Personal Finance

Study Guide

MISSOURI PERSONAL FINANCE COMPETENCIES

INCOME
1. Identify components and sources of income.
2. Analyze how career choice, education, skills, and economic conditions affect income and goal
attainment.
3. Relate taxes, government transfer payments, and employee benefits to disposable income.

MONEY MANAGEMENT
1. Explain how limited personal financial resources affect the choices people make.
2. Interpret the opportunity costs of financial decisions.
3. Evaluate the consequences of personal financial decisions.
4. Apply a decision-making process to personal financial choices.
5. Summarize how inflation affects spending and saving decisions.
6. Evaluate how insurance (e.g., auto, home, life, medical and long-term health) and other
riskmanagement
strategies protect against financial loss.
7. Design a financial plan (budget) for earning, spending, saving, and investing.
8. Demonstrate how to use the services available from financial institutions.
9. Analyze the role of the Federal Reserve in controlling the money supply.

SPENDING AND CREDIT

1. Compare the benefits and costs of alternatives in spending decisions.
2. Evaluate information about products and services.
3. Compare the advantages and disadvantages of different payment methods.
4. Analyze the benefits and cost of consumer credit.
5. Compare sources of consumer credit (e.g., credit cards, consumer loans, auto loans, student
loans).
6. Evaluate the terms and conditions of credit cards and consumer loans.
7. Evaluate factors that affect creditworthiness.
8. Explain the purpose and components of credit records.
9. Demonstrate awareness of consumer protection and information (e.g., identity theft, phishing,
scams).
10. Propose ways to avoid or correct credit problems.
11. Describe the rights and responsibilities of buyers and sellers under consumer protection laws.

SAVING AND INVESTING

1. Compare consumer choices for saving and investing.
2. Explain the relationship between saving and investing.
3. Examine reasons for saving and investing, e.g., time value of money.
4. Compare the risk, return, liquidity, manageability, and tax aspects of investment alternatives.
5. Demonstrate how to buy and sell investments.
6. Analyze factors affecting the rate of return on investments (e.g., Rule of 72, simple interest,
compound interest).
7. Evaluate sources of investment information.
8. Examine how agencies that regulate financial markets protect investors.
9. Demonstrate how to evaluate advisors’ credentials and how to select professional advisors and
their services.
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Section 1: Income
Vocabulary: Be able to define these terms and apply them to various situations, scenarios, and
examples

• Income • Expenses
• Wages • Fixed expenses
• Salary • Variable expenses
• Discretionary (Disposable) Income • Periodic expenses
• Direct Deposit • Savings
• Employee Benefits • Asset
• Pension Plans • Liability
• Payroll Deductions • Net worth
• Income tax • Form W-4
• Medicare tax • Exemptions
• Social Security tax • Form I-9
• FICA • Form W-2
• Budget • Opportunity Costs
• Net pay (take-home pay) • Goals
• Gross pay

Concepts to Know:
• Relationship between education and career opportunities
• Consideration of employee benefit package in career selection
• Employment outlook
• How taxes affect your income
• How to read a paycheck stub
• Calculate take-home/net pay
• Be able to read and analyze a W-2 and W-4
• Distinguish between required and optional deductions
• Parts of a budget

Sample Questions:
For a good resource for sample questions in this area, visit the following personal finance curriculum
website (free registration for students and parents) and download sample questions in the area of Income
(paychecks and spending plans). http://fefe.arizona.edu/takeCharge.php
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Study Guide

Section 2: Money Management

1. HOW LIMITED PERSONAL RESOURCES AFFECT THE FINANCIAL CHOICES

PEOPLE MAKE:

Principle of Scarcity—It’s affect on Your 3 main resources--

Time— spend more money
Energy –lean on convenience—spend more money
Money—must spend more on time and energy

SCARCITY: People want more than is available, so they must make choice and the cost of any
choice is the option that a person gives up known as opportunity cost.

