DSST Personal Finance flashcards

33 cards. Read the term and the definition here. The deck at the top of this page is optional.

Annual percentage rate

The yearly cost of borrowing expressed as a percentage, including interest and most fees; it is the standard figure used to compare loans and credit cards.

Credit utilization ratio

Total revolving balances divided by total credit limits. It is a major credit-scoring factor, and lower utilization generally supports a stronger score.

Debt avalanche method

A repayment strategy that applies extra money to the highest-APR balance first while paying minimums on others. It minimizes total interest paid over the life of the debts.

Amortized loan payment

A fixed periodic payment calculated as PMT = P x [r(1+r)^n] / [(1+r)^n - 1], where P is principal, r the periodic rate, and n the payment count.

Secured versus unsecured debt

Secured debt is backed by collateral that can be repossessed, such as an auto loan. Unsecured debt, like most credit cards, relies only on the borrower's promise.

Chapter 7 versus Chapter 13

Chapter 7 bankruptcy liquidates nonexempt assets to pay creditors. Chapter 13 reorganizes debts into a court-approved repayment plan lasting roughly three to five years.

Private mortgage insurance

Insurance typically required on conventional mortgages when the down payment is below 20 percent. It protects the lender, not the borrower, against default losses.

PITI payment

The four components of a monthly mortgage payment: principal, interest, property taxes, and homeowners insurance. Taxes and insurance are often collected through escrow.

Adjustable-rate mortgage

A mortgage with an interest rate that resets periodically based on an index. It usually starts below fixed rates but carries payment risk at each adjustment.

Closing costs

Fees paid at mortgage settlement, commonly two to six percent of the loan amount, including origination, appraisal, title insurance, and prepaid interest or escrow.

Lease versus buy a car

Leasing pays for depreciation during the term with lower payments but builds no equity and may add mileage charges. Buying builds equity and has no mileage limits.

Out-the-door price

The total vehicle cost including negotiated price, sales tax, title, and dealer fees. Negotiating this figure avoids payment-focused deals that hide total cost.

Marginal versus effective rate

The marginal rate applies to the last dollar of taxable income. The effective rate is total tax divided by total income and is lower in a progressive system.

Taxable income calculation

Gross income minus above-the-line adjustments, minus the standard or itemized deduction, minus any qualified business income deduction. Tax is computed on this amount.

Standard versus itemized deduction

The standard deduction is a flat amount by filing status. Itemizing is chosen only when qualifying expenses such as mortgage interest and charitable gifts exceed it.

Long-term capital gains

Gains on assets held more than one year, taxed at generally lower rates than ordinary income. Assets held one year or less are taxed at ordinary rates.

Traditional versus Roth accounts

Traditional contributions may be pre-tax and withdrawals are taxed. Roth contributions are after-tax, and qualified withdrawals are tax-free.

W-4 withholding purpose

The form tells an employer how much federal income tax to withhold. Too little withholding creates a balance due and possibly an underpayment penalty.

Deductible and coinsurance

The deductible is what the insured pays before coverage starts. Coinsurance is the percentage split of remaining covered costs, such as 80/20.

Term versus whole life

Term life covers a set period with no cash value and lower premiums. Whole life is permanent, builds cash value, and costs considerably more.

Own-occupation disability

A disability policy definition that pays benefits when the insured cannot perform the duties of their own specific occupation, which is broader than any-occupation coverage.

Homeowners policy exclusions

Standard homeowners policies exclude flood and earthquake damage, which require separate policies. They typically cover dwelling, personal property, liability, and loss of use.

Renters insurance coverage

Covers a tenant's personal property and personal liability, not the building structure, which the landlord insures. It may also cover temporary living expenses.

Umbrella liability policy

Extra liability coverage that applies above the limits of auto and homeowners policies. It is relatively inexpensive for the high limits it provides.

Rule of 72

An estimate of how many years an investment takes to double: divide 72 by the annual percentage return. At 6 percent, money doubles in about 12 years.

Real return

Nominal return minus inflation, approximating the change in purchasing power. It measures whether investments actually gained buying power over time.

Bond price and interest rates

Bond prices move inversely to interest rates. Longer maturities and lower coupons make a bond's price more sensitive to rate changes.

Net asset value

A mutual fund's per-share value, calculated as total assets minus liabilities divided by shares outstanding. Funds are priced at NAV at each market close.

Expense ratio

A fund's annual operating cost expressed as a percentage of assets. A one percent fee can substantially reduce compounded returns over long periods.

IRA contribution limit

For 2024, seven thousand dollars per person, or eight thousand if age fifty or older. Contributions cannot exceed earned income for the year.

Required minimum distributions

Mandatory annual withdrawals from traditional IRAs and 401(k)s generally starting at age 73. Roth IRAs have no lifetime RMDs for the original owner.

Will versus revocable trust

A will goes through probate and names guardians and heirs. A revocable living trust avoids probate and can manage assets during the owner's incapacity.

Beneficiary designation

A form naming who receives an account or policy at death. It overrides the will, so retirement accounts and insurance require periodic review.