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22 Cards in this Set
- Front
- Back
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Effective annual rate
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interest rate you earn after taking compounding into account
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Present Value
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current worth of an amt of money or a sequence of cash flows
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Future value
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value as a specified date in the future of an amt of money or a sequence of cash flows
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Rates of return
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more general term than interest rate or amt you have coming in
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Annuity
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sequence of cash flows over a period of time
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annuity due
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If the annuity payment is made at the beginning of a period it is called an
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if payment of annuity it is made at the end of a period it is
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ordinary annuity
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Present Value of annuity factor (PVA)
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gives you the present value of an annuity per $1 payoff per period by multiplying the payment per period
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Personal balance sheets
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snapshot of our financial position at a point in time
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Net Worth
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Total assets – total liabilities, as a student prob negative
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Gross human capital
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is the present value of your expected future income, or reflects your earning potential, it is an asset. Most valuable asset in your working years, when you retire it becomes zero, it also goes down the older you get
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Economic balance sheet
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personal balance sheet that shows your financial potential
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Economic net worth
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differences in your total assets and total liabilities, now called this because eit contains value of gross human capital, as a student positive
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Market value
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money you would get for assets if you sold them today
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Explicit liabilities
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market value of all financial debts you owe at a certain age, ex. Credit card, student loan, car loan, mortgage loan. These debts are recognized by both you and the lender which makes them EXPLICIT
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. Implicit Liabilities
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Value of FUTURE expenses, ex minimum costs of living that you will have to spend the rest of your life. Ex. Food, shelter, clothes, medical the higher your implicit liabilities the less you have to spend. They are nondiscretionary so you have no control over them.
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Financial capital
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traditional net worth or financial assets - explicit liabilities
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Net human capital
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gross human capital- implicit liabilities
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To estimate gross human capital
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reasonably estimate your annual wages, select a retirement date, (3) properly discount all the wages earned at distinct points in time
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Consumption smoothing
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balancing spending and saving to optimize the your standard of living over your lifetime, keeps you from oversaving and undersaving
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Maximal happiness is associated with
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the highest possible total standard of living over a lifetime
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70% income rule
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individuals should aim to generate an income of 70% of their pre retirement income
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