DECISION MAKING PROCESS TO PERSONAL FINANCIAL CHOICES

Define the problem
Analyze the problem
Generate possible solutions
Evaluate the solutions
Select the best solution
Evaluate the results

ECONOMIC WAY OF THINKING

There is no such thing as a free lunch—someone somewhere is always paid for the item and if you
acquire something for free, the giver expects something in return.
Incentives matter—everyone likes a reward
People choose for good reasons—their choices reflect their values and make a statement about who
they are.
Trade can make everyone better off
Standard of living depends on your ability to produce goods and services
Beware of the law of unintended consequences---People are not always aware of the decisions they
are making.
The invisible hand works better than the visible boot—Market economy works better than command
economy
The U.S. economy is resilient A president can’t fix the economy but can harm it in the long run

2. INTERPRETING OPPORTUNITY COSTS OF FINANCIAL DECISIONS

Opportunity cost is the value of the next best choice that one gives us when making a decision. For
example—When you purchase on credit one month and that bill comes due the next month, your
opportunity to purchase the next month is reduced because part of your pay check is already owed to
that bill.

By making saving a habit and paying yourself first you create financial opportunity for your future.
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3. EVALUATING CONSEQUENCES OF PERSONAL FINANCIAL DECISIONS

Examine reasons for savings—examples-emergencies, college, retirement, cars, life events, like
wedding, vacations, etc.

Examine reasons for spending—examples—monthly expenses—fixed, variable, insurance, car

payment, housing, utilities, recreation, medical, food, miscellaneous

4. APPLY A DECISION-MAKING PROCESS TO PERSONAL FINANCIAL CHOICES

Define the problem

Analyze the problem
Generate possible solutions
Evaluate the solutions
Select the best solution
Evaluate the results

5. SUMMARIZE HOW INFLATIONS AFFECTS SPENDING AND SAVING DECISIONS

Inflation is the overall increase in the level of prices.

Spending—Inflation causes consumers to purchase products in haste before price increases even
though they don’t need them causing hoarding. It disrupts the economic flow of product demand due
to uncertainty in consumer confidence. Effects consumers because they feel the pinch stretching
their paycheck.

Savings—Inflation makes it more difficult for people to save because of increased cost of products.
It reduces the value of their savings.—Example—Investments must keep pace with inflation—
example if the rate of inflation is 6% and and savings accounts are currently earning 3 % you are
losing money investing in that vehicle.

6. INSURANCE--

A contract or policy where an individual receives financial protection or reimbursement against

losses from an insurance company.

Types:
Life—is a contract between the insurer and the policy owner whereupon the insurer agrees to pay a
sum of money upon the occurrence of the insured individual’s death.

The life insurance premium depends upon your life expectancy and the amount of coverage you
choose.

Your life expectancy is an estimate of the average number of years remaining in a people lives based
on their gender and current age and health---example—smoking, obesity, any health concerns.

The following insurances have deductibles or co-payments:

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A deductible is the amount you pay for a loss before the insurance company pays anything.

A co-payment is required under managed care health insurance, the specific amount you pay for
particular services, regardless of the cost of those services.

Auto—Required in Missouri
Comprehensive coverage means in the case of an accident the damages to your car and the person’s
car you hit are both covered.
Collision or Liability Coverage only covers the person’s car that you hit, not your own.
Auto Medical Liability—Liability pays for bodily injury to other people.

Bodily Injury Liability is insurance that covers physical injuries caused by a vehicle accident for
which you are responsible. If pedestrians, people in other vehicles or passengers in your vehicle are
injured or killed, bodily injury liability coverage pays for expenses related to the crash.

Medical—
Group Plans—the risk is shared and premium cost is less than an individual plan.
HMO- Health Maintenance Organization—is a managed care plan that charges a asset amount for
each member each year. In return, members are covered for most medical services at no extra cost
for a small co-payment, no matter how often you see your doctor. Patients must choose doctors from
the HMO staff.

PPO—A preferred provider organization a managed care plan where the PPO contracts with doctors,
hospitals and other care providers to offer care to its members at reduced costs. You can choose to
go outside then plan if you care to pay a larger part of the cost.

