Personal Finance Exam

fixed expenses

A periodic cost that remains more or less unchanged irrespective of the output level

Budget

A plan for managing income and expenses.

Budget deficit

A shortfall of government receipts from government spending.

inflation

A sustained, rapid increase in prices, as measured by some broad index (such as Consumer Price Index) over months or years, and mirrored in the correspondingly decreasing purchasing power of the currency. It has its worst effect on the fixed-wage earners, and is a disincentive to save. There is no one single, universally accepted cause of inflation, and the modern economic theory describes three types of inflation: (1) Cost-push inflation is due to wage increases that cause businesses to raise prices to cover higher labor costs, which leads to demand for still higher wages (the wage-price spiral), (2) Demand-pull inflation results from increasing consumer demand financed by easier availability of credit; (3) Monetary inflation caused by the expansion in money supply (due to printing of more money by a government to cover its deficits).

Form W-4

A tax form prepared by an employee for an employer indicating the employee's exemptions and Social Security number, and enabling the employer to determine the amount of taxes to be withheld for the employee.

salary

Agreed-upon and regular compensation for employment that may be paid in any frequency but, in common practice, is paid on monthly and not on hourly, daily, weekly, or piece-work basis.

Credit

All money borrowed, other than home financing.

Form I-9

All new hires must verify their eligibility to work legally in the U.S.

payroll deduction

Amount withheld by an employer from employee's earnings. It typically includes income tax, national insurance or social security contributions, and may also include group insurance or pension fund contributions, union or association dues, authorized wage assignments, etc.

payroll deductions

Amount withheld by an employer from employee's earnings. It typically includes income tax, national insurance or social security contributions, and may also include group insurance or pension fund contributions, union or association dues, authorized wage assignments, etc.

Deductions

Amounts that are or may be lawfully deducted from tax obligations.

consumer loan

An amount of money lent to an individual (usually on a nonsecured basis) for personal, family, or household purposes. Consumer loans are monitored by government regulatory agencies for their compliance with consumer protection regulations such as the Truth in Lending Act. Also called consumer credit or consumer lending.

budget

An estimate of costs, revenues, and resources over a specified period, reflecting a reading of future financial conditions and goals. One of the most important administrative tools, a budget serves also as a (1) plan of action for achieving quantified objectives, (2) standard for measuring performance, and (3) device for coping with foreseeable adverse situations.

Budget surplus

An excess of government receipts over government spending.

product

1. A good, idea, method, information, object or service created as a result of a process and serves a need or satisfies a want. It has a combination of tangible and intangible attributes (benefits, features, functions, uses) that a seller offers a buyer for purchase. For example a seller of a toothbrush not only offers the physical product but also the idea that the consumer will be improving the health of their teeth. 2. Law: A commercially distributed good that is (1) tangible personal property, (2) output or result of a fabrication, manufacturing, or production process, and (3) passes through a distribution channel before being consumed or used. 3. Marketing: A good or service that most closely meets the requirements of a particular market and yields enough profit to justify its continued existence.

liquidity

1. A measure of the extent to which a person or organization has cash to meet immediate and short-term obligations, or assets that can be quickly converted to do this. 2. Accounting: The ability of current assets to meet current liabilities. 3. Investing: The ability to quickly convert an investment portfolio to cash with little or no loss in value.

risk

1. A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action. 2. Finance: The probability that an actual return on an investment will be lower than the expected return. Financial risk is divided into the following categories: Basic risk, Capital risk, Country risk, Default risk, Delivery risk, Economic risk, Exchange rate risk, Interest rate risk, Liquidity risk, Operations risk, Payment system risk, Political risk, Refinancing risk, Reinvestment risk, Settlement risk, Sovereign risk, and Underwriting risk. 3. Food industry: The possibility that due to a certain hazard in food there will be an negative effect to a certain magnitude. 4. Insurance: A situation where the probability of a variable (such as burning down of a building) is known but when a mode of occurrence or the actual value of the occurrence (whether the fire will occur at a particular property) is not.

service

1. A valuable action, deed, or effort performed to satisfy a need or to fulfill a demand. 2. Law: Formal delivery of a notice, summons, or writ. 3. Banking: Payment of interest or loan installment, or dividends, as scheduled.

