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