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107 Cards in this Set

  • Front
  • Back
Financial success
Obtaining maximum benefits from limited financial resources
Financial independence
Having sufficient income or resources to be self-reliant
Current consumption
Goods and services used in a current time period
Principle of diminishing marginal satisfaction
A decreasing rate of satisfaction in relation to increasing income
Future consumption
Goods and services to be used in future periods
The portion of current income not consumed
Life-cycle planning
A view of financial planning as a lifelong process
Marginal analysis
Evaluating changes in important variables in relation to controllable decision inputs
Opportunity costs
Benefits given up when one alternative is chosen over another
Building-block approach to financial planning
Sequential investing, starting with a low-risk foundation and then moving to riskier investments
Financial planner
A professional who helps clients create, maintain, and execute a financial plan, designed to achieve their financial goals
The process of accumulating value over time from a single payment
A series of equal payments
Future value
A sum of money received or paid in the future
Compound interest
A future value that includes interest on interest
Simple interest
An assumption that interest earned in a period is withdrawn in that period
The rule of 72
A simple technique to determine how long it takes to double an investment's value
Ordinary annuity
An annuity with end-of-period payments
Annuity due
An annuity with beginning-of-period payments
The process of reducing future values to present values
Personal balance sheet
A statement designed to measure someone's wealth
Items of value owned by the balance sheet preparer
Bills and other obligations of the balance sheet preparer
Net worth
Wealth of the balance sheet preparer (assets minus liabilities)
Liquid asset
Cash or any other asset easily convertible to cash with no loss in market value
Lifestyle assets
Things that help us achieve our desired quality of life
Investment assets
Assets that provide income or increase our net worth
Current liability
A debt that must be paid within one year
Noncurrent liabilities
Debt obligations beyond one year
Positive contribution to savings
Increase in net worth
Reduction in net worth
Income statement
Detailed breakdown of cash income and expenses over a past period
Cash inflows, consisting primarily of salaries and wages
Cash outflows that sustain our scale of living
Inflexible expenses
Expenses that are hard to control in the short run
Sunk costs
Costs that cannot be avoided regardless of what happens in the future
Flexible expenses
Expenses that are generally controllable in the short run
Financial ratios
Yardsticks to measure financial strength and progress
Nominal income
Actual income received
Real income
Nominal income adjusted for inflation
Liquid assets to take-home pay ratio
A liquidity measurement. A good numbers is between 0.5 and 1
Liquidity ratio
Liquid assets divided by current liabilities. Any number greater than 1.0 is good
Debt ratio
Total liabilities divided by total assets. A number below 0.5 is good, lower the better
Debt service coverage ratio
Take-home pay divided by debt service charges. 3.0 or better is a good number
A plan indicating financial goals and how resources will be allocated to achieve them
Goal setting
A complex process that involves a hierarchy of wants; abstract at the top and tangible at the bottom
Master budget worksheet
Budget allocations detailing planned income, expenses, and contribution to savings
Monthly income and expense plan
A monthly breakdown of amounts listed on the master budget worksheet
Actual income or expense item that differs from the budgeted amount
Income variance
Income item variance—favorable when actual exceeds budgeted; unfavorable in the reverse situation
Expense variance
Expense item variance—favorable when actual is less than budgeted; unfavorable in the reverse situation
Cumulative variance
Monthly accumulation of variances
Gross income items
Sources of income that are subject to the federal income tax
Nontaxable exclusions
Items that are not includable as gross income
Global income
Income from all sources
Adjusted gross income
Gross income plus or minus certain adjustments
IRAs and Keogh plans
Retirement plans that reduce gross income
Alimony payments
Added to gross income of the receiver but a reduction of the payer's gross income
Taxable income
Adjusted gross income less personal and dependency exemptions and allowable personal expense deductions
Personal and dependency exemptions
Deductions from adjusted gross income based on the number of people in a household, their ages, and eyesight quality
Standard deduction
Deduction from adjusted gross income based on the taxpayer's filing status
Itemized deductions
Deductions from adjusted gross income based on actual amounts spent by a taxpayer
Tax credit
Tax credit: A dollar-for-dollar offset against the tax liability
W-2 form
A form prepared by an employer showing an employee's earnings and withholdings
W-4 form
A form signed by an employee to claim exemption allowances for payroll withholding purposes
Average tax rate
Total tax liability divided by total income
Marginal tax rate
Additional tax liability divided by additional income
Capital gain or loss
Gain or loss resulting from the sale of a capital asset
Capital assets
Assets held for personal pleasure or investment
Alternative Minimum Tax (AMT)
Alternative tax calculation to ensure upper income families pay a minimum tax
Internal Revenue Service (IRS)
Federal agency assigned the task of administering the federal income tax
Automatic extension
An extension of time for filing an income tax return, given automatically by the IRS
Refund anticipation loan
A loan provided by a tax preparation service based on a taxpayer's refund
Statute of limitations
A period of three years given the IRS to impose additional taxes on a filed return
Municipal bonds
Bonds paying interest that are exempt from federal income tax
Custodial account
An account set up by parents in their children's names
Tax-deferred annuity
An investment, usually sold by insurance companies, that allows tax deferral on current interest earned
FICA taxes
Taxes collected for Social Security purposes
Federal estate tax
A tax levied on a decedent's estate
Federal gift tax
Excise tax levied on the transfer of property; supplements the federal estate tax
Inheritance tax
State tax levied on the heirs to an estate
Cash management strategy
A plan determining how much cash to hold, in what form, and in which financial institutions
Pocket money
Coins and currency a person holds
Checking account
Funds held with a financial institution and available upon demand
Emergency reserves
Liquid deposits held to meet unexpected cash needs
NOW (negotiated order of withdrawal) account
Interest-earning checking account, usually with a minimum balance requirement
Savings account
Account with virtually no restrictions but with no checkwriting privileges
Passbook rate
Interest rate on a savings account; usually the lowest savings rate offered by a financial institution
Money market deposit account (MMDA)
Savings account with an interest rate that is tied to money market rates of interest
Money market mutual fund
Pooling arrangement that invests in money market securities having very large denominations
Certificate of deposit (CD)
Savings account with a set maturity and restricted access to funds until maturity
U.S. Series EE bonds
Treasury-issued bonds with indexed interest rates, low denominations, and other attractive features
Any financial institution offering checking account services
Right of survivorship
An owner of an account has access to all funds upon the death of a co-owner
Tenants in common
An owner of an account has a legal claim only to his or her share of an account upon the death of a co-owner
Blank endorsement
Unrestricted endorsement of a check; anyone possessing the check can cash it
Restrictive endorsement
Limits the use of a check to a single purpose, usually to make a deposit
Special endorsement
Using a check to pay a third party
Overdraft (bounced check)
A check lacking sufficient funds to cover it
Stop-payment order
Directive to a bank not to pay a check
Bank reconciliation
End-of-month analysis comparing the cash balance per bank statement with the cash balance per checkbook
The bank retains a payer's checks
Certified check
Bank verification that a payer has sufficient funds to cover a specific check
Cashier's check
A check issued by a bank against itself
Traveler's check
Check purchased from a bank, usually when a payer is raveling away from home
Automated teller machines (ATMs)
Machines that perform certain banking functions
Electronic funds transfer systems (EFTS)
Electronic payment of bills and other transfers of cash