Eco 110 – Personal Finance and Financial Decision‐Making Final Exam Review Sheet Chapter 1 – Personal Financial Planning in Action What personal and economic factors affect financial decisions? What is the rule of 72? How is it applied? Calculate rate of increase in prices o Use inflation rates to calculate expenses Who is helped by inflation? Who is hurt? Calculate earnings from savings What does time value of money measure? How do you calculate future value? Present value? o Using charts to evaluate (Exhibits 1‐A through 1‐D) o Single amount o Series of deposits What are different types of risk? Chapter 2 – Money Management Skills What are the 3 major money management activities? How long should you keep different types of documents? For example: o Credit card statements, mortgage documents, retirement account information, tax records, housing records What do we use personal financial statements for? Assets (liquid), Liabilities, and net worth Cash inflow, cash outflow o Surplus/deficit Ratios o Liquidity ratio o Debt ratio o Current ratio o Debt‐payments ratio o Savings ratio How can you increase savings easily? Fixed/variable expenses Page 1 tax evasion Comparing different tax situations o Family vs. series of deposits Present value of deposit o Single vs. series of deposits Annual percentage yield Comparing tax‐free yield to taxable yield o Which will have better return on savings? FDIC coverage – what does it entail? Calculate penalties for early withdrawal from CD Calculating interest (with respect to overdraft fees) o Annual fees Bank reconciliation – calculate adjusted balance Page 2 . money market fund o Important factors to savings plans What factors affect choice of checking accounts? Savings totals o Compounded annually / Single deposit vs. single taxpayer o What are the main sources of help for tax preparation? o How can one avoid an IRS audit? o 1040EZ. 1040 o Common tax‐saving methods? Calculating annual lost income through lost savings Retirement account deductions o Tax savings calculations / Future and current Chapter 4 – Financial Services: Savings Plans and Payment Accounts What are the major categories of financial services? o What factors play into a consumer’s choice of bank? What are different types of savings plans? o Money market account vs. 1040A. married vs. standard deduction o Tax deduction vs.Chapter 3 – Taxes in Your Financial Plan What are the 4 major categories of taxes? Calculate taxable income What is the difference between tax‐exempt and tax‐deferrable? o Itemized vs. average tax rates o Tax avoidance vs. tax credit o Marginal vs. monthly payments. Sources.Chapter 5 – Consumer Credit: Advantages. and Costs What is consumer credit? Why is it important? What are two types? o Name the two general rules of measuring credit capacity Using market values and net worth of home to determine borrowing ability What does it mean to “live within your means?” o Calculate a debt payment‐to‐income ratio o 20% rule? Compute finance charges o Calculate APR (one time or monthly) What is a credit bureau? What should you do if you are denied credit? What two main things should you remember when you borrow money? Cash advances vs. credit card payments o Calculate a cash advance fee o Calculate monthly interest given APR Calculating interest o Calculating add‐on interest. Disadvantages. and APR What should you do if there is a billing error on your statement? What if someone stole your identity? How can you better protect yourself online? o Chapter 7 vs. Chapter 13 bankruptcy Chapter 6 – Consumer Purchasing Strategies & Wise Buying of Motor Vehicles What is the difference between a service contract and warranty? What kinds of warranties are there? Comparing credit payments to paying in full Comparing yearly (single) payment to future value (present value) of savings Calculating unit prices Compare buying/leasing car o What should you do when buying a used car? What might reduce the life of your car? o Variable versus fixed costs of operation o Operating cost per mile What tends to cause consumer problems/complaints? How are they typically resolved? Difference between arbitration and mediation o Class action suits / When might this be helpful? Page 3 . Peril vs. retirement) o Property risk o Liability risk What is covered in homeowner insurance? What is an umbrella policy? o Building / Living expenses / Personal Property / Personal Liability What is renter’s insurance? o Two types (broad. payment o Compare total payments o Compare interest rates What affects qualification for mortgage? Why might one want an adjustable‐rate mortgage? Refinancing – effect on monthly payments. mortgage payment o Pros/cons of owning Affordable cost of home o Affordable mortgage amount. Hazard (examples might help you remember differences) Examples of risks o Personal risk (disability. illness. comprehensive) What is the difference? How much home (or renter) coverage do you need? Automobile insurance – what is covered? o Bodily injury / Medical Payments / Uninsured motorist o Property vs.Chapter 7 – Selecting and Financing Housing Compare costs of renting/buying home o What items on a lease are negotiable? o Earned interest on security deposit o Condominium fees Property taxes. total payments What should you do when you want to sell your home? What affects