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Personal Finance Midterm 1
Terms and Definitions for BUSM 200 Midterm 1
65
Business
Undergraduate 1
02/09/2013

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Term
What is the happiest income?
Definition
$40,000 per year, or more than your closest relative and nearest neighbor.
Term
What famous person in history aimed for his POC at age 42?
Definition
Benjamin Franklin
Term
What are financial assets? Examples?
Definition
Assets that increase in value with time: Home, savings account, 401(k), IRA, stocks, bonds, etc.
Term
What are non-financial assets? Examples?
Definition
Assets that decrease in value with time: cars, boats, clothes
Term
What is a Point of Choice?
Definition
A time when income from assets replaces income from work, provides more income than you'll ever need
Term
What is the POC formula?
Definition
HXII: Home, Ten Percent to 401(k), 1% to accelerated debt reduction, 1% to Million Dollar Choices
Term
How much would a young person today need to accrue in order to live off of a $50,000 basket of goods? $100,000?
Definition
$7.3 million; $14.6 million
Term
Is it better to buy a house with a smaller mortgage or a larger home with a mortgage that will stretch you?
Definition
Smaller home: Prophetic counsel: "Buy a modest home and pay off the mortgage"
Term
Behavioral Intelligence of the 401(k): Three things
Definition
1. You don't miss what you don't see
2. Your employer does the work for you
3. Substantial penalty for early withdrawal
Term
What is the largest liquid investment you will have in your retirement?
Definition
401(k)
Term
What is the rule of 72 and how does it work?
Definition
Take your interest rate and divide it into 72; the product is the number of years it will take your investment to double. For example, with 6% interest, your investment will take 12 years to double.
Term
How many years could the average American family be out of debt if they used the Accelerate Debt Reduction method?
Definition
6-8 years
Term
What is meant by 1% of income to accelerated debt reduction?
Definition
Take 1% of income, divide it by twelve. Each month, pay this much in addition to your minimum payments on debts to pay them off faster and minimize the amount you pay in interest.
Term
T or F: It is good practice to borrow money to make an investment.
Definition
False. Heber J Grant did this and was in the equivalent of 3 million dollars of debt as a result.
Term
What is meant by 1% of income to million dollar choices?
Definition
Save the equivalent of 1% of your annual income and invest it. For example, in the Millionaire Next Door, a couple that quit smoking and invested the equivalent savings as a percentage of their income straight into their 401(k) could have accumulated millions by retirement by that action alone.
Term
R.E.S.I.R.V.
Definition
Recurring Expenses you Save and Invest in the Right Vehicle
Term
What is 'vesting'?
Definition
"Ownership"; a stipulation by some companies of an amount of time you need to work for the company before their match into your 401(k) actually becomes your money.
Term
What is the "Salary Index Match"?
Definition
Investing an amount of money into your 401(k) as a percentage of your income rather than an actual dollar amount. Because your salary will likely increase annually, your contribution will increase automatically. This can increase the value of your 401(k) by 75%
Term
What is an "Endowment" in financial terms?
Definition
A fund where an authorized person may spend/use the income generated by the principle, but never the principle itself.
Term
Best practices for purchasing a car:
Definition
Don't lease, don't buy new, buy for value, keep it 10+ years
Term
"The Fortune in Food"
Definition
One can accumulate multi-millions by planning an affordable, storable, easy-to-make month-long menu in advance and buying in bulk when food goes on sale from the right locations.
Term
3 key disciplines of The Science of Personal Prosperity
Definition
Behavioral Intelligence, Financial Intelligence, Community Intelligence
Term
Financial Intelligence: Strategies that work:
Definition
Buying a home, investing in 401(k), accelerated debt reduction, million dollar choices, income producing real estate, owning your own business, mentors, marriage, staying healthy, optimism
Term
Strategies that don't work:
Definition
Debt consolidation home loan, Investment Life Insurance contracts, traditional budgeting, rent-to-own contracts, small dollar loans, two-income households, economic outpatient care,
Term
T or F: Education is directly proportional to income:
T or F: Education is directly proportional to accumulation:
Definition
T
F
Term
UAW, AAW, PAW, ASSET FORMULA
Definition
Current age times current income, divided by ten= what net worth should be.
A prodigious accumulator of wealth has twice as much as their predicted net worth
Term
How much do millionaires save, on average?
Definition
15% of income is MINIMUM
Average is 20%
Term
Millionaire Investment Rules:
Definition
Long-term investments, familiarity with company/industry, “dull/normal” investments, twelve-percent return past 10 years, increasing dividends each quarter (always improving), same management team
Term
Who is the best person to have as your Estate Executor?
Definition
Non-family (objective third party)
Term
What is the leading cause of bankruptcy in America?
Definition
Not having health insurance (huge medical bills)
Term
What is the advantage of an HSA?
Definition
The difference in premium on a high-deductible policy is invested in a HSA that accumulates like a 401(k) but with the added benefit of no FICA (sp?) taxes. This accumulates much like a 401(k) especially if you take preventative measures to have good health.
Term
75% of all medical expenses could be avoided if people would:
Definition
1. get regular medical examinations
2. Establish their risk profile
3. Take reasonable steps to minimize their health risks
Term
Define: Stop loss:
Co pay:
Definition
the maximum amount of co pay a person will be responsible for, usually something like 10 or 20 k
defined as a percentage of medical expenses that the insured is liable for.
Term
What is "Walksmart"?
Definition
A program for reducing health problems, including things like aerobic exercise, health eating, etc.