earnings

1. Alternative term for net income. 2. The famous 'bottom line,' being the last line-item in an income statement. In the UK and most other countries, earnings generally represent the balance left after deducting operating expenses, interest charges, taxes, and dividends on the preference shares (preferred stock) but not extraordinary items. In the US, earnings are often used interchangeably with net income (net profit). Earnings of a firm are the paramount measure of its value as seen by the stockmarket which prizes both fast as well as stable earnings growth.

liability

1. Finance: A claim against the assets, or legal obligations of a person or organization, arising out of past or current transactions or actions. Liabilities require mandatory transfer of assets, or provision of services, at specified dates or in determinable future. 2. Accounting: Accounts and wages payable, accrued rent and taxes, trade debt, and short and long-term loans. Owners' equity is also termed a liability because it is an obligation of the company to its owners. Liabilities are entered on the right-hand of the page in a double-entry bookkeeping system. 3. Law: (1) Responsibility for the consequences of one's acts or omissions, enforceable by civil remedy (damages) or criminal punishment.

exemption

1. Freedom from an obligation, restriction, or responsibility. 2. Amount that can be legally deducted from a gross income to arrive at the taxable income. See also exclusion.

return

1. Report formally or officially on a specific matter, such as a tax return. 2. Proceeds generated by a sale. 3. Yield generated by an investment, expressed usually as a percentage of the amount invested.

asset

1. Something valuable that an entity owns, benefits from, or has use of, in generating income. 2. Accounting: Something that an entity has acquired or purchased, and that has money value (its cost, book value, market value, or residual value). An asset can be (1) something physical, such as cash, machinery, inventory, land and building, (2) an enforceable claim against others, such as accounts receivable, (3) right, such as copyright, patent, trademark, or (4) an assumption, such as goodwill. Assets shown on their owner's balance sheet are usually classified according to the ease with which they can be converted into cash.

Income

1. The flow of cash or cash-equivalents received from work (wage or salary), capital (interest or profit), or land (rent). 2. Accounting: (1) An excess of revenue over expenses for an accounting period. Also called earnings or gross profit. (2) An amount by which total assets increase in an accounting period. 3. Economics: Consumption that, at the end of a period, will leave an individual with the same amount of goods (and the expectations of future goods) as at the beginning of that period. Therefore, income means the maximum amount an individual can spend during a period without being any worse off.

spending

1. To pay money, usually in exchange for goods or services. See also consumer spending. 2. To use a resource, such as time. "He will spend the next week trying to find a new job."

opportunity cost

A benefit, profit, or value of something that must be given up to acquire or achieve something else. Since every resource (land, money, time, etc.) can be put to alternative uses, every action, choice, or decision has an associated opportunity cost. Opportunity costs are fundamental costs in economics, and are used in computing cost benefit analysis of a project. Such costs, however, are not recorded in the account books but are recognized in decision making by computing the cash outlays and their resulting profit or loss.

Debit card

A card issued by a bank that directly accesses available funds from a bank account, typically a savings or checking account.

Equal Credit Opportunity Act

A federal law that requires a lender or other creditor to make credit available for applicants regardless of sex, marital status, race, religion, or age.

scam

A fraudulent scheme performed by a dishonest individual, group, or company in an attempt obtain money or something else of value. Scams traditionally resided in confidence tricks, where an individual would misrepresent themselves as someone with skill or authority, i.e. a doctor, lawyer, investor. After the internet became widely used, new forms of scams emerged such as lottery scams, scam baiting, email spoofing, phishing, or request for helps. These are considered to be email fraud. Also see phishing, scheme.

Employer-sponsored savings plans

A government-approved program through which an employer can assist workers in building their personal retirement funds.

Federal Insurance Contributions Act (FICA)

A law that mandates payroll taxes, which help to fund security and Medicare benefits. Under FICA, the employer and the employee make equal contributions through their taxes. The employer pays taxes on payroll, while the workers pay taxes on their salaries or wages earned.

Debt

An obligation or liability to pay or render something to someone else.

goal

An observable and measurable end result having one or more objectives to be achieved within a more or less fixed timeframe.

income tax

Annual charge levied on both earned income (wages, salaries, commission) and unearned income (dividends, interest, rents). In addition to financing a government's operations, progressive income taxation is designed to distribute wealth more evenly in a population, and to serve as automatic fiscal stabilizer to cushion the effects of economic cycles. Its two basic types are (1) Personal income tax, levied on incomes of individuals, households, partnerships, and sole-proprietorships; and (2) Corporation income tax, levied on profits (net earnings) of incorporated firms. However, presence of tax loopholes (whose number increases in direct proportion to the complexity of tax code) may allow some wealthy persons to escape higher taxes without violating the letter of the tax laws.

