Understanding Personal Finance: A Glossary of Terms and Concepts
Vocab
Banking and Credit
Operating Costs: The costs associated with operating a business.
Fixed Costs: Costs that are constant, such as rent, that you incur every month.
FDIC: Insures bank deposits up to $500,000.00
Variable Costs: Costs that change every month.
Compound Interest: Interest that is calculated on a monthly basis; interest charged on top of both principal and interest.
Competition: Two or more businesses competing for the same customers.
Bank Fee: A charge for services such as an item or checking account.
Check Register: A place where the individual owning the account lists all of his/her transactions.
Credit Fraud: Theft and illegal use of someone else’s credit information.
Identity Theft: Gathering enough information about a person to assume their identity and commit fraud or other crimes.
Bankruptcy: A legal process where a person declares the inability to repay debts.
Grace Period: A period of time (usually 30 days) when interest is not charged on credit card purchases.
Income and Payroll
Gross Pay: The amount of money paid before any deductions.
Deductions: Amounts withdrawn from your gross pay, including taxes, healthcare, and pension.
Net Pay: The amount of money you receive AFTER deductions; the amount you actually receive.
Regular Pay: The gross amount for regular hours worked.
Hourly Pay: When a worker gets paid a base amount for each hour worked.
Overtime: When you get paid one and one-half times your normal hourly pay for the hours you work in a week that are over a total of 40 hours.
Salary: When a worker gets paid a set amount per year in total; it doesn’t matter how many hours they work in a week or in a year.
Calculating Pay
Overtime = 1.5 x Hourly Pay
Investing and Savings
Definitions
Market Efficiency: All stock prices accurately reflect all historical and current data.
Market Timing: When you analyze charts to predict what they will do in the future.
P/E Ratio: Price to Earnings ratio. How much you pay for each dollar a stock earns.
Regular Savings: A saving plan with low or no minimum balance and the ability to withdraw at any time.
Withdrawal Slip: A written request to take money out of your account.
CD (Certificate of Deposit): A long-term deposit that has certain restrictions and pays a higher interest rate than regular savings accounts.
Money Market: An account whose interest rates are based on the rates paid by T-Bills (Treasury Bills) and where you invest in currencies.
Traditional IRA: A tax-sheltered (deferred) retirement plan that allows certain workers to invest money and pay no taxes until it is withdrawn.
Savings Account Register: A place where you record deposits, withdrawals, interest earned, and the balance of your savings account.
Key Concepts
What happens when interest rates go up? Money market rates go up, and stock prices go down.
Is it better to have a higher or lower P/E Ratio? Lower
Choosing the Right Savings Plan
- Small amount for a set period to earn a higher return: CD
- Saving for an undetermined amount of time, not sure when you’ll need to take money out: Regular Savings
- When you can afford to lose a little in return for earning a higher rate: Stocks
- When you’re older or have disposable income and don’t need to make withdrawals: IRA
- When you won’t be making withdrawals for a long time, want safety, and a little more interest: Bonds
- When you have a set period of time to put your money away (less than 5 years), and you want more interest than regular savings and safety: CD
- When you have a little bit of money but are not sure when you will be making additional deposits: Regular savings
Advantages and Disadvantages of Different Savings Plans
Regular Savings Account
Advantages: Low or no minimum balance, safe, insured
Disadvantages: Low-interest rate
Money Market Accounts
Advantages: Higher interest rates, insured, safe
Disadvantages: Higher minimum balance, longer term for deposits
CD/Certificates of Deposit
Advantages: Higher interest rate, safe, insured
Disadvantages: Higher minimum balance, longer-term deposit, early withdrawal penalty
IRA/Individual Retirement Account
Advantages: Higher interest rate, tax-deferred, variety of investment plans offered
Disadvantages: Higher minimum balance, can’t withdraw until 59 ½, safety depends on where you choose to invest
Stocks
Advantages: Low minimum investment, highest return is possible
Disadvantages: Very risky, not insured