COBRA (Consolidate Omnibus Reconciliation Act)—Allows people who leave employment to

continue their health insurance under the company plan for a limited period of time (usually 18
months)

FLEXIBLE SAVINGS ACCOUNT —You can set money aside to pay medical expense not paid by
your insurance including your deductible.

Your contributions to this account are tax deductible.

The funds that remain in the account at the end of the year do not roll over.

Home/Property—is insurance that protects property owners from property and liability risks
including:
Hazards like fire, water, wind and smoke
Criminal activity
Liability to other person’s losses or injuries

Most people insure the contents of their home for half the value of their home—Example if a home
costs $150,000 you would insure the inside for $75,000

Renters - provides the same property and liability coverage as homeowner’s policy. It just doesn’t
cover the structure itself. Not an expensive policy. —renters insurance when a student’s primary
residence is with parents is sometimes covered by parent’s homeowners.
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Long-Term Health—Wide and varied and it bears great scrutiny because the details of the policy
coverage in terms of nursing home coverage and home care coverage vary greatly.

7. HOW TO CREATE A BUDGET/FINANCIAL PLAN

Identify your financial goals
Assess your current finances
Analyze spending habits
Planning for financial goals

8. DEMONSTRATE HOW TO USE SERVICES FROM FINANCIAL INSTITUTIONS

BANKING
Banking services are available from commercial banks, savings and loans, credit unions and
brokerage firms

Services:
Checking
Savings
Loans
Investments

Main Features to Look For in a Checking Account:

Minimum Balance
Fees
Transaction Limits
Interest
Overdraft Protection

Understand the difference in account features:

Sometimes there’s a limit on the number of checks that can be written
Sometimes if it is interest bearing, there are more fees associated.

TYPES OF CHECKS:
Certified Check—Check from a personal checking account that has been stamped by the bank to
guarantee that there are sufficient funds in the account.

Cashier’s Check—issued and guaranteed by the bank—you pay the bank with cash or credit or the
bank can withdraw the money from your account. The bank then issues it’s own check to the payee
you’ve named.

Money Order—a purchased certificate used to pay a specified amount to a particular payee.

Reconciling Your Bank Account—To Bring your bank statement and your own transactions into
agreement.

Types of Electronic Banking Services:

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Online Services
ATM

9. ANALYZE THE ROLE OF THE FEDERAL RESERVE IN CONTROLLING THE MONEY

SUPPLY

The Federal Reserve controls the money supply through open market operations conducted by
Federal Open Market Committee (FOMC). The Fed’s goals are to promote maximum sustainable
growth and employment while maintaining price stability.

The Federal Reserve maintains the nation’s financial system by raising and lowering short-term
interest rates.

When the Fed cuts short-term rates it is cutting the rate that banks charge each other to borrow
money. Those cuts are eventually passed on to businesses and consumers. The same thing happens
when the Fed raises short-term rates.
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Section 3: Savings and Credit

Vocabulary: Be able to define these terms and apply them to various situations, scenarios, and examples

• Credit • Credit limit/Credit line

• Credit cards • Schumer Box

• Debit cards • Installment loans

• Smart cards • Mortgage

• Capacity • Debt

• Character • Bankruptcy

• Collateral • Credit bureaus

• Interest • Credit report

• Principal • Credit score (FICO score)

• APR • Identity Theft

• Annual fee • Phishing

• Finance charge • Fair Credit Reporting Act

• Origination fee • Truth in Lending Act

• Grace period • Consumer Credit Protection Act

• Minimum payment

Concepts to Know:
• Decision Making Process
• Advantages and disadvantages of using cash, credit, or debit
• Knowledge of consumer credit (benefits and costs)
• Types of credit (credit cards and loans)
• Schumer Box (terms, conditions, hidden fees, APR, grace period, etc.)
• Difference and examples of closed end and open end credit
• Credit history and credit worthiness (building good credit habits)
• Information found on a credit report (personal info, credit inquires, payment history,
creditors, etc.)
• The three credit reporting agencies
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• Impact of interest, length, and amount (principal)

• Identity theft, phishing, and other scams and how these can affect your credit
• How to avoid debt and what to do if excessive debt occurs
• How to avoid and correct credit report mistakes
• Knowledge of consumer protection laws