Credit card

Any card, plate, or coupon book that may be used repeatedly to borrow money or buy goods and services on credit.

direct depost

Automatic transfer of salaries, wages, rents, benefits, or other such sums, directly to the account of an employee or beneficiary.

taxes

Compulsory monetary contribution to the state's revenue, assessed and imposed by a government on the activities, enjoyment, expenditure, income, occupation, privilege, property, etc., of individuals and organizations.

Banks

Corporations chartered by state or federal government to offer numerous financial services such as checking and savings accounts, loans, and safe deposit boxes; the Federal Deposit Insurance Corporation (FDIC) insures accounts in federally chartered banks.

wages

Cost of using labor as opposed to cost of using capital or land. As a price of labor, it is subject to the forces of demand and supply in the labor market, which in turn is affected by productivity levels and ability of the employers to substitute labor with other factors of production such as machinery. See also wage.

periodic expenses

Costs which occur on an irregular basis, rather than monthly. Examples of periodic expenses may include quarterly insurance premiums, school taxes, or automobile maintenance costs.

creditworthiness

Creditor's judgment of an entity's current and future ability, and inclination to honor debt obligations as agreed upon. It is usually based on the credit history, credit rating, and character of the entity.

Choices

Decisions.

credit report

Document supplied by a bank or a credit reporting agency (such as Dun & Bradstreet) that summarizes an entity's credit history and present financial position, and notifies about any lien in force or pending judgment(s) against the entity.

Commissions

Fees to a third party for assisting in a business transaction, such as buying or selling an asset.

rate of return

Fundamental rule of investment that an investor should make investment where the rate of return is greater than the opportunity cost of the capital (usually the time deposit interest rate).

Capital gains

Gains from selling stocks or other financial investments for more than what was paid for them.

Balanced budget

Government revenues equal expenditures.

Creditworthy

Having the ability and willingness to repay debts.

employee benefits

In general, indirect and non-cash compensation paid to an employee. Some benefits are mandated by law (such as social security, unemployment compensation, and workers compensation), others vary from firm to firm or industry to industry (such as health insurance, life insurance, medical plan, paid vacation, pension, gratuity).

compound interest

Interest computed on the principal amount to which interest earned to-date has been added. Where compound interest is applied, the investment grows exponentially and not linearly as in the case of simple interest. Formula: Principal x {(Annual interest rate ÷ 100) + 1}^number of years. For example, $1,000 at an annual compound interest rate of 10 percent will, in 5 years, be: 1000 x {(10 ÷ 100) + 1}^5 = $1,6105.51.

simple interest

Interest computed only on the principal and (unlike compound interest) not on principal plus interest earned or incurred in the previous period(s). Simple interest is used commonly in variable rate consumer lending and in mortgage loans where a borrower pays interest only on funds used. Formula: Principal amount x Annual interest rate x Number of years.

Compound interest

Interest credited daily, monthly, quarterly, semi-annually or annually on both principal and previously credited interest.

alternative investments

Investments considered outside of the traditional asset classes of stocks, bonds and cash. Examples of alternative investments include real estate, commodities, options and financial derivatives. Alternative investments are often used by hedge funds.

Asset

Items that one owns; they can be financial or non-financial in nature.

Rule of 72

Method of computing the time in which an invested sum will double at a specific rate of interest; or for computing the interest rate that will double a principal in a specific period. Formula for time (years): 72 ÷ Annual rate of interest. Formula for interest rate (annual percent): 72 ÷ Number of years.

expenses

Money spent or cost incurred in an organization's efforts to generate revenue, representing the cost of doing business. Expenses may be in the form of actual cash payments (such as wages and salaries), a computed expired portion (depreciation) of an asset, or an amount taken out of earnings (such as bad debts). Expenses are summarized and charged in the income statement as deductions from the income before assessing income tax. Whereas all expenses are costs, not all costs (such as those incurred in acquisition of income generating assets) are expenses.

Credit unions

Not-for-profit cooperatives of members with some type of common bond (e.g., employer) that provide a wide array of financial services, often at a lower cost than banks.

identity theft

Obtaining a person's personal and financial information through criminal means. A thief uses this information for illegal purposes, such as to make purchases using the victim's name. Thieves can find information through discarded credit card or bank statements that are not destroyed, and can find the information online in customer databases.

