Personal Finance Fundamentals
118 flashcards by MentisLibrary
Budgeting, emergency funds, credit scores, debt payoff, retirement accounts, taxes, and insurance explained in plain language. The money education most people never got in school.
- What is the 50/30/20 budgeting rule?
- Allocate after tax income as 50 percent needs, 30 percent wants, and 20 percent savings and debt payoff
- What is a zero based budget?
- A budget where every dollar of income is assigned a job, so income minus allocations equals zero
- What is the envelope budgeting method?
- Dividing spending cash into labeled envelopes per category, stopping when an envelope is empty
- What does pay yourself first mean?
- Automatically routing savings out of each paycheck before spending anything
- What is an emergency fund and how big should it be?
- Cash reserved for genuine emergencies, typically 3 to 6 months of essential expenses
- What is a sinking fund?
- Money set aside monthly for a known future expense, like car repairs, holidays, or annual insurance
- What is the difference between fixed and variable expenses?
- Fixed expenses stay the same each month (rent, insurance); variable expenses fluctuate (groceries, gas)
- What is the difference between gross and net income?
- Gross is pay before deductions; net (take home) is what remains after taxes and withholdings
- What is discretionary income?
- Money left after taxes and essential living costs are covered
- What is lifestyle creep?
- Spending rising automatically as income rises, leaving savings flat
- What is the range of FICO credit scores?
- 300 to 850, with higher being better
- What are the five factors in a FICO credit score?
- Payment history 35 percent, amounts owed 30 percent, length of history 15 percent, new credit 10 percent, credit mix 10 percent
- What is credit utilization and what level is recommended?
- The share of your credit limits in use; keeping it below 30 percent is commonly advised, lower is better
- What is the difference between a hard and soft credit inquiry?
- A hard inquiry (loan or card application) can slightly lower your score; a soft inquiry (prequalification, checking your own) does not
- What is a secured credit card?
- A card backed by a refundable cash deposit that usually sets the credit limit, used to build or rebuild credit
- What are the three major US credit bureaus?
- Equifax, Experian, and TransUnion
- How can you get your credit reports for free?
- Through AnnualCreditReport.com, the federally authorized site, now offering free weekly reports from each bureau
- What is the difference between APR and APY?
- APR is the annual rate without compounding; APY includes compounding, showing the true annual cost or yield
- What is a credit card grace period?
- The window between the statement date and due date when paying in full avoids interest on purchases
- Why is paying only the minimum on a credit card costly?
- Minimums mostly cover interest, so the balance shrinks very slowly while interest compounds
- What is the debt avalanche method?
- Paying extra toward the highest interest rate debt first while paying minimums on the rest
- What is the debt snowball method?
- Paying extra toward the smallest balance first for quick psychological wins
- What is a debt to income (DTI) ratio?
- Monthly debt payments divided by gross monthly income, expressed as a percentage
- What is a credit freeze?
- A free lock on your credit file that blocks new accounts from being opened in your name
- What risk does a cosigner take on?
- Full legal responsibility for the debt if the primary borrower fails to pay
- What is a charge off?
- A debt the lender has written off as unlikely to be collected, typically after 180 days of nonpayment
- What is a credit builder loan?
- A small loan held in savings while you make payments, released to you at the end, building payment history
- What is the simple interest formula?
- Interest equals principal times rate times time: I = P x r x t
- What is the compound interest formula?
- A = P(1 + r/n)^(nt), where n is compounds per year and t is years
- What is the Rule of 72?
- Divide 72 by the annual return percentage to estimate years for money to double