Sample Questions:
For a good resource for sample questions in this area, visit the following personal finance
curriculum website (free registration for students and parents) and download sample questions in
the area of Spending and Credit. http://fefe.arizona.edu/takeCharge.php
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Study Guide

SECTION 4-SAVING AND INVESTING

1. COMPARE CONSUMER CHOICES FOR SAVING AND INVESTING.

• Savings Accounts
• Certificates of Deposit (CDs)
• Money Market Accounts
• Bonds (Fed, State, Local Bonds, Corporate Bonds, Junk Bonds)
• Common Stock (Growth, Income, Blue-Chip, Defensive, Cyclical)
• Preferred Stock
• Mutual Funds
• Real Estate
• Annuities
• Retirement Savings (IRA, 401k, 403b)

SECTION 1-Sample Questions (Go to end of document for answers)

1. Which is an advantage of preferred stock over common stock?
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2. A mutual fund is a type of investment that:

3. Which is the pool of investors’ money that is used to buy stocks, bonds, and other securities
based on the selections of professional managers from an investment company? (Commission,
Mutual Fund, Portfolio, OR Common Stock)
4. Which investment would provide the most predictable income? (Certificate of Deposit, Real
Estate, Mutual Funds, OR Penny Stocks)

2. EXPLAIN THE RELATIONSHIP BETWEEN SAVING AND INVESTING.

Financial Planning/Financial Goals

Sources of Money to Invest

a. Pay Yourself First
b. Employer-Sponsored Retirement Plan
c. Elective Savings Programs
d. Special Savings Effort
e. Gifts, Inheritances, and Windfalls
• Time Value of Money
• Annual Percentage Yield
• Capital Gains
• Commissions
• Compound Interest
• Diversification
• Dividends
• Inflation
• Liquidity
• Market Value
• Maturity Date
• Principle
• Pyramid of Investment
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• Rate of Return
• Risk
• Stockbroker
• Banking Fees
SECTION 2-Sample Questions (Go to end of document for answers)
1. Reinvesting interest on savings is beneficial because of the:

3. EXAMINE REASONS FOR SAVING AND INVESTING, E.G., TIME VALUE OF

MONEY.
• Compounding
• Annual Percentage Yield (APY)
• Financial Goals (College, Retirement, Purchase Home)
• Time Value of Money (Benefit of Investing at a Young Age)
Stages of Investing
1. Emergency Fund (3 to 6 months of gross salary)
2. Beginning Investment (excess money in budget)
3. Systematic Investment (for retirement)
4. Strategic Investment (diversification, hedging)
5. Speculative Investment (taking chances for quick profit)

4. COMPARE THE RISK, RETURN, LIQUIDITY, MANAGEABILITY AND TAX

ASPECTS OF INVESTMENT ALTERNATIVES.

• Inflation Risk
• Interest Rate Risk
• Income Risk
• Personal Risk
• Liquidity Risk
• Rate of Return
• Liquidity
• Evaluate Investments
• Monitor Investments
• Keep Accurate Record Records
• Tax Considerations
• Tax-Deferred
• Tax-Exempt
• Capital Gains
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• Capital Loss
• Wash Rule

SECTION 4-Sample Questions (Go to end of document for answers)

1. Why is it important for a short term investor in stocks to understand the 31 day “wash”
sale rule?
2. Kim wants to invest $15,000 and get some return on her money while she continues to
save. She is depending on this money plus some additional savings to make a down
payment on a house in a little over a year. Which option should Kim choose? (CD-
Certificate of Deposit, Savings Bonds, Stocks, OR Mutual Funds)
3. Which describes money earned from the sales of an asset, such as stocks, bonds, or real
estate? (Interest Income, Capital Gain, Dividend, Tax Exempt Income)
4. Which generally offers the highest potential rate of return? (Junk Bond, Municipal Bond,
12 Month Certificate of Deposit, OR U.S. Savings Bond)