Borrowing

Obtaining or receiving something on loan with the promise or understanding of returning it or its equivalent.

government transfer payments

One-way payment of money for which no money, good, or service is received in exchange. Governments use such payments as means of income redistribution by giving out money under social welfare programs such as social security, old age or disability pensions, student grants, unemployment compensation, etc. Subsidies paid to exporters, farmers, manufacturers, however, are not considered transfer payments. Transfer payments are excluded in computing gross national product.

Credit bureaus

Organizations to which business firms apply for credit information on prospective customers.

Consequences

Outcomes that logically or naturally follow from an action or condition; consequences can occur with the decision maker or with an uninvolved party.

Medicare tax

Part of the FICA tax, this tax is calculated based on an employee's wages. The current rate is 1.45 percent paid by an employee with the employer matching 1.45 percent. Medicare tax paid is 2.9 percent.

Entrepreneurs

People who organize, manage, and assume the risks of a firm, taking a new idea or a new product and turning it into a successful business.

Consumers

People whose wants are satisfied by using goods and services.

Dividends

Periodic payments of the profit of a corporation to its stockholders or owners.

Time Value of Money

Price put on the time an investor or lender has to wait until the investment or loan is fully recouped. TVM is based on the concept that money received earlier is worth more than the same amount of money received later, because it can be 'employed' to earn interest over time. Computed as compound interest.

financial institution

Private (shareholder-owned) or public (government-owned) organizations that, broadly speaking, act as a channel between savers and borrowers of funds (suppliers and consumers of capital). Two main types of financial institutions (with increasingly blurred dividing line) are: (1) Depository banks and credit unions which pay interest on deposits from the interest earned on the loans, and (2) Non-depository insurance companies and mutual funds (unit trusts) which collect funds by selling their policies or shares (units) to the public and provide returns in the form periodic benefits and profit payouts.

Exemptions

Release from tax payments that the IRS allows.

insurance

Risk-transfer mechanism that ensures full or partial financial compensation for the loss or damage caused by event(s) beyond the control of the insured party. Under an insurance contract, a party (the insurer) indemnifies the other party (the insured) against a specified amount of loss, occurring from specified eventualities within a specified period, provided a fee called premium is paid. In general insurance, compensation is normally proportionate to the loss incurred, whereas in life insurance usually a fixed sum is paid. Some types of insurance (such as product liability insurance) are an essential component of risk management, and are mandatory in several countries.

Pension Plan

Scheme under which retirement benefits accrue and are distributed to the beneficiary employees. Its two basic types are (1) Deferred compensation plan in which an employer pays a fixed monthly pension depending on the employee's retirement age, length of service, and last salary received. It may also be paid to a deceased employee's surviving spouse. (2) Defined contribution plan in which the employee contributes a percentage of salary every month and the employer matches it. Upon retirement the employee receives the combined sum. Also called pension scheme.

Employee benefits

Something of value that an employee receives in addition to a wage or salary. Examples include health insurance, life insurance, discounted child care and subsidized meals at the company.

Benefits

Something that is favorable to the decision maker.

Costs

Something that is unfavorable to the decision maker.

credit card

Standard-size plastic token, with a magnetic stripe that holds a machine readable code. Credit cards are a convenient substitute for cash or check, and an essential component of electronic commerce and internet commerce. Credit card holders (who may pay annual service charges) draw on a credit limit approved by the card-issuer such as a bank, store, or service provider (an airline, for example). Cardholders normally must pay for credit card purchases within 30 days of purchase to avoid interest and/or penalties.

Credit reports

Statements containing information about prospective customers furnished by credit bureaus.

consumer protection laws

Statutes enacted to safeguard consumer rights by (1) enforcing or enhancing product safety standards, (2) increasing the availability of consumer interest related information, and/or (3) preventing use of deceptive marketing techniques

phishing

The act of acquiring private or sensitive data from personal computers for use in fraudulent activities. Phishing is usually done by sending emails that seem to appear to come from credible sources (however, they are in no way affiliated with the actual source/company), which require users to put in personal data such as a credit card number or social security number. This information is then transmitted to the hacker and utilized to commit acts of fraud. Some of the criminals behind phishing scams have even gone so far as to create websites that appear to be operated by government agencies. Many virus programs and email providers have developed software in attempt to combat the problem

Investing

The decision to pledge money into investments and securities in order to increase personal or business income.

investing

The decision to pledge money into investments and securities in order to increase personal or business income.

