DSST Personal Finance cheat sheet

APR (annual percentage rate) expresses the yearly cost of credit as a percentage, including interest and most fees; it is the standard comparison number for loans and credit cards.

Finance charge equals total payments minus principal borrowed; for installment loans it includes interest plus fees such as origination or annual fees.

Credit utilization equals balances divided by total credit limits; it is a major scoring factor, so keeping utilization low supports a stronger score.

Minimum-payment trap: paying only the minimum on a revolving balance extends repayment for years and sharply increases total interest paid.

Rule of 78s (precomputed interest) front-loads interest in some older installment loans, so early payoff saves less interest than simple-interest amortization.

Amortized loan payment formula: PMT = P x [r(1+r)^n] / [(1+r)^n - 1], where P is principal, r is the periodic rate, and n is the number of payments.

Debt avalanche pays highest-APR balances first (lowest total interest); debt snowball pays smallest balances first (behavioral momentum).

Secured debt is backed by collateral that can be repossessed or foreclosed; unsecured debt such as most credit cards is backed only by the borrower's promise.

Bankruptcy basics: Chapter 7 liquidates nonexempt assets; Chapter 13 reorganizes debt into a 3-5 year court-approved repayment plan.

Down payment reduces principal and total interest; PMI (private mortgage insurance) is typically required on conventional loans when the down payment is below 20%.

Mortgage PITI equals principal, interest, property taxes, and homeowners insurance; escrow accounts collect the tax and insurance portions monthly.

Fixed-rate mortgages lock the interest rate for the full term; adjustable-rate mortgages (ARMs) start lower but reset on a schedule, often with periodic and lifetime caps.

Closing costs commonly run 2-6% of the loan amount and may include origination fees, appraisal, title insurance, and prepaid interest and escrow deposits.

Auto loan interest is simple interest on the declining balance; a longer term lowers the monthly payment but raises total interest and increases the chance of being upside down.

Lease versus buy: leasing pays for depreciation during the term with lower monthly payments but builds no equity and may impose mileage and wear charges.

Price negotiation targets the out-the-door price (vehicle price plus tax, title, and fees), not the monthly payment, because payment-focused deals hide total cost.

Sales tax on a major purchase is generally a one-time cost at the point of sale, while property tax on real estate recurs annually based on assessed value.

Marginal tax rate applies to the last dollar of taxable income; the effective tax rate equals total tax divided by total income and is always lower in a progressive system.

Taxable income equals gross income minus above-the-line adjustments, minus the standard or itemized deduction, minus qualified business income deductions.

Standard deduction is a flat amount by filing status; itemizing is chosen when qualifying deductions (mortgage interest, state and local taxes up to the cap, charitable gifts) exceed it.

W-4 withholding: more allowances or higher dependent credits reduce withholding; too little withholding creates a balance due and possibly an underpayment penalty.

Filing statuses are single, married filing jointly, married filing separately, head of household, and qualifying surviving spouse; head of household requires an eligible dependent and paying over half the home's costs.

Capital gains: assets held more than one year qualify for long-term rates (generally lower); one year or less is taxed at ordinary income rates.

Tax-advantaged accounts: traditional IRA/401(k) contributions may be pre-tax with taxable withdrawals; Roth contributions are after-tax with qualified withdrawals tax-free.

Self-employment tax covers Social Security and Medicare on net self-employment earnings; the employer-equivalent half is deductible as an adjustment to income.

Estimated taxes are generally required quarterly when withholding does not cover the tax liability, with safe-harbor rules based on prior-year or current-year tax.

Insurance transfers risk by pooling premiums; the premium reflects expected losses plus insurer expenses and profit, and a deductible is the amount the insured pays before coverage begins.

Coinsurance is the percentage split of covered costs after the deductible; a copay is a fixed dollar amount per service, and an out-of-pocket maximum caps annual cost sharing.

Life insurance: term covers a set period with no cash value; whole and universal policies are permanent and build cash value, usually at higher cost.

Need-based life insurance estimate: coverage roughly equals income replacement plus debts and future obligations (college, mortgage) minus existing assets and coverage.

Homeowners policies typically cover dwelling, personal property, liability, and loss of use; standard policies exclude flood and earthquake, which require separate coverage.

Auto insurance components: liability (bodily injury and property damage), collision, comprehensive, medical payments, uninsured/underinsured motorist, and optional gap coverage.

Renters insurance covers personal property and personal liability, not the building structure, which the landlord insures.

Disability insurance replaces a portion of income, commonly 50-70%; own-occupation definitions pay if you cannot do your own job, while any-occupation definitions are stricter.

Umbrella liability policies add coverage above the limits of auto and homeowners policies and are relatively inexpensive for high limits.

Total return equals income (dividends or interest) plus capital appreciation; annualized return converts multi-year results to a yearly compounded rate.

Risk-return tradeoff: higher expected return requires accepting more volatility; diversification reduces unsystematic risk but not market (systematic) risk.

Compounding: future value = PV x (1 + r)^n; the Rule of 72 estimates doubling time as 72 divided by the annual percentage rate.

Real return approximates nominal return minus inflation and measures change in purchasing power.

Bond prices move inversely to interest rates; longer maturities and lower coupons mean greater price sensitivity (duration).

Mutual funds pool investor money and are priced at net asset value (NAV) at the close; index funds track a benchmark with low expense ratios.

Expense ratio is the annual fund cost as a percentage of assets; a 1% fee can materially reduce long-term compounded returns.

Asset allocation divides a portfolio among stocks, bonds, and cash to match risk tolerance and time horizon; rebalancing restores target weights.

Investment order rule: build an emergency fund and capture any employer 401(k) match before prioritizing other investing goals.

2024 IRA contribution limit is $7,000 ($8,000 if age 50 or older); 401(k) elective deferral limit is $23,000 with a $7,500 catch-up for age 50 and older.

Required minimum distributions (RMDs) generally begin at age 73 for traditional IRAs and 401(k)s; Roth IRAs have no lifetime RMDs for the original owner.

Early withdrawal from a traditional IRA before age 59 1/2 generally triggers a 10% penalty plus ordinary income tax, with exceptions such as disability and qualified higher education.

Social Security full retirement age is 67 for those born in 1960 or later; claiming at 62 permanently reduces benefits, and delaying to 70 increases them.

Will versus trust: a will goes through probate and names guardians and heirs; a revocable living trust avoids probate and can manage assets during incapacity.

Beneficiary designations on retirement accounts and life insurance override the will, so keeping them current controls who receives those assets.

Durable power of attorney authorizes financial decisions if you become incapacitated; a health care proxy or advance directive covers medical decisions.

Estate tax applies to the taxable estate above the federal exclusion amount; the unlimited marital deduction defers tax between spouses.

Retirement income sources typically combine Social Security, employer pensions, tax-advantaged accounts, and taxable savings; the replacement ratio estimates the share of pre-retirement income needed.