5. DEMONSTRATE HOW TO BUY AND SELL INVESTMENTS.

• Par Value-assigned value-NOT meaningful to investors

• Market Value-what investors are willing to pay-meaningful to investors
• Stock Price
• Stock Split (Example-You get two shares for each one share you own)
• Factors Affecting Stock Price (Company Performance, Interest Rates, Market Trends,
Earnings Per Share, Price/Earnings Ratio, Return on Investment (ROI=Stock
Profit/Purchase Price + Commission)
• Exchanges (New York Stock Exchange-NYSE, AMEX, OTC Markets-NASDAQ)
• Bull Market
• Bear Market
• Investment Strategies (Short Term or Long Term)
• Buying on Margin
• Short Selling
• Buy and Hold
• Dollar Cost Averaging
• Direct Investment
• Reinvesting Dividends
• Reading Stock Listings
• Stock Indexes (DJIA, Russell 2000, S&P 500)

SECTION 5-Sample Questions (Go to end of document for answers)

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1. Which reason best supports the claim that one should invest in the stock market for the
long term?
2. Mark purchased 100 shares of Daisy Donuts stock at $16 per share. He heard today that
Daisy Donuts stock split two for one. This means that Mark now owns:

6. ANALYZE FACTORS AFFECTING THE RATE OF RETURN ON INVESTMENTS

(E.G., RULE OF 72, SIMPLE INTEREST, COMPOUND INTEREST).
• Rule of 72 (How long it takes for investment to double)
• Simple Interest (Principal x Interest Rate x Time)
• Compounding
• Future Value
• Present Value

SECTION 6-Sample Question (Go to end of document for answers)

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1. If Kathy’s investments are growing at an annual rate of 7.2%, how long will it take for
his investments to double in value?
2. If the inflation rate for the past year was 3 percent, how much must Frank spend today to
buy what he could have bought a year ago for $1500?

7. EVALUATE SOURCES OF INVESTMENT INFORMATION.

• Internet and Online Services (www.sec.gov)

• Newspapers and News Programs (Wall Street Journal, Barron’s)
• Business and Publications (Kiplinger’s, Money, Forbes, Business Week, Fortune)
• Government Publications (www.sec.gov)
• Corporate Reports (Annual Report, Prospectus)
• Statistical Averages (Dow Jones Industrial Average, Standard and Poor’s 500 Stock
Index, NASDAQ Composite Stock Index)
• Investor Services (Standard and Poor’s Reports, Moody’s Investors Services, Value Line,
Motley Fool)

SECTION 7-Sample Question (Go to end of document for answers)

1. Which is the best source of information about a business that a person wants to invest in?
(Wall Street Journal, Money Magazine, Dow Jones Industrial Average, The Company’s
Prospectus)

8. EXAMINE HOW AGENCIES THAT REGULATE FINANCIAL MARKETS

PROTECT INVESTORS.

• Securities and Exchange Commissions (SEC)

• Federal Reserve Bank
• States’ Attorney General

9. DEMONSTRATE HOW TO EVALUATE ADVISORS’ CREDENTIALS AND HOW

TO SELECT PROFESSIONAL ADVISORS AND THEIR SERVICES.

• Full Service Brokers

• Discount Brokers
• Online Brokers
• Certified Financial Planner (CFP)
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Answers to Sample Questions

Section 1
Question 1
Answer--Preferred stockholders receive dividends before common stockholders.
Question 2
Answer--includes a group of stocks selected by the fund’s manager.
Question 3
Answer--Mutual Fund
Question 4
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Answer--Certificate of Deposit

Section 2
Question 1
Answer--power of compounding interest.

Section 4
Question 1
Answer--It determines how the consumer reports losses at tax time.
Question 2
Answer--CD (Certificate of Deposit)
Question 3
Answer--Capital Gains
Question 4
Answer--Junk Bond

Section 5
Question 1
Answer--The stock market has averaged a 10 percent gain per year for eight decades.
Question 2
Answer--200 shares of stock worth $1,600 (number of shares doubles but total value of stocks
remains the same)

Section 6
Question 1
Answer--10 years (Rule of 72--72 / Interest Rate = Number of Years Investment Takes to
Double (72 / 7.2 equals approximately 10 years))
Question 2
Answer--$1545 ($1500 x 1.03 (3% inflation rate))

