Five Foundations Of Personal Finance
What is personal finance? Personal finance is a term that covers managing your money as well as saving and investing. It encompasses budgeting, banking, insurance, mortgages, investments, retirement planning, and tax and estate planning. What are the five foundations of personal finance?
What are the five foundations of personal finance? The five steps to financial success:
- A $500 emergency fund
- Get out of debt
- Pay cash for a car
- Pay Cash for College
- Build wealth and give.
Important things to know in foundations of personal finance:
Consumer: A person or organization that uses a product or service
Credit: The granting of a loan and the creation of debt; any form of deferred payment.
Debt: An obligation of repayment owed by one party (the debtor/borrower) to a second party (the creditor/lender); in most cases, this includes repayment of the original loan amount plus interest.
Economy: A system by which goods and services are produced and distributed.
Financial Literacy: The knowledge and skill set necessary to be an informed consumer and manage finances effectively.
Interest: A fee paid by a borrower to the lender for the use of borrowed money; typically interest is calculated as a percentage of the principal (original loan amount).
Loan: A debt evidenced by a “note,” which specifies the principal amount, interest rate, and date of repayment. •8.
Personal Finance: All of the decisions and activities of an individual or family regarding their money, including spending saving, budgeting.
Loan Shark: A loan shark is a person who offers loans at extremely high-interest rates, has strict terms of collection upon failure, and operates outside off the street. Loan sharking is usually illegal but may be predatory lending with extremely high-interest rates such as payday or title loans.
Pragmatic: Practical, realistic, logical, matter-of-fact; relating to matters of fact or practical affairs often to the exclusion of intellectual or artistic matters: practical as opposed to idealistic.
Recession: Slump, downturn, decline, collapse; a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP (Gross Domestic Product) in two successive quarters.
Compound Interest: Interest paid on interest previously earned; credited daily, monthly, quarterly, or semi-annually.
Emergency Fund: $500 in readily available cash to be used only in the event of an emergency; the goal of the First Foundation.
Interest Rate: Percentage paid to a lender for the use of borrowed money (in debt); percentage earned on invested principal (in investing).
The Five Foundations: The five steps to financial success: (1) A $500 emergency fund; (2) Get out of debt; (3) Pay cash for a car; (4) Pay Cash for College; (5) Build wealth and give.
Sinking Fund: Saving money over time for a large purchase.
Amoral: Lacking morals; being neither good nor bad
Investing: The process of setting money aside to increase wealth over time for long-term growth; invested money should not be used for a suggested minimum of five years.
Entrepreneur: A person who starts a business.
Interest Bearing Account: An account that earns interest over time.
Inflation: Rate at which the general level of prices for goods and services rise.
Murphy’s Law. A rule that states, “If something can go wrong, it will.” An addition to this law reads, “and usually at the worst time.” The identity of “Murphy” is unknown, but the saying was first used during the 1940s and may have originated with members of the armed forces in World War II.
Macabre: Disturbing and horrifying because of involvement with or depiction of death and injury.
Character: The mental and moral qualities distinctive to an individual.
Reputation: The beliefs or opinions that are generally held about someone or something. •26. Budget: A written cash flow plan.
Cash Flow Statement: A summary that shows the total income and spending for a given time period. •28. Carbon Check: A copy of each check you write.
Envelope System: Series of envelopes that are divided into categories (food, entertainment, gas, etc.) and are used to store cash for planned monthly expenses.
Impulse Purchase: An item that is bought without previous planning or consideration of the long-term effects.
Overdraft: Occurs when money is withdrawn from a bank account and the available balance goes below zero. Reconcile: To match your bank statement with your checkbook.
Zero-Based Budget: A cash flow plan that assigns an expense to every dollar of your income, wherein the total income minus the total expenses equals zero. Every dollar is assigned a name.
Annual Fee: A yearly fee that is charged by the credit card company for the convenience of the use of the credit card.
Annual Percentage Rate (APR): Cost of borrowing money on an annual basis; takes into account the interest rate and other related fees on a loan.
Credit Card: Type of card issued by a bank that allows users to finance a purchase.
Credit Report: A detailed report of a bank that allows users to finance a purchase
Credit Score: A measure of an individual’s credit risk; calculated from a credit report using a standardized formula.
Debt Snowball: Preferred method of debt repayment; includes a list of all debts organized from the smallest to the largest balance; minimum payments are made to all debts except for the smallest, which is attacked with the largest possible payments.
Depreciation: A decrease or loss in value.
Introductory Rate: An interest rate charged to a customer during the early stages of a loan; the rate often goes up after a specified period of time.
Loan Term: Time frame that a loan agreement is in force, and before or at the end of which the loan should either be repaid or renegotiated for another term.
Tax Deduction: An expense, such as a charitable contribution, that can be deducted from one’s taxable income.
FICO (legal name: Fair Isaac Corporation), originally Fair, Isaac, and Company, is a data analytics company based in San Jose, California focused on credit scoring services. It was founded by Bill Fair and Earl Isaac in 1956. The company renamed itself FICO in 2009.