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Study Guide: Exam 1
Flexibility |
The ability for your plan to change as your situation or goals change |
Liquidity |
the relative ease and speed with which you can convert non cash assets into cash |
Protection |
Your ability to meet the unexpected large expenses without destroying your plan |
Minimization Of Taxes |
Your ability to pay as little as possible to Uncle Sam |
Estate Planning |
planning for your eventual death and the passage of your wealth to your heirs |
Inflation |
An economic condition in which rising prices reduce the purchasing power of money |
Compound Interest |
Interest paid on interest |
Diversification |
acquisition of a variety of different investments instead of just one to reduce risk |
Personal Balance Sheet |
A statement of your financial position on a given date |
Assets |
what you own |
Monetary Assets |
cash of other assets that can be easily liquidates |
Investment Assets |
Assets that are invested for the future |
Retirement Plans |
Investments made by you or your employer to save money for retirement |
Liabilities |
Something that is owed or borrowing of money |
Net Worth or Equity |
A measure of the level of your wealth. Determined by subtracting debt from assets |
Fair Market Value |
What an asset could be sold for rather than what is cost or what it will be worth sometime in the future |
Tangible Asset |
A physical asset, such as a house or car |
Insolvent |
The condition in which you owe more money than your assets are worth |
Personal Income Statement |
A statement that tells you where your money has come from and where it has gone over some period |
Variable Expense |
An expense over which you have control. |
Fixed Expense |
An expense over which you have no control |
Budget |
A plan for controlling cash inflows and outflows |
Current Ratio |
Monetary Assets / Current Liabilities |
Month's Living Expenses Covered Ratio |
Monetary Assets / ( annual living expenses/ 12) |
Debt Ratio |
Total Debt / Total Assets |
Long-term Debt Coverage Ratio |
Total income available for spending / Total long-term debt payments |
Savings Ratio |
Income available for saving and investments / Income available or living expenses |
Time Value of Money |
The concept that a dollar received today is worth more than a dollar received in the future and, therefore, comparisons between amounts in different periods cannot be made without adjustments to their values |
Reinvesting |
Taking money that you have earned on an investment and plowing it back into that investment |
Rule of 72 |
A helpful investment rule that states you can determine how many years it will take for a sum of money to double by dividing 72 by the annual growth rate |
Discount Rate |
the interest rate used to bring future dollars back to the present |
Annuity |
A series of equal dollar payments coming at the end of each period for a specific number of periods |
Compound Annuity |
An investment that involves depositing an equal sum of money at the end of each year for a certain number of years and allowing it to grow |
Amortized Loan |
A loan paid off in equal installments |
Perpetuity |
An annuity that continues forever |