Section 7
Question 1
Answer--The Company’s Prospectus
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Glossary of Terms (from Missouri Personal

Finance Curriculum, MCCE)
Asset – Items that one owns; they can be financial or non-financial in nature.
Balanced budget – Government revenues equal expenditures.
Banks – Corporations chartered by state or federal government to offer numerous financial
services such as checking and savings accounts, loans, and safe deposit boxes; the Federal
Deposit Insurance Corporation (FDIC) insures accounts in federally chartered banks.
Benefits – Something that is favorable to the decision maker.
Borrowing – Obtaining or receiving something on loan with the promise or understanding of
returning it or its equivalent.
Budget – A plan for managing income and expenses.
Budget deficit – A shortfall of government receipts from government spending.
Budget surplus – An excess of government receipts over government spending.
Capital gains – Gains from selling stocks or other financial investments for more than what was
paid for them.
Choices – Decisions.
Commissions – Fees to a third party for assisting in a business transaction, such as buying or
selling an asset.
Compound interest – Interest credited daily, monthly, quarterly, semi-annually or annually on
both principal and previously credited interest.
Consequences – Outcomes that logically or naturally follow from an action or condition;
consequences can occur with the decision maker or with an uninvolved party.
Consumers – People whose wants are satisfied by using goods and services.
Costs – Something that is unfavorable to the decision maker.
Credit – All money borrowed, other than home financing.
Credit bureaus – Organizations to which business firms apply for credit information on
prospective customers.
Credit card – Any card, plate, or coupon book that may be used repeatedly to borrow money or
buy goods and services on credit.
Credit reports – Statements containing information about prospective customers furnished by
credit bureaus.
Credit unions – Not-for-profit cooperatives of members with some type of common bond (e.g.,
employer) that provide a wide array of financial services, often at a lower cost than banks.
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Creditworthy – Having the ability and willingness to repay debts.

Debt – An obligation or liability to pay or render something to someone else.
Debit card – A card issued by a bank that directly accesses available funds from a bank account,
typically a savings or checking account.

