Foundations in Personal Finance - Practice for Certificate Exam with complete solution

Foundations in Personal Finance - Practice for Certificate Exam with complete solution Compound Interest -Answer- Interest paid on interest previously earned Emergency Fund -Answer- Five hundred dollars in readily av ...

Foundations in Personal Finance - Practice for Certificate Exam with complete solution Compound Interest -Answer- Interest paid on interest previously earned Emergency Fund -Answer- Five hundred dollars in readily available cash to be used only in the event of an emergency. Interest rate -Answer- Percentage paid to a lender for the used of borrowed money or percentage earned on invested money. Sinking Fund -Answer- Saving money over time for a large purchase. Inflation -Answer- The persistant rise in the price of goods and services over a period of time. Interest- Bearing Account -Answer- An account that generates interest income on the available balance in the account. 1st Foundation -Answer- Save $500 2nd Foundation -Answer- Get out of debt, and stay out of debt 3rd Foundation -Answer- Pay cash for a car (sinking fund) 4th foundation -Answer- Pay cash for college 5th foundation -Answer- Build wealth and give Negative Savings Rate -Answer- Spending more money than you make and going into debt 2 components to saving -Answer- Time and rate of return Time value of money -Answer- the idea that $100 today will not buy the same amount as in the future due to inflation and interest. 3 reasons to save -Answer- purchases, emergency fund, wealth building Keys to saving -Answer- focus, making it priority and habit, discipline People who don't save money -Answer- often lack focus and discipline, and have no budget Why should emergency fund and spending money be kept separate -Answer- To make sure its only spent for emergencies and not as easy to access and spend it. What is the purpose of fully funded emergency fund -Answer- To have money for unexpected financial emergencies Saving should bring -Answer- contentment Emergency Fund interest -Answer- Is not important because an emergency fund is not used to growth wealth Savings habits -Answer- should not be based on income should be determined in the budget Americans savings rates -Answer- are usually not high Emergency fund after school -Answer- should be 3-6 months of expenses Investing -Answer- should start now Essential elements of wealth building -Answer- discipline, time, compound interest Why do you need an emergency fund -Answer- Emergencies can happen at any age. Why in emergency fund the 1st foundation? -Answer- An emergency fund allows you to have money available for any surprise expenses and can help you avoid debt Calculate compound interest: $1000 at 6% for 3 years -Answer- $1,191.02 Savings rates -Answer- Compares after-tax income to the money people spend on a variety of items Overdraft -Answer- occurs when money is withdrawn from a bank account and the available balance goes below zero zero-based budget -Answer- a cash flow plan that spends every dollar of your income (total income- total expenses = 0) Envelope system -Answer- series of envelopes that are divided into categories and used to hold cash for monthly expenses Impulse purchase -Answer- an item that is bought without previous planning of the long term effects Reconcile -Answer- To match your bank statement with your checkbook and should be done at least once each month. Budget -Answer- a written cash flow plan Fixed expenses -Answer- expenses that remain the same from month to month Discretionary expenses -Answer- expenses that you do not need (but like to have) Cash flow statement -Answer- summary of all the income and outgoing over a certain period (summarizes money you have already spent) Check Register -Answer- record of all your transactions Overdrawing your checking account Consequences -Answer- Bounced Checks (fees from store) Overdraft fee from bank Stress A budget -Answer- does not make overspending more likely (made for the future) Budget should include -Answer- variable expenses, fixed expenses, discretionary expenses, income A typical millionaire -Answer- spends less money than he or she makes Rent is -Answer- fixed expense Eating Out -Answer- discretionary expense Car repairs -Answer- intermittent expense Groceries -Answer- variable expense A written budget should stop -Answer- overspending, guilt, management by crisis Irregular income -Answer- can be budgeted too! 70% -Answer- American living paycheck to paycheck Bank's record keeping -Answer- reconciliation sheet, account register, monthly account statement account register (check register) -Answer- Most current account balance Money -Answer- #1 cause of divorce in America Debit Card -Answer- spends money directly from your checking account Pay yourself first -Answer- putting a portion of your income to saving and investing each month Online bill pay -Answer- allows you to make payments from your checking account without having to write a check and send it in the mail Automatic account transfers -Answer- easiest way to build savings for sinking fund or emergency fund Reasons cash flow plans don't work -Answer- you leave things out, overcomplicate your plan, donʹt write a budget, and/or donʹt live on your budget. Payment options from a checking account -Answer- Writing checks, debit card purchase (online or in store), online bill pay Why should you have a paper and electronic financial record? -Answer- 1. As a reference for filing taxes, 2. So that you always