selling price? o How should you decide between selling on your own or using an agent? Chapter 8 – Home and Automobile Insurance What is insurance? What is a premium? Risk vs. condo association fee. Collision (do you know the difference?) o Comprehensive (difference from property and/or collision)? What is “no fault” system? What factors influence how much auto insurance costs? Page 4 . death. insurance. life. Individual. auto. out‐of pocket limit. house): health insurance often pays for “normal” (not catastrophic) events Three ways one can purchase health insurance (not including “Obama‐ care”): Group. (differences / advantages / disadvantages) o There is a third type (universal life) but it is not widely utilized Key provisions in a typical life insurance policy? What to look for from whom you buy life insurance? Financial Planning with Annuities (costs vs. Purposes (reasons for) life insurance? o Term + Annuity to approximate whole How to estimate how much life insurance you need? o Different methods o When in doubt. term). Medicaid Disability insurance (types). surgical. stop‐ loss. COBRA Types: Basic (hospital.Chapter 9 – Health and Disability Income Insurance Why is health and disability insurance relevant for financial planning? o Key difference between most types of health insurance and other types of insurance (e.g. PPO POS Government health care (not including Obama‐care): Medicare. copayment. etc. physician. Chapter 10 – Financial Planning with Life Insurance What is life insurance? o Whole vs.. costs Overview of reasons for the very high medical costs in U. Types of plans: private. deductible.S. Term. major medical) / Long‐term care Key terms: coinsurance. benefits) o Why buy an annuity? o Immediate & Deferred annuities o Fixed vs. HMO. Variable annuities – do you know the difference? Page 5 . use the “easy” method with a multiple of 5 to 10 Two types of life insurance companies: o participating and non‐participating (differences / advantages / disadvantages) Two main types of life insurance (whole. benefits vs. BCBS. ). market) How can diversification (asset allocation) reduce investment risk? U.) o Market order. brokerage firms. Relevance of time value of money to investing Factors affecting the choice of investments (safety vs. stop‐loss order Long‐term vs. notes. Government bonds. business failure. establish emergency fund. State and local bonds (difference between general obligation and revenue bonds) Corporate bonds Inverse relationship between interest rates and market value of a bond Bond ratings and rating agencies Chapter 12 – Investing in Stocks Key features of common and preferred stock What is equity financing? Dividend? Stock split? Return from owning stock: dividend income & price appreciation Classification of stocks investments (blue chip. risk factors) Key risk factors (inflation.) Key numerical measures that influence investment decisions (earnings per share. o Reduce credit card debt. etc. dividend yield.Chapter 11 – Investing Basics and Evaluating Bonds Key things to do when preparing your investment program o Budget o Evaluate your risk tolerance. bills. interest rate. Short‐term investment strategies What is “selling short”? Page 6 . etc. limit order. projected earnings. etc. price‐earnings ratio. etc. cyclical. Know formulae and how to calculate Is book value the same as a company’s stock market valuation? Basics of buying & selling stock (markets. TIPS.S. lifecycle money‐market) What to consider when picking mutual funds (retirement vs. guardian What is a living will? Trusts (types: credit‐shelter. How much money will you need in a typical year in retirement? How much money do you need to allocate to major financial contingencies (e.) Major Sources of Retirement income (employer pension. nursing home. how does turnover ratio matter (think about tax implication)? Chapter 14 – Starting Early: Retirement and Estate Planning Time value of money and the importance of starting early (Exhibit 14‐1 – do you understand?) Time value of money and estimating retirement expenses (plan for emergencies. hybrid/balanced/”fund of funds”. bond. investment) Managed vs. disclaimer. no‐load funds.g. redemption fee (back‐end load). Know the differences. traditional marital share. exemption trust. stated amount). health expenses. Index funds – pros and cons Return on investment (income and capital gain with mutual funds) Tax issues. public pension. living. testamentary) Estate taxes (four major types of taxes) Page 7 .). etc. What is probate? Executor vs.Chapter 13 – Investing in Mutual Funds What is a mutual fund? Why do investors purchase mutual funds (say. social security is a public pension plan What is “vesting”? Two types of employer plans: “defined benefit plan” and “defined contribution plan” (know the difference) Types of individual retirement accounts What is the difference between regular IRA and Roth IRA? Estate Planning: what is it? Why would a person do it? Wills (types: simple.. hospitalization. annuities). personal retirement plans. open‐end). Why would firms charge front‐end and/or back‐end loads? Why are the implication for an investor’s return? Expense ratio – how does it matter? Types of mutual funds (stock. instead of stocks)? Advantages/disadvantages? Classification of mutual funds (closed‐end. ETF. Load vs. etc.