Deductions – Amounts that are or may be lawfully deducted from tax obligations.
Demand – The quantity of goods, services or resources that consumers are willing and able to
buy at all possible prices in a given time period.
Discount rate – The interest rate charged to commercial banks and other depository institutions
on loans they receive from their regional Federal Reserve Bank's lending facility--the
discount window.
Disposable income – The income a person has left to spend or save after taxes and other
required deductions have been taken out of his or her gross pay; net pay.
Diversification – To distribute money among several financial investment tools in order to
average the risk of loss.
Dividends – Periodic payments of the profit of a corporation to its stockholders or owners.
Employee benefits – Something of value that an employee receives in addition to a wage or
salary. Examples include health insurance, life insurance, discounted child care and
subsidized meals at the company.
Employer-sponsored savings plans – A government-approved program through which an
employer can assist workers in building their personal retirement funds.
Entrepreneurs – People who organize, manage, and assume the risks of a firm, taking a new
idea or a new product and turning it into a successful business.
Exemptions – Release from tax payments that the IRS allows.
Federal funds rate – The interest rate at which depository institutions lend balances (federal
funds) at the Federal Reserve to other depository institutions overnight. It is not (as the
name might initially suggest) the rate at which the Fed lends to financial institutions.
Federal Insurance Contribution Act (FICA) taxes – Every year a person works, the person
and his/her employer contribute equal amounts (6.2% in 2005) up to the earnings cap and
1.45% of amounts over that to Social Security. If a person earns more than the cap,
he/she continues to pay 1.45% of the total amount for Medicare. FICA taxes are also
called payroll taxes.
Federal Reserve System – The central bank of the United States.
FICO score – Fair Isaac and Company software used by credit bureaus to calculate an
individual’s credit risk provided to lenders; the higher the score the lower the risk but
other factors are considered in addition to this score.
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Financial investment – Money set aside to increase wealth over time and accumulate funds for
long-term financial goals such as retirement.
Financial plan – A plan of action that allows a person to meet not only immediate desires but
also long-term goals.
Fiscal policy – The spending and taxing policies used by the government to influence the
economy.
Free riders – Persons who receive the benefit of a good but avoid paying for it.
Goods – Objects that can satisfy people’s wants.
Gross domestic product (GDP) – The total market value, expressed in dollars, of all final goods
and services produced in an economy in a given year.
Human capital – The knowledge, skills and experience that make a worker more productive.
Human resources – The resources provided to the economy by people who work (mental or
physical work) in the economy.
Incentives – Perceived benefits that encourage certain behaviors.
Income – Earnings received as wages, rent, profit, or interest (alternative: payments received
for providing resources in the market).
Individual Retirement Account (IRA) – Accounts established by the Federal government in
1981 to encourage people to save money for retirement. Individuals with income from
employment can deposit up to 10% of their earnings, to a maximum set by the
government each year, into a special account set up using a bank, brokerage, or mutual
fund as trustee or custodian. IRAs are self-directed, which means the individual chooses
how the money is invested. Deposits in traditional IRAs are tax deductible. The money is
taxed when it is withdrawn from the account.
Individual Retirement Account (IRA) Roth – A new type of IRA, established in the Taxpayer
Relief Act of 1997, which allows taxpayers, subject to certain income limits, to save for
retirement while allowing the savings to grow tax-free. Taxes are paid on contributions,
but withdrawals, subject to certain rules, are not taxed at all. Individuals with income
from employment can deposit a maximum amount set by the government each year into a
special account using a bank, brokerage, or mutual fund as trustee or custodian. Roth
IRAs are self directed.
Inflation – A sustained increase in the average price level.
Insurance – Coverage by contract through which one party agrees to indemnify or guarantee
another against loss which results from a specified peril or contingency.
Interest – The price of using credit. Interest is the income payment for the use of capital
resources.
Interest rate – The price of using credit expressed as a percentage of the amount owed.
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Intermediate goods – Things produced by people and used in the production of other goods and
services.
Investment – The purchase of new capital resources. (A more sophisticated definition is the
diversion of resources from the production of goods and services for current consumption
to the production of goods that increase the economy’s productive capacity.)
Labor unions – Worker associations that bargain with employers over wages and working
conditions.
Leasing – Entering into a rental agreement.
Liquidity – The quality of an asset that permits it to be converted quickly into cash without loss
of value.
Loan – A sum of money provided temporarily on the condition that the amount borrowed be
returned, usually with an interest fee.
Market – A group of buyers and sellers of a particular good or service.
Market system – An economy that allocates resources through the decentralized decisions of
many firms and households as they interact in markets for goods and services.
Medicare – The federal government-sponsored health insurance program for citizens 65 or
older. An individual’s contribution to Medicare is part of FICA – the Federal Insurance
Contribution Act.
Medium of exchange – What sellers generally accept and buyers generally use to pay for goods
and services.
Monetary policy – The behavior of the Federal Reserve System regarding the money supply.
Money – Anything that is used as a medium of exchange.
Money supply – The quantity of money available in the economy.
National debt – The total amount of outstanding government securities held by the public.
Natural resources – Physical inputs that occur naturally in our world.
Net worth statement – A record of what a family or person would own after paying off all
liabilities; assets – liabilities = net worth.
Opportunity cost – The value of the highest foregone alternative.
PACED decision making grid – Problem, Alternative, Criteria, Evaluate and Decision grid is a
graphic organizer used to make an informed decision.
Payroll deductions – Amounts subtracted from a paycheck as the government requires or the
employee requests Mandated deductions include various taxes. Voluntary deductions
include loan payments or deposits into saving accounts.
Per capita GDP – Gross Domestic Product divided by population.
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Personal income taxes – A tax levied on a person’s annual income.

