Personal Finance midterm

What is your credit score and how can you improve it?

A score that predicts how likely a person is to pay back a loan. It can be improved by paying debt on time. Utilizing 30% of limit or lower. Having a long credit history. Having multiple credit lines.

Effects of the Annual Percentage Rate, APR on your credit.

APR does not directly affect credit score, but a higher APR means that debt costs more to pay off which can affect your line of credit.

Importance of an "emergency fund".

An emergency fund is money set aside to help pay for an emergency or unexpected expense. This is important because we can't account for everything that life will throw at us.

Ways to raise a low credit score.

Pay bills on time, eliminate debt, lower utilization, hold accounts for long time.

Know the difference between the following forms related to taxes: W-2, W-4, 1040, I-9

A W-2 is given by the employer each year accounting for how much an employee was paid. A W-4 is filled out by the employee when hired to claim how much they want deducted for taxes each paycheck.

What is the difference between a cancelled check and a voided check?

A check is "canceled" after it has been paid. A check is "void" if it is canceled before it is paid.

What is the difference between a Debit Card and a Credit Card?

A debit card is connected directly to your bank account and purchases made with it are withdrawn at that same time. A credit card is attached to a line of credit and purchases made on it can be paid at a later date with interest.

Define overdraft fee

A fee that occurs when you withdraw/pay more than what is in your account.

What is the deadline to file your taxes each year?

April 15th

When should you start saving for retirement?

As soon as possible. Ideally in your early 20s.

Gross pay vs Net pay-Gross Pay

Before tax/expenses while Net Pay: After tax/expenses

Budget surplus vs budget deficit

Budget surplus is when extra money is left over after budgeting. Deficit is when money is owed after budgeting.

What is a "zero-based budget"?

Budget system that restarts every month and every dollar is allocated so that income-expenses=0

What is "Pay Yourself First" & how can you benefit from this?

Budgeting method where you put money into retirement, savings, or other goal based accounts before doing any other budgeting with it. Advantage is that it creates a larger savings for the future.

50/30/20 Rule

Budgeting rule based on percentages. 50% on needs. 30% on wants. 20% on savings.

Disadvantages of being "unbanked"

Can be hard/time consuming to cash paychecks or checks in general. Don't have the ability to use the services of banking institutions such as loans/atms/insurance. Won't build a credit score. Paying bills can be higher cost/difficult.

Terms to know: cosigner, authorized user, payday loan.

Cosigner pledges to pay the debt off if the person taking the loan doesn't. Authorized user is someone who is authorized to use the account. Payday loan is a small loan taken at a high interest rate with the idea that it will be repaid on the next payday.

Give examples of how you can access/use the money in your checking account.

Debit Card, withdrawing money from bank/ATM, direct pay online with checking account.

What are some effective strategies for personal saving?

Eliminate your debt first. Set a budget and stick to it. Cut spending. Establish and emergency fund.

Endowment Effect

Emotional bias where people value something they have higher than market value.

What is the purpose of a 401K?

Employee retirement plan that is not taxed to a certain amount. Some employers also will match a percentage of money put into it.

What part of a paycheck is mandatory government tax withholding?

Federal income tax withholding and Social Security and Medicare Taxes.

When deciding where to open your checking account, what features are important?

Fees, insurance, overdraft protection, interest rate, mobile app, availability/ATMs.

Variable / flexible expenses vs fixed expenses.

Fixed expenses don't change from month to month. Variable expenses do change.

How is having a room-mate economical?

Having a roommate allows you to split expenses and bills.

When are you required to file taxes?

If you make more than $12,500.

Fixed rate mortgages vs Adjustable-rate mortgage

In a fixed rate, the interest rate is fixed when the mortgage is created. In an ARM, the interest rate will fluctuate with the real interest rate.

Explain the difference between high-rate vs snowball repayment

In high rate, you pay off the highest interest rate debt first (also called Avalanche method). In snowball, you pay off the lowest amount first regardless of interest rate.

What are the deductions for that are taken out of your paycheck?

Income Tax, Social Security, 401k, Medicare, FICA.

Benefit of a Certificate of Deposit

Low risk. Higher interest than regular savings. Fixed rate. Predictable returns.

Sunk Cost

Money spent that can not be recouped.

What are some possible ways we can prevent ourselves from being a victim of identity theft?

Pick strong/secure passwords. Avoid public wifi. Activate 2fa. Monitor credit and bank account. Be careful who you give your information out to

Describe the benefits of online and mobile banking

Quicker and easier than handling money in person.

Advantages to a prepaid card-Less risk of overspending.

Safer than cash. Easy to reload.

Definition of simple interest & compound interest

Simple interest is just based on the principle amount of the loan. Compound interest is based on the principle+the amount of interest earned.

What is the difference between saving and investing?

The biggest difference is the level of risk associated. Saving is lower risk and typically lower gain while investment is placed with the idea that the value will increase but carries a higher risk level.

Loss Aversion

The concept that most people will choose the option that is less likely to lead to loss.

FOMO

The fear of missing out. The tendency for people to worry about not being able to buy something if they don't buy it today.

Why is it important to make more than just the minimum payment on your credit card each month?

The minimum payment is only the amount required by the bank, but the amount remaining will incur interest and cost more to pay off later.

Opportunity Cost

The next best action that could have been done when doing something.

Confirmation Bias

The tendency for people to cherry pick evidence that supports their already held beliefs.

Herd Mentality

The tendency for people to follow the group.

What do Equifax, TransUnion, & Experian do?

The three main credit bureaus that assign credit scores.

What items can be found on a credit report?

Types of credit accounts held, payment history, and credit limits.

What defines a "dependent" for tax purposes?

Under 19 or under 24 if a full time student. a dependent is someone who relies on another person for financial support, such as for housing, food, clothing, necessities, and more

Name possible ways to protect your checking account information.

Use a strong password, enable two-factor authentication, avoid public wifi, sign up for bank alerts.

What are the possible ways to pay your taxes if you owe the IRS money?

Writing a check, paying online, with credit/debit, cash

When creating a monthly budget, you should?

you will subtract your expenses from your pay.