Fair Credit Reporting Acct

The federal legislation that governs the processes credit reporting agencies must follow.

risk managment

The identification, analysis, assessment, control, and avoidance, minimization, or elimination of unacceptable risks. An organization may use risk assumption, risk avoidance, risk retention, risk transfer, or any other strategy (or combination of strategies) in proper management of future events.

Disposable Income

The income a person has left to spend or save after taxes and other required deductions have been taken out of his or her gross pay; net pay.

Discount rate

The interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window.

savings

The portion of disposable income not spent on consumption of consumer goods but accumulated or invested directly in capital equipment or in paying off a home mortgage, or indirectly through purchase of securities.

Demand

The quantity of goods, services or resources that consumers are willing and able to buy at all possible prices in a given time period.

net pay

The remaining amount of an employee's gross pay after deductions, such as taxes and retirement contributions, are made.

gross pay

The total of an employee's regular remuneration including allowances, overtime pay, commissions, and bonuses, and any other amounts, before any deductions are made.

payment method

The way that a buyer chooses to compensate the seller of a good or service that is also acceptable to the seller. Typical payment methods used in a modern business context include cash, checks, credit or debit cards, money orders, bank transfers and online payment services such as PayPal.

Social Security tax

This tax was created under the Federal Insurance Contributions Act (FICA). The amount taken from a contributor's earnings covers support for retired workers, those on disability, and individuals who are entitled to survivorship benefits, which provide financial support for individuals of a deceased family member who was the primary breadwinner.

Diversification

To distribute money among several financial investment tools in order to average the risk of loss.

Federal Reserve System

US central-banking system comprising of 12 regional central banks (called the Federal Reserve Banks) owned by private banks. Governed by seven-member (each appointed by the US president for 14 years) board of governors, the Fed regulates interest rates and availability of bank credit and sets other monetary policies such as legal reserve requirements for banks. Both its chairman (who is its de facto CEO) and vice-chairman are appointed by the US president for a renewable four-year term. The Fed publishes 'Federal Reserve bulletin,' an authoritative source of data on banking, economy, and money.

net worth

Value of a firm to its owners (stockholders/shareholders) as shown on its balance sheet. It is the sum of the issued share capital, retained earnings, and capital gains. Also called net value.

Form W-2

Wage and Tax Statement. A tax form prepared by an employer and given to an employee to be filed with his/her 1040 form, listing wages earned during that year, federal and state taxes withheld, and Social Security tax information. Employers must provide employees their W-2 forms by the deadline that is set by the IRS.

variable expenses

a cost that varies

consumer credit

credit given by shops, banks and other financial institutions to consumers so that they can buy goods

Desicretionary (disposable) income

income remaining after deduction of taxes and other mandatory charges, available to be spent or saved as one wishes.

Earned Income

income that is generated by working. Your salary or money made from hourly employment (regardless of whether that salary or hourly income came from working for someone else or from your own "consulting") is considered earned income. Some activities that generate earned income include: Working a job Owning a small business Consulting Gambling Any other activity that pays based on time/effort spent

Passive Income

money you get from assets you have purchased or created. For example, if you were to buy a house and rent it out for more money than it costs you to pay your mortgage and other expenses, the profit you make would be considered passive income. As another example, if you owned a business that could operate independently of your working for it, any money that you make from the business would be considered passive income (of course, if the businesses success was limited by the number of hours you worked, the income you made would be considered "earned income"). Some activities that generate passive income include: Rental Income or Note Income from Real Estate Business Income (assuming it's not earned based on amount of time/effort spent — that would be Earned Income) Creating and Selling Intellectual Property — Books, Patents, Internet Content, etc Affiliate or Multi-Level Marketing

Portfolio Income

ncome generated by selling an investment at a higher price than you paid for it. Some people refer to portfolio income as "capital gains," because that's how the money is taxed by the federal government. Some activities that generate portfolio income include: Trading (buying/selling) Paper Assets — Paper assets refer to things like stocks, bonds, mutual funds, ETFs, CDs, T-bills, currencies or other types of futures/derivatives. Stock market investing is the most common generator of portfolio income Buying and Selling Real Estate (specifically the profit from the sale) Buying and Selling of any other Assets — Antiques or cars, for example, or other types of collectibles that have appreciated in value