Foundations in Personal Finance Chapter 2 Test Study Questions

The first foundation (the first step) to managing your money is . . . Save a $500 emergency fund.
Instead of borrowing money for large purchases, you should set money aside over time in what kind of fund? (So you can pay cash) Sinking Fund
What does it mean to have a negative savings rate? Spending more money than you make and acquiring debt.
The saving habits of Bill and Arthur best illustrate which principle of swing? The length of time money is invested matters AND the rate of return matters.
This principle suggests that a certain amount of money today has different buying power than the same amount of money in the future. This is due to both the opportunity to earn interest on the money and because inflation will drive prices up, thereby changing the “value” of the money. Time value of money
You should save for . . . Purchases, wealth building and an emergency fund.
Using the sinking fund approach, how much do you have to save each month to buy a $4,800 car one year from now? $400
At your age, a fully funded emergency fund should be . . . $500
This is not a key to saving money: Your income.
What are the reasons people do not save money? Lack of discipline, not living on a budget and lacking focus.
True or false: One of the basic reasons for saving money is to be able to lend money to friends.
Why should your emergency fund be kept in a separate savings account? So that ibis clear what money is only to be used in emergencies.
Why is having a fully funded emergency fund so important when it comes to your financial well-being? The purpose of an emergency fund is to set money aside for UNEXPECTED financial emergencies and to provide a sense of financial security.
Saving is about . . . Contentment and emotion.
Why should interest earned not be a factor with your emergency fund? The emergency fund is not intended to grow wealth.
True or False: The first thing you should save for is your retirement fund. False
True or False: Your income level greatly affects your savings habits. False
True or False: Americans typically maintain a vey high savings rate. False
True or False: You should save money for three basic reasons: emergency fund, purchases and wealth building. True
True or False: When it comes to saving money, the amount you save is determined by how much you have left at the end of the month once all of your spending is done. False
True or False: When you are older and out of school, you’ll need to grow your emergency fund to a full three to six months’ worth of expenses. True
True or False: You should keep your emergency fund in the same account as your spending money. False
True or False: An interest-bearing account is an account that generates interest income on the available balance in the account. True
True or False: When you are in high school, you won’t have the same emergency expenses as your parents. True
True or False: You should hold off investing for retirement until you have college or other post-secondary education paid for. True
What two things do you consider when evaluating the time value of money? Inflation and interest rate (or rate of return)
What are the essential elements of wealth building? Discipline, time and compound interest.
Why do you need an emergency fund at your age? Emergencies can happen at any age.
The Five Foundations (and their descriptions) are . . . 1) Save a $500 emergency fund so that you do not have to go into debt if in a financial emergency.2) Get out of debt and stay out of debt. Debt prevents you from wealth building.3) Pay cash for a car. Use the sinking fund approach to buy cars.4) Pay cash for college in order to avoid student loan debt.5) Build wealth and give in order to achieve complete financial well-being.
Why should establishing an emergency fund be your first savings priority before large purchases and wealth building? An emergency fund allows you to have money available for any surprise expenses and can help you avoid debt.
Calculate the compound interest for the following: $1000 at 6% interest for 3 years = $1,191.02
Calculate the compound interest for the following: $500 at 18% interest for four years = $969.39
Calculate the compound interest for the following: $1,500 at 12% interest for two years = $1,881.60
The dollar amount in your emergency fund will change as you get older because . . . As you get older, your financial responsibilities will grow. Your emergency fund should increase as well.
Money set aside and left alone for a “rainy day” is called . . . an emergency fund
Saving money over time for a large purchase is called . . . a sinking fund
Percentage paid to a lender for the use of borrowed money, or the percentage earned on invested principal . . . interest rate
Money today has a different buying power than the same amount of money in the future . . . time value of money
Interest paid on interest previously earned . . . compound interest
Compares after-tax income to the money people spend on a variety of money . . . savings rate
The five steps to financial success . . . the Five Foundations
Save a $500 emergency fund . . . the First Foundation
When a person intentionally invests money in a place where it can earn more money . . . wealth building
The persistent rise in the cost of goods and services . . . inflation

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