bonds was to finance military operations during war time. The bonds yielded a mere 2.9% return after a 10-year maturity.

Growth, Income

25% ____________ and ______________ Stock Mutual Fund (Large-cap): Fund comprised of large, well-established companies

Growth Stock

25% _____________ __________ Mutual Fund (Mid-Cap): fund that buys stock in medium-sized companies that have experienced some growth and are still expanding.

Aggressive Growth

25% ___________________ _____________ Stock Mutual Fund (Small-cap): fund that seeks to provide maximum long-term capital growth from stocks of primarily smaller companies; the most volatile fund

International

25% _______________________ Stock Mutual Fund: fund that contains international or overseas companies

Nonprofit

403 (b) is found in ______________ organizations such as churches, hospitals, and schools.

Government

457 is deferred compensation, which means you are deferring or putting off compensation. Usually this is available for __________________ employees.

Certificate of Deposit

A CD is a _____________________ ______ ____________________, typically at a bank. It is a savings account with a slightly higher interest rate because of a longer savings commitment (i.e. six months, one year, etc.)

Bond

A ____________ is a debt instrument by which the company owes you money; a form of I.O.U. The company that issued the bond makes regular interest payments to the bond holder and promises to pay back or redeem the face value of the bond at a specified point in the future (maturity date).

Qualified Plan

A _________________ __________ is a tax-favored investment (which means it has special tax treatment).

Low

A money market account is a _______-risk bank savings account with check-writing privileges.

Money

A mutual fund is an investment vehicle made up of a pool of ____________ collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.

False

A single stock would be a good place to keep your emergency fund.

Investment

Account or arrangement in which a person puts his/her money for long-term growth; invested money should not be used for a suggested minimum of five years

Tax Free

After five years, you can make ______-____________, penalty-free withdrawals of earnings under these conditions: 1. Over 59 and a half years old 2. Because of death or disability 3. First-time home purchase

Insurance

Common Employee benefits are retirement plans, savings plans, ________________, leave (sick, vacation, etc.), stock purchase, educational reimbursement, incentive plans and cafeteria plans.

True

Diversification lowers risk with investing.

Non wage

Employee benefits are various _____-__________ compensations provided to employees in addition to their normal wages or salaries.

Single Bond

Few individuals do well with ______________ ___________ purchases.

Rollovers

If you leave a job and have money saved in your employer's retirement plan, always roll that money into an IRA using a direct rollover, which allows you to avoid taxes and penalties.

Simple

Keep It ________________, Stupid! Investing doesn't have to be complicated, and there is really no trick to it. Never invest money in anything you do not understand!

Liquidity, less

Liquidity refers to assets that can be easily bought or sold (liquid assets). When discussing investments, _________________ is availability. As there is more liquidity, there is typically _________ return.

D

Long term investments properly diversified include the following mutual funds: A. Growth, growth and income, bond, aggressive growth B. Growth, balanced, international, bond C. International, bond, aggressive growth, growth D. Growth, growth and income, international, aggressive growth

Long

Mutual funds are good ___________- term investments.

Tax Savings

Never Invest Purely for ________ ______________. If what you are investing in is primarily a tax deal, then it is probably not a good investment. Your motivation should be to make money, not save on taxes.

Borrowed

Never Invest Using _______________ Money. Never borrow money, period. Borrowing money is a particularly bad idea for an investment because it increases the risk of the investment. And if you lose the money, you are still left with payments on it.

Retirement Plan

Never borrow on your ______________________ ________. Never! Even though you pay yourself back some interest, it is nowhere close to what you would have earned if you had left the money in the investment.

Fund

Portfolio managers manage the pool or __________ and attempt to increase the value of the fund in order to produce capital gains and income for the fund's investors.

Least

Real estate is the ______________ liquid consumer investment.

Tax treatment

Remember: IRA is not a type of investment at a bank. It is the _______ ____________________ on virtually any type of investment.

High

Single Stock investing carries an extremeley ________ degree of risk.