Term
which is preferable, a dollar in income or a dollar in net worth?
Definition
A dollar in net worth is MUCH better than a dollar in income, because it takes many dollars of income to generate a dollar of net worth.
Term
6 Things to look for in a Potential Employer:
Definition
401(k) with matching contribution
HSA
Continuing Education
Living Salary
Upward Mobility
Growth Business Model
Term
Pre-Tax Equivalency Formula:
Definition
Savings/(1-Tax rate)
Term
Types of Investments: Equity
Definition
Ownership in a company
Payment through dividends, selling stock at higher price in future
Company NOT obligated to pay dividends
higher risk than bonds, higher return than bonds
Term
Types of Investments: Bonds
Definition
The same as giving a loan to a company for a set interest rate
Dividends guaranteed, the only way you won't get paid is if the company goes bankrupt
Bond value inversely proportional to interest rates: a high-rate bond more valuable when interest rates are low
Term
Types of Investments: Derivatives
Definition
contract between two parties
return is based on the movement of assets
ex: calls/puts
used for speculation
a form of ‘bets’ or ‘hedges’
Small fluctuations can produce large changes
much larger risk=much higher returns
Term
Put Option:
Definition
Remember "Call up to Put down"
Call option: Bet that stocks go up
Put option: Bet that stocks go down
Term
What percent increase does the stock market average?
Definition
10.5-11%
Millionaires look for investments that do at least 12%
Term
Bad financial advice: (Examples)
Definition
Have a zero credit score, "Only wealthy people have this investment" (avoid an investment with this kind of sales pitch), unaudited investments, 401(k) investments only when you are out of debt, Borrow against your home for investments, ‘Guaranteed’ Variable annuities and Life insurance investments, 40% per month investments, convert traditional IRA to Roth IRA, invest in gold, speculative investing,
Term
Mutual fund company:
Definition
You pay money to a mutual fund company which is invested in stocks. It invests your money, collects the dividends, and pays you a portion of them (taxed), less their own expenses/profit margin.
Term
Index fund company:
Definition
Like a mutual fund in terms of its investments, but it decreases your expenses that are kept by the company. Long term investments as opposed to the mutual fund company's more variable and micro-managed portfolio.
Term
PRIMED
Definition
Predisposition, RESIRV, Inspired, Multiplier, Endow, Determination
Term
IRA
Definition
same as a 401(k), but not administered by an employer
Term
Potential mentors:
Definition
Tax Advisor (good); millionaires are good at managing their own money with some tax insights provided by a CPA or tax advisor.
Stock broker (probably bad, terrible at managing their own money)
Term
Net worth:
Definition
Financial assets-liabilities
Term
T or F: millionaires will go to any length or effort to get a good deal
Definition
F. Millionaires know where the best deals are in general, don't waste a lot of time clipping coupons or driving far distances to get a relatively small discount.
Term
What's the best type of business to own?
What's the riskiest type of business to be in?
Definition
A franchise.
Multi-level marketing.
Term
Why are home equity consolidation loans a bad idea?
Definition
They don't change behavior. You have a lower monthly payment and will likely re-accumulate all your debt back. 82% of people reaccumulate all their debt within 3 years.
Term
Is "Just pay your tithing" good, comprehensive financial advice?
Definition
No. 27% of bankrupt Utahns were eligible to continue paying tithing during their bankruptcy because they could demonstrate a clear, regular pattern of paying before their bankruptcy. This financial strategy wasn't sufficient for these people, it won't be sufficient for you.
Term
Point of Service (POS) Health Insurance
Definition
Like a PPO, but you have an assigned Primary Care Physician whom you have to see for clearance to have visits to specialists reimbursed. These plans may cover more preventative health care services.
Term
Preferred Provider Organizations (PPO) Health Insurance
Definition
A health insurance plan that provides a network of health care providers that the plan will cover; you can visit anyone in the network and enjoy a small co-pay, but you must pay the whole cost of an out-of-network provider.
Term
Health Maintenance Organization (HMO) Health Insurance
Definition
The least expensive but least flexible type of insurance, most favored by group plans. In this, you must see a primary care physician for a referral to a specialist and must even get cleared to go to the ER. This type of insurance has the best reputation for preventative health care programs.
Term
Managed Care Health Insurance
Definition
A form of health insurance that has been around since the 1930s, this plan offers financial incentives to policyholders for staying within a preferred network of providers.
Term
Fee-for-Service Health Insurance
Definition
Traditional Health Insurance; under this plan, an insured person would pay a deductible on all medical expenses (usually 20% up to a stop loss) and the insurer would cover the rest. There are no restrictions on which providers a person may utilize.
Term
HSA Health Insurance
Definition
A tax-advantaged account that may be set up if you have a high-deductible health insurance plan. You and an employer may contribute tax-free to an account that compounds to pay for qualified medical expenses. By living in a way that reduces your healthcare costs, this can accumulate strongly toward your retirement.
Term
What is a capital gain?
Definition
When a financial asset increases in value
Term
True of False: Home ownership is considered "behaviorally efficient"?
Definition
True
Term
What is the median value of a home today?
Definition
$250,000
Term
According to the Rule of 72, how many years will it take an investment with interest rate of 6% to double in value?
Definition
12 years
Term
What is the 50% tax match?
Definition
Re-allocating disposable income as a contribution to 401(k); not only is the money you contributed saved, so is 50% more in equivalent taxes.
Term
About how much money do I as a young person have to cut back in order to have 1 million more dollars in my retirement?
Definition
28 cents per day
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