Economics Final Exam Study Guide Financial Peace/Dave ...

Economics Final Exam Study Guide

Financial Peace/Dave Ramsey Curriculum

Chapter 1

7 Baby Steps

1. $1,000 in an emergency fund (of $500 if you make less than $20,000 per year).

2. Pay off all debt except the house utilizing the debt snowball.

3. Three to six months of expenses in savings.

4. Invest 15% of your household income into Roth IRAs and pre-tax retirement plans.

5. College funding.

6. Pay off your home early.

7. Build wealth and give!

Compound interest¡ªinterest paid on interest previously earned

Emergency fund¡ªbest kept in a money market account

Chapter 2

KISS Rule of Investing: Keep It Simple Stupid!

Never invest using borrowed money

Diversification¡ªmeans to spread around¡ªdiversification lowers risk

As risk goes up, so does the return (generally)

Liquidity¡ªthe availability of your investments (generally the more liquidity, the less return)

Types of Investments:

Money Markets¡ªlow risk accounts with check writing privileges

Single Stocks¡ªcarries a high degree of risk

--a stock is a small piece of the company

--your return comes as the company increases in value

Bonds¡ªan debt instrument by which the company owes you money

Mutual Funds¡ªinvestors pool money to invest

--portfolio managers manage the pool or fund

Real Estate¡ªDo not invest in real estate unless you have lots of cash

Annuities¡ªpurchased through an insurance company¡ªa bad investment with a low rate of return

Bad investments: Gold, Day trading, Viaticals, Also¡ªnever put money into something you don¡¯t understand

Chapter 3

Invest 15% of your household income into Roth IRAs and pre-tax retirement plans

IRA¡ªIndividual Retirement Arrangements¡ªtax treatment on virtually any type of investment

Roth IRA¡ªafter tax IRA that grows tax free

401(k)¡ªtypical retirement plan at most companies (many companies will match contributions up to a certain

percentage¡ªmajor benefit of 401(k))

Pension plans¡ªmost companies have completely done away with traditional pension plans

--asset of the company (not yours)

--funded automatically by your company¡ªyou don¡¯t have to contribute

Retirement loans¡ªnever borrow on your retirement plan!

Chapter 4

Debt

--has been marketed to us with such intensity for so long that it requires a paradigm shift¡ªa completely new

way of looking at things

--Henry Ford, Sears and J.C. Penney did not believe in debt

¡°The rich rule over the poor and the borrower is slave to the lender.¡± Proverbs 22:7

--Don¡¯t loan money to friends or family¡ªit changes your relationship

--the lottery is a tax on the poor and on people who can¡¯t do math¡ªit will not make you rich

--stay away from car payments by buying reliable used cars

--average car payment today is $ 464 per month over 64 months!

--leasing a car is the most expensive way to finance and operate a vehicle

--new cars lose a lot of value in the first four years

--don¡¯t¡¯ take out more than a 15 year fixed rate mortgage on your home

--don¡¯t take out an adjustable rate mortgage (ARM)

--ARMs transfer the risk of higher interest rates to you instead of the bank

--you don¡¯t need a credit card¡ªuse a debit card instead

--you spend less when you use cash¡ªit hurts more than using a credit card

--teens are a huge target of credit card companies¡ªyou are loyal to the first card you get

--80% of college graduates have credit card debt before they get a job

--home equity loans are NOT substitutes for emergency funds

--debt consolidation costs you money in the long run¡ªyou cannot borrow your way out of debt

Chapter 7

You must do a written budget every month

--spend every dollar on paper before the month begins

Balance your checkbook monthly

Use the envelope system¡ªwhen a category is gone, you are done spending for that category

Know how to balance a checkbook¡ªpage 97 of your workbook

Irregular income planning¡ªpage 113 of your workbook

Econ Textbook Chapter 1

Vocab¡ªbe able to define and distinguish between these terms:

Need

Want

Economics

Goods

Services

Scarcity

Shortage

Factors of Production: Land, Labor, and Capital

Physical capital

Human capital

Entrepreneurs

Trade-offs

¡°Guns or Butter¡±

Opportunity cost

¡°Thinking at the margin¡±

Efficiency

Underutilization

Cost

Law of Increasing Costs

Tasks that you should know how to perform:

Understand and interpret a production possibilities curve

Make and defend a decision based on the concept of trade-offs, opportunity cost, and thinking at the margins

Explain how a production possibilities curve can be used to identify and discuss efficiency, growth, and cost

Explain trade-offs using the law of increasing costs

Econ Textbook Chapters 2 and 3

Vocab¡ªbe able to define and distinguish between these terms:

Economic system

Market Economies

Centrally planned (command) economies

Mixed economies

Traditional economies

Market

Specialization

Households

Firms

Factor market

Product market

Invisible hand

Competition-regulating force

Self-interest-motivating force

Gross Domestic Product

Business cycle

Public good

Market failure

Externality

Positive and negative externalities

Tasks that you should know how to perform:

How does each type of economic system answer the 3 key economic questions

Explain how the circular flow diagram explains the interaction between houses and firms

Compare and contrast different types of economies

Identify positive and negative externalities

Analyze information to identify a market failure

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