AFP Entrance flashcards
AFP Entrance · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Rule of 72
- A formula that estimates the number of years for an investment to double by dividing 72 by the annual interest rate. For example, at 8% return, doubling takes about 9 years.
- Time Value of Money
- The concept that money available today is worth more than the same amount in the future due to its potential earning capacity. It underpins present and future value calculations.
- Fiduciary Duty
- A legal obligation to act in the best interest of another party, requiring loyalty, care, and full disclosure of conflicts. It is a core ethical standard in financial planning.
- Risk Tolerance
- An investor's psychological willingness to accept investment risk and volatility. It is distinct from risk capacity, which is the financial ability to bear risk.
- Term Life Insurance
- Pure life insurance protection for a specified period, paying a death benefit if the insured dies during the term. It has no cash value and generally lower premiums.
- Whole Life Insurance
- Permanent life insurance with level premiums, a guaranteed death benefit, and a cash value component that grows tax-deferred. It remains in force for the insured's lifetime.
- Human Life Value
- An insurance needs method that calculates the present value of the insured's future income contributions to the family, minus personal expenses, to determine coverage.
- Needs Approach
- A life insurance calculation method that sums immediate expenses, debts, income replacement, and education costs, then subtracts existing resources to find the coverage gap.
- 401(k) Plan
- An employer-sponsored defined contribution retirement plan allowing pre-tax or Roth contributions. Employers may match contributions, and funds grow tax-deferred until withdrawal.
- Vesting
- The process by which an employee gains non-forfeitable rights to employer contributions in a retirement plan. Vesting schedules may be cliff or graded.
- Required Minimum Distribution
- The minimum amount that must be withdrawn annually from traditional IRAs and 401(k)s starting at age 73 (SECURE 2.0). Failure to withdraw incurs a penalty.
- Social Security PIA
- The Primary Insurance Amount is the benefit a person receives at full retirement age, calculated from indexed earnings over the highest 35 years.
- Asset Allocation
- The process of dividing investments among asset classes such as stocks, bonds, and cash. It is a primary determinant of portfolio risk and return.
- Beta
- A measure of a security's systematic risk relative to the market. A beta greater than 1 indicates higher volatility than the market; less than 1 indicates lower volatility.
- Sharpe Ratio
- A risk-adjusted performance measure calculated as (portfolio return minus risk-free rate) divided by portfolio standard deviation. Higher values indicate better risk-adjusted return.
- Duration
- A measure of a bond's price sensitivity to interest rate changes, expressed in years. Higher duration means greater price volatility when rates move.
- Marginal Tax Rate
- The tax rate applied to the next dollar of taxable income. It differs from the average tax rate, which is total tax divided by total taxable income.
- Capital Gain
- The profit from selling an asset, calculated as sale proceeds minus adjusted basis. Long-term gains (held over one year) receive preferential tax rates.
- Standard Deduction
- A flat deduction from adjusted gross income that reduces taxable income. For 2024, it is $14,600 for single filers and $29,200 for married filing jointly.
- Tax-Loss Harvesting
- Selling investments at a loss to offset capital gains and up to $3,000 of ordinary income per year. Excess losses can be carried forward.
- Estate Tax Exemption
- The amount of an estate exempt from federal estate tax. For 2024, it is $13.61 million per person, with portability to a surviving spouse.
- Annual Gift Tax Exclusion
- The amount one person can gift to another without gift tax consequences or using lifetime exemption. For 2024, it is $18,000 per recipient.
- Revocable Living Trust
- A trust created during the grantor's lifetime that can be altered or revoked. It avoids probate and allows management of assets if the grantor becomes incapacitated.
- Step-Up in Basis
- The adjustment of an inherited asset's cost basis to its fair market value at the date of death, reducing capital gains tax for heirs.
- Net Worth
- The difference between total assets and total liabilities. It is a key measure of financial health and progress toward goals.
- Emergency Fund
- A reserve of liquid assets set aside to cover unexpected expenses or income loss. A common recommendation is 3–6 months of living expenses.
- Debt-to-Income Ratio
- Total monthly debt payments divided by gross monthly income, expressed as a percentage. Lenders often use it to assess creditworthiness; 36–43% is a common threshold.
- Debt Avalanche Method
- A debt repayment strategy that prioritizes paying off the highest-interest debt first while making minimum payments on others, minimizing total interest paid.
- Credit Utilization Ratio
- The percentage of available credit that is currently used. Keeping it below 30% is generally recommended to maintain a good credit score.
- 529 Plan
- A tax-advantaged savings plan for education expenses. Contributions grow tax-deferred, and withdrawals for qualified education costs are tax-free.
- FAFSA
- The Free Application for Federal Student Aid, used to determine eligibility for need-based financial aid. It calculates the Student Aid Index (formerly EFC).
- American Opportunity Tax Credit
- A tax credit of up to $2,500 per eligible student for qualified education expenses during the first four years of post-secondary education. It is partially refundable.