FHCE 3200 Exam 1 Study Guide 2024

financial literacy - answer-how well you can understand and use personal finance-related information financial knowledge - answer-the ability to understand personal finance information. financial risk tolerance - answer-your unwillingness to engage in financial endeavors that have uncertain outcomes Key action step to financial well being - answer-1. Keep good records 2. Spend less than you earn 3. Maintain appropriate insurance 4. Save money on a regular basis human capital - answer-your ability and willingness to work, learn, earn, and make wise decisions about how to save and invest money social capital - answer-how well you are able to form connections with other people informal social capital - answer-the interpersonal relationships you form with your family and close friends formal social capital - answer-connect you with people in professional, recreational, leisure, and social communities risks - answer-uncertainty associated with any physical, social, emotional, environmental, labor market, or financial activity risk taking - answer-refers to doing something that involves the possibility of a gain or a loss Relationship between risk taking and wealth creation - answer-There is a direct positive association, in financial markets, the only way to accumulate a certain level of wealth is to take informed financial risks with your savings SMART goal process - answer-S-pecific M-easurable A-ttainable R-elevant T-imely goal time horizon - answer-the time between creating a goal and achieving the goal short term- less than one year long term- longer than one year past orientation - answer-based on memories, whether good or bad present orientation - answer-based on -hedonistic perspective (doing things for pleasure, the experience, and excitement of the action) -fatalistic perspective (unable to visualize a meaningful future) future orientation - answer-based on a calculation of the consequences of actions in terms of a future payoff self-efficacy - answer-how well you believe you can do something hyperbolic discounting - answer-occurs when the value of future benefits is perceived to be lower than that of an alternative available right now. heuristics - answer-make decisions more quickly and easily than if we were to labor over every choice status quo bias - answer-is a personal preference for keeping things the same loss aversion - answer-people generally focus much of their attention on avoiding losses because the joy of a gain is smothered by the pain of a loss optimisim bias - answer-some people think that they will rarely, if ever, experience painful losses during their lifetime confirmation bias - answer-leads to overconfidence in future decisions Influence video - answer-1. reciprocity- obligation to give when you receive 2. scarcity 3. authority- people will follow credible knowledgeable experts 4. consistency- looking for and looking for commitments that can be made 5. liking- similar, compliments, corporate towards mutual goals 6. consensus- people will look to the actions and behaviors of others interest - answer-pros: when you lend money to others, you generate interest cons: when you borrow money, you pay it back plus interest Protection limits of saving deposits - answer-the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA) protect your deposit up to $250,000 Annual Percentage Rate (APR) - answer-the annual sum of the periodic interest rates applied to the account, without considering the effect of compound growth Annual Percentage Yield (APY) - answer-accounts for compound growth balance sheet - answer-assets: what you own liabilities: what you owe liquity - answer-how quickly an asset can be converted to cash fair market value - answer-the price someone would realistically pay you to buy the asset appreciating - answer-assets that increase in value over time, for example, a house depreciating assets - answer-assets such as cars and computers, fall in value over time short-term liabilities - answer-utility bills, credit cards, and short-term installment loans, are due within a year long-term liabilities - answer-have a longer repayment schedule and would include student loans and money borrowed to purchase a house (i.e., a mortgage) bad debt - answer-happens when you borrow money to buy something that either goes down in value quickly or is consumed immediately good debt - answer-Going into debt to pay for your education, transportation, and other items that you need to invest in your human capital savings ratio - answer-savings/income Targeted saving rates - answer--younger than 30 - save 12% toward retirement •30-40, your target savings rate should be at least 15% • 40, you will need a target retirement savings rate of 20% per year for each year until age 65 save more tomorrow - answer-•Commit to putting half of every future raise towards savings present bias - answer-the tendency of people to give stronger weight to payoffs that are closer to the present time when considering trade-offs between two future moments Sole Proprietorship - answer-The default legal structure of a self-employed individual ADVANTAGES •Easy to start up and requires no legal registration or paperwork •You are the owner and are in charge of the decisions •Losses from your business can lower your tax liability DISADVANTAGES •You have unlimited liability, that is, you are totally responsible for paying any business debt and expenses Partnerships - answer-General Partnerships •Decision making is typically by majority •Capital (money used to start or expand the business) can be raised through the collective assets of the partners •Taxes are calculated on each partner's share of income •Each partner has unlimited liability for the entire partnership Limited partnerships •A general partner manages the business and one or more limited partners invest money in the business Limited liability partnerships •Partners are not liable for actions of other partners, but are liable for the general obligations of the business Limited Liability Company (LLC) - answer-shields the personal assets of the owner(s) from the liabilities of the business. •If the business cannot pay its debts, creditors can claim the assets of the business, but they cannot claim the nonbusiness assets of the owner •LLCs are similar to partnerships in structure but limit liability much better •There are higher legal costs, but the added liability protection generally outweighs the additional costs Corporations - answer-•A legal structure that is separate from the owner(s) of the business •Very effective at limiting liability, but also expensive to form and maintain earned income - answer-money from work primarily through the labor market ex: salary, wages, commission, bonus unearned income - answer-money from non-labor sources ex: public assistance, allowances, interest, dividends, social security capital asset - answer-the IRS says that almost everything you own or use for personal or investment purposes umemployment benefits - answer-cash payments made to individuals who lost their job due to no fault of their own. •Amount and duration of unemployment benefits depends on how much the employee was earning immediately prior to losing the job •Benefits typically last for 26 weeks or less •Maximum unemployment benefits are capped Medicaid - answer-health insurance program for low-income households. -works well with unemployment benefits Medicare - answer-is a federally run health insurance program for elderly individuals over age 65 -works well with social security for someone who is retired Supplemental Nutrition Assistance Program (SNAP) - answer-•Provides money to low-income households to purchase food (also called food stamps) Temporary Assistance for Needy Families (TANF) - answer-•Provides supplemental income to very low-income, unemployed households, typically with children social security benefits - answer-•Retirement benefits when you retire •Disability benefits if you become disabled •Family benefits if you were to die while you are providing for children younger than age 18