have an accurate account balance, 3. So that you can catch errors made by the bank, 4. So that youʹre aware of fraudulent activity on your account. What circumstances might affect a budget? -Answer- change in or loss of income, change in family (divorce, death, birth), accountability -Answer- taking responsibility and assisting wise decisions allowance -Answer- money given to a child by his/ her parent or guardian typically on a weekly basis commission -Answer- a fee paid for providing a service fiscal -Answer- having to do with money free spirit -Answer- a person who thinks, "everything will work out fine," and typically hates to deal with numbers nerd -Answer- one who is picky about budgeting and numbers self-esteem -Answer- one's attitude about themselves value system -Answer- a person's priorities, beliefs, and standards considered important work ethic -Answer- how motivated, loyal, and honest you are in your work Determines a FICO score -Answer- 1 Getting a personal loan from a bank 2 Using Credit Cards 3 Taking out a Mortgage on a House Good Ideas for Getting Out of Debt -Answer- 1 stop borrowing money 2 Get a part time job or work overtime 3 sell something Something you can do with a credit card, but not a debit card -Answer- Go into debt Things you can purchase with a debit card -Answer- 1 Rent a car 2 purchase something online 3 airline ticket Fair Credit Reporting Act (FCRA) -Answer- 1.enacted by congress to help with concerns about credit reports, privacy and fairness 2. consumers are allowed one free credit report every year 3. creditors must inform consumers if credit denied based on a credit report and which credit bureau provided the report Steps in :Drive Free" -Answer- 1 plan your purchase in advance using a sinking fund. 2. place your money in a mutual fund so that your money can make more money 3. start with an inexpensive car and move up as your savings increases Most cost effective option for purchasing a home -Answer- 1. buy it outright---100% down 2. if unable to do #1: 15 year mortgage with at least 10% down. Debt Snowball method -Answer- 1. List your debts in order from smallest to largest balance and focus on paying smallest debt off first 2. Attack your debt with intensity 3. Every time you pay off a debt, you add its old minimum payment to your next debt payment. Paycheck Garnishment -Answer- court ordered attachment that allows a lender to take money owed directly from a borrower's paycheck. Using credit instead of cash for a purchase -Answer- Most spend more when using credit compared to using cash. Credit myths -Answer- 1. lottery will make you rich 2. You have "arrived" when you get approved for credit cards 3. Debt is a tool to build wealth Without a FICO score, you qualify for a mortgage by -Answer- 1. History of rental and utilities payments 2. amount of down payment 3. Employment History A credit score measures -Answer- the risk of you not repaying debt Signs that your identify may have been stolen -Answer- 1. call from a collection agency about a debt that isn't yours 2. bank and billing statements don't arrive on time. 3. your credit report has accounts you didn't open How long does account information say on your credit report? -Answer- 10 years (bankruptcy is longer) Three credit bureaus -Answer- Experian, TransUnion, Equifax You (do, do not) have established credit to buy a house -Answer- Do not Zero -Answer- Amount of money you have to pay back when you are identify theft vitctim Every year -Answer- You can and should be checking your free credit report 2 big items you CAN do with debit card -Answer- rent a car check into a hotel Federal Trade Commission (FTC) -Answer- US agency that regulates the consumer credit system and enforces laws related to it. Fair Credit Reporting Act (FCRA) -Answer- only allows people with legitimate reason to check a person's credit Teens -Answer- huge target of credit card compaines Co-signing -Answer- taking financial responsibility for a loan if the original borrower cannot pay; NOT a good idea Debt Snowball -Answer- preferred method of debt repayment: list all debts, from smallest to largest, make minimum payments to all debts except the smallest which gets the largest possible payments, once that is payed off, take that money and apply it the next debt on the list. Credit Report -Answer- a detailed report of an individual's credit history Loan Term -Answer- time frame that a loan agreement is for. Annual Percentage Rate (APR) -Answer- Cost of borrowing money on an annual basis(includes interest rate,and other related fees) Depreciation -Answer- A decrease on loss in value Annual Fee -Answer- A yearly fee that's charged by the credit card company just for having the credit card Introductory Rate -Answer- An interest rate charged to a customer during the early stages of a loan; the rate often goes up after this period Lease -Answer- A long term rental agreement on a car (secured long term-debt) Upside down -Answer- When a person owes more on an item like a house or car than it is worth Credit Card -Answer- a card issued by a bank that allows users to finance a purchase Secured loan -Answer- When something of value is collateral for a loan---if you don't make your payments the bank takes that item Unsecured loan -Answer- based on a borrowers ability to repay the loan Adjustable Rate Mortgage (ARM) -Answer- interest rate that changes based on market conditions. NOT a good idea because the rate could adjust higher and you may not be able to afford the payments when it does.