Price – What people pay when they buy a good or service and what they receive when they sell a
good or service.
Prime Rate – The interest rate charged by banks to their most creditworthy customers (usually
the most prominent and stable business customers).
Principal – The original amount of money invested or borrowed, excluding any interest or
dividends.
Producers – People who use resources and intermediate goods to make goods and services.
Productivity – A ratio of output to input. For example, output per worker is a measure of the
productivity of labor. The productivity of a firm can be increased through specialization
or division of labor, investment in human capital, and investment in capital resources.
Profit – The revenue remaining after the business has paid its costs of production. Profit is the
income payment to entrepreneurs.
Property rights – Having the legal authority to control the use of an item one owns.
Property taxes – Required payments on one’s property to local government.
Public goods – Goods that cannot be sold effectively in the marketplace; these goods are
characterized by shared consumption and non-exclusion. As a result, government usually
provides these goods.
Purchasing power – A measurement of the relative value of money in terms of the quality and
quantity of goods and services it can buy.
Rate of return – Also called the “yield,” this is the return on an investment expressed as a
percentage of its cost.
Rent – The amount charged to use something for a period of time. The income payment
received for the use of natural resources.
Rent to Own – To borrow with the intent to take permanent possession through purchase.
Resources – Things used to produce goods and services.
Risk – Exposure to loss of investment capital due to a variety of causes such as business failure,
stock market volatility, and interest rate changes; in business, the likelihood of loss or
reduced profit; the danger or probability of loss to an individual.
Salaries – Payments for work, usually calculated in periods of a week or longer. Salary is
usually tied to the completion of specific duties over a minimum but not maximum
number of hours.
Sales taxes – Taxes levied on the retail price of merchandise and collected by the retailer.
Save – To set aside income (earnings) for future use.
Saving – The process of setting aside income (earnings) for future use.
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Savings – The accumulation of money set aside for future use.

Savings and loan associations – Financial institutions that provide loans and interest-bearing
accounts.
Scarcity – The condition of not being able to have all of the goods and services that one wants; it
exists because human wants for goods and services exceed the quantity of goods and
services that can be produced using all available resources.
Self-employment – Work for oneself, not for an employer.
Self-interest – Regard for one’s personal advantage.
Services – Actions that can satisfy people’s wants.
Smart card – A plastic card containing a computer chip with memory and CPU capabilities.
Such a card may be used for identification, to store information or financial amounts, or
other forms of data. Also called an integrated circuit card or a chip card.
Social Security – A federal government program of transfer payments for retirement, disability,
or the loss of income from a parent or guardian.
Spending – Using income (earnings) to buy goods and services.
Standard of living – A measure of the goods and services affordable by and available to a
person or a country; the dollar value is calculated as per capita GDP.
Supply – The quantities of goods, services, or resources that producers are willing and able to
sell at all possible prices in a given time period.
Tax credits – An amount that a taxpayer who meets certain criteria can subtract from tax owed.
Examples include a credit for earned income below a certain limit and for qualified post-
secondary school expenses.
Tax-deferred – Financial investments where taxes due on the amount invested and/or its
earnings are postponed until funds are withdrawn, usually at retirement.
Tax-exempt – Financial investments (e.g., municipal bonds) earnings that are free from tax
liability.
Taxes – Government fees on business and individual income, activities, or products.
Tax shelter – An investment intended to reduce tax; any technique that allows one to legally
reduce or avoid tax liabilities.
Tips – Amount paid beyond what is required, usually to express satisfaction with service quality;
also know as a gratuity.
Trade – To give in exchange for something else; trade can involve money or barter.
Trade-off – The act of giving up some of one thing to have more of another.
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Transfer payments – Payments by governments, such as social security, veterans’ benefits, and
welfare, to people who do not supply current goods, services, or labor in exchange for
these payments.
Unearned income – Money received for which no exchange was made, such as a gift.
Unemployment rate – The percentage of people without jobs who were actively seeking work
within the past 30 days.
Wages – Payment for work, usually calculated in periods of an hour.
Wants – Desires that can be satisfied by consuming a good or service.
Wealth – Accumulated assets such as money and/or possessions, often as a result of saving and
investment.
Withholding—The amount of an employee’s income that an employer sends directly to the
federal, state, or local tax authority as partial payment of that individual’s tax liability for the
year. When people start new jobs they are required to complete a W-4 form on which they
indicate their filing status and the number of allowances