Unit 5 - Personal Finance #144-180 Economics Flashcards Unit 5 - Personal Finance #144-180

144. Savings Monetary deposits secured for a later, undetermined use. Low risk and guaranteed rate of return.

145. Investment Using money in a way that carries an expectation of some future return or benefit. Higher risk and no guaranteed rate of return.

146. Interest Money paid regularly at a particular rate (or %). Interest earned is money you make from an investment. Interest paid is money you pay to a lender.

147. Risk and Return Relationship The higher the risk when investing, the higher the potential return on your money. Ex. Buying stock vs. piggy bank savings

148. Financial Institutions Places to keep money (earnings). Banks Credit Unions Savings and Loan Payday Loan Company

149. Banks A safe means to store money. Offer services like: direct deposit, checking, debit / credit cards, and loans. Make money by charging interest for loans.

150. Credit Unions Provides services similar to a bank, but only to its members. Often have higher savings rates for deposits and lower interest rates for loans.

151. Payday Loan Company Gives out small loans in return for a portion of an upcoming paycheck.

152. Title Pawn Lenders Grants loans where borrowers can use their vehicle title as collateral or as security for repayment.

153. Savings and Investment Options Savings accounts Certificates of deposit (CD) Retirement accounts Stocks Bonds Mutual funds.

154. Savings Account Bank account for storing money you need easy access to. FDIC insured up to $250,000. Inflation risk: inflation rate is higher than the rate of interest earned on the account.

155. Certificate of Deposit Offered by banks. Higher rate of return than regular savings account. Saver agrees to keep funds in the CD for a specified period, and must pay a fee for early withdrawal.

156. Retirement Account Savings for retirement. 401K - most common. Employers offer a percentage of matching funds to what the employee puts in the account. Roth IRA and Traditional IRA – personal retirement accounts through an investment bank.

157. Stocks Represent partial ownership in a company (shares). Buying stock in a company allows you to make a profit if the business does well and the value of the stock increases.

158. Bonds Offered by the US government to investors with the promise of the investment being repaid with interest. Low rate of return and carries inflation risk.

159. Mutual Fund A collection of various investments (stocks, bonds, securities). Provide more protection against loss because the investment is spread across many different companies rather than just one company.

160. Unanticipated Inflation Hurts lenders who lend at fixed rates. Helps borrowers who borrow at fixed rates because interest rates remain stable as prices rise, and they pay back their loans with money that has less purchasing power than the money they borrowed.

161. Types of Income Tax The government taxes our wages in these ways: Progressive Tax Regressive Tax Proportional Tax

162. Progressive Tax Tax rate increases as income increases. The wealthy pay a higher percentage of their earnings than the poor. (U.S. Income tax) Annual Income Progressive Tax Rate Amount Paid in Taxes $10,000 1% (1%) ($10,000) = $100 $30,000 3% (3%) ($30,000) = $900 $200,000 20% (20%) (%200,000) = $40,000 $500,000 50% (50%) ($500,000) = $250,000 $700,000 (50%) ($700,000) = $350,000

163. Regressive Tax The tax rate decreases as income increases. People pay the same amount (not percent!) of tax regardless of income. (Ex. sales tax) Annual Income Regressive Tax Rate Amount Paid in Taxes $10,000 $5,000 $5,000 (50% of income) $30,000 $5,000 (17% of income) $200,000 $5,000 (3% of income) $500,000 $5,000 (1% of income) $700,000 $5,000 (.7% of income)

164. Proportional Tax Also known as a flat tax. Everyone pays the same percentage of their income. (Ex. Social security) Percentage does not change with respect to changes in income. Annual Income Proportional Tax Rate Amount Paid in Taxes $10,000 15% (15%) ($10,000) = $1500 $30,000 (15%) ($30,000) = $4500 $200,000 (15%) (%200,000) = $30,000 $500,000 (15%) ($500,000) = $75,000 $700,000 (15%) ($700,000) = 105,000

165. Property Tax Taxation of the value of real property (buildings and land). Levied by local governments, like counties or cities.

166. Sales Tax A consumption tax levied on people when they make certain kinds of purchases, such as buying a book or eating out at a restaurant. Classified as a regressive tax because it takes a greater percentage of income from a low-income person than from a high-income person.

167. Credit Worthiness Likelihood of a borrower to repay—based on factors such as history of repayment, credit score, and current debt. Based on the “3 Cs” of Credit

168. Annual Percentage Rate The annual percentage rate (APR) is the yearly rate charged for borrowing or the yearly rate earned through an investment.

169. Variable Rate The interest rate fluctuates over time because it is based on an index that changes periodically.

170. Fixed Rate The interest rate is determined when the loan is originated, and it does not change.

171. Simple Interest Rate Interest calculated only on principal.

172. Compound Interest Rate Interest calculated on principal along with accrued interest.

173. Shared Liability This is provided by insurance companies. Allows individuals to share the cost of debt associated with unforeseen issues such as auto accidents, health costs, the loss of a loved one, etc..

174. Types of Insurance Automobile Health Disability Life Property

175. Premium Cost or how much you pay for insurance.

176. Deductible Amount you have to pay out of pocket before your insurance pays.

177. Real Wages Refers to the purchasing power of your earnings. Your wages may stay the same from one year to the next, but you cannot buy as much because of rising prices. This is a drop in real wages.

178. Factors that affect earnings 1. Demand for workers in the market. 2. Number of workers in the market. 3. Amount of specialized knowledge, skills, training, and licenses that are required for the job.