Dave Ramsey Chapter 8 Flashcards

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Questions and Answers

What is investing?

The process of setting money aside to increase wealth over time for long-term financial goals such as retirement.

What is an investment?

An account or arrangement in which a person puts his/her money for long-term growth; invested money should not be used for a suggested minimum of five years.

What does liquidity refer to?

Quality of an asset that permits it to be converted quickly into cash without loss of value.

What is a portfolio?

A list of your investments. Signup and view all the answers

What is risk in terms of investments?

A degree of uncertainty of return on an asset; in business, the likelihood of loss or reduced profit. Signup and view all the answers

What is the risk-return ratio?

Relationship of substantial reward compared to the amount of risk taken. Signup and view all the answers

What is a share?

A piece of ownership in a company, mutual fund or other investment. Signup and view all the answers

What are stocks?

Securities that represent part ownership or equity in a corporation. Signup and view all the answers

What are tax-favored dollars?

Money that is invested, either tax deferred or tax-free, within a retirement plan. Signup and view all the answers

Keep it _________, stupid!

simple Signup and view all the answers

Never invest purely for _ _______.

tax savings Signup and view all the answers

Never invest using ______________ money.

borrowed Signup and view all the answers

____________________ is a risk-management technique that mixes a wide variety of investments within a portfolio.

Diversification Signup and view all the answers

The risk-return ratio is calculated mathematically by dividing the amount you stand to lose if the price goes down (risk) by the amount of profit you expect to make (return).With virtually all investments, as the _____ goes up, so does the potential return.

risk Signup and view all the answers

Liquidity refers to assets that can be easily bought or sold (liquid assets).When discussing investments, ___________ is availability.

liquidity Signup and view all the answers

A CD is a ____ _, typically at a bank.

certificate of deposit Signup and view all the answers

What is a money market account?

A low-risk bank savings account with check-writing privileges and low returns. Signup and view all the answers

What does single stock investing carry?

An extremely high degree of risk. Signup and view all the answers

When you buy stock, what are you buying?

A small piece of ownership in the company. Signup and view all the answers

What is value in terms of investment returns?

Your return comes as the company increases in value or pays you, its owners, some of the profits (dividends). Signup and view all the answers

Match the definitions below:

Debt = A financial instrument by which the company owes you money. Interest = The fluctuation in price and the rate paid. Money = A pool collected from many investors for the purpose of investing in securities. Fund = Managed pool attempting to increase value for investors. Signup and view all the answers

What are the benefits of diversification in investments?

It lowers risk by mixing a wide variety of investments. Signup and view all the answers

A single stock would be a good place to keep your emergency fund.

False Signup and view all the answers

Diversification lowers risk when investing.

True Signup and view all the answers

Which of the following mutual funds are considered long-term investments?

Growth, growth and income, international, aggressive growth Signup and view all the answers

Which of the following is a good investment option?

Mutual funds Signup and view all the answers

What statement is true about liquidity?

The more liquid an investment, the less return. Signup and view all the answers

Why should you never invest using borrowed money?

If you lose the money, you still owe them the amount you borrowed. Signup and view all the answers

What does the risk-return ratio imply?

The greater the risk, the greater the potential return. Signup and view all the answers

Why do single stocks carry a high degree of risk?

Because you don't diversify your investment. Signup and view all the answers

What is the Rule of 72?

A quick way to calculate how long it will take to double a sum of money. 72 divided by expected interest rate = number of years. Signup and view all the answers

Is real estate a liquid investment?

False Signup and view all the answers

Study Notes

Investing Concepts

Investing is the act of setting aside money to grow wealth over time, particularly for retirement.
An investment is a long-term arrangement where money is intended to grow, typically over at least five years.
Liquidity refers to how quickly an asset can be converted into cash without losing value.

Investment Fundamentals

A portfolio is a compilation of all personal investments.
Risk denotes the uncertainty of returns, with businesses facing the possibility of losses or reduced profits.
The risk-return ratio measures potential rewards relative to the risk taken; higher risks can lead to greater returns.

Types of Investments

Shares represent ownership in a company or fund, while stocks indicate equity in a corporation.
Tax-favored dollars pertain to money invested in retirement plans on a tax-deferred or tax-free basis.
Real estate is considered a long-term investment that requires significant cash and is the least liquid consumer investment.

Investment Strategies

Simplicity in investing means avoiding complex strategies and only investing in understandable options.
Diversification is essential for risk management and involves holding various investments to achieve better returns and lower risks.
Always avoid investing with borrowed money, as this elevates risk and liability if losses occur.

Investment Accounts and Plans

Certificates of Deposit (CDs) are savings accounts with fixed terms and higher interest due to longer commitments.
Money market accounts possess low risk and offer limited check-writing privileges, yielding low returns.
Mutual funds pool money from multiple investors to purchase a variety of securities, making them a diversified investment option.

Retirement Accounts

Individual Retirement Arrangements (IRAs) provide tax treatment for investment income and are available to those with earned income.
Roth IRAs use after-tax money, allowing tax-free withdrawals under specific conditions after a 5-year holding period.
A 401(k) is a corporate retirement savings plan, while 403(b) plans are available to employees of nonprofits.

Annuities and Bonds

Annuities provide payments at predefined intervals, offering a fixed or variable return but often subject to high fees.
Bonds are debt instruments where the issuer owes the holder money and must make regular interest payments.

Market Insights

The stock market trades securities on exchanges and is often measured by indices like the Dow Jones Industrial Average.
Bull markets reflect rising stock prices, whereas bear markets signify declining prices.

Investment Considerations

High-risk investments like single stocks can lead to significant loss, while mutual funds mitigate risk through diversification.
Assess employee benefits, including retirement plans and insurance, when evaluating job offers.
Real estate investment requires careful consideration due to its cyclical market nature and management demands.

Rules and Principles

The Rule of 72 provides a quick estimate of how long it takes to double an investment based on the expected interest rate.
Always prioritize investing for growth rather than tax advantages, as an investment primarily focused on tax savings may indicate poor quality.

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Description

Test your knowledge on key terms from Chapter 8 of Dave Ramsey's financial guide. This quiz covers important concepts like investing, investment, and liquidity essential for understanding personal finance and wealth management. Perfect for anyone looking to enhance their financial literacy.