Personal Finance – Chapter 2 Review

What is the first foundation step? Save for an emergency fund
At your age, what should a fully funded emergency fund be? $500
Using the sinking fund approach, how much do you have to save each month to buy a $6,000 car one year from now? $500 a month
Instead of borrowing money for large purchases, you should set money aside in a _________ over time and pay with cash. Sinking fund
What are the 3 reasons to save? -Emergency Fund-Purchases-Wealth Building
What does it mean to have a negative savings rate? Spending more than you make
Explain the time value on money principle. Suggests that a certain amount of money today has different buying power than the same amount of money in the future.
What are 3 keys to saving money? -Self discipline-Focus and a goal-Habit and a priority
Why should interest earned not be a factor with your emergency fund? It’s not an investment
What are 3 reasons that people don’t save money? -No discipline-Spend money they don’t have-No focus or budget
Saving is about ________ and ________. Contentment and emotion
What are some reasons your emergency fund should be kept in a separate saving account away from your spending money? It’s not an emergency if it’s a regular purchase.
Why is having a fully funded emergency fund so important when it comes to your financial well-being? Money is set aside for unexpected events and it provides financial security.
Is the first thing you should save for retirement? No
Should you wait to invest for retirement until you have college or other education paid for? Yes
What is an interest-bearing account? An account that generates interest income on the available balance in the account
What 2 things do you consider when evaluating the time value of money? Interest rate and inflation
What is the first foundation and explain how and why the dollar amount will change as you get older. Emergency Fund-bigger financial unexpected events and bigger responsibilities
What are the 3 essential elements of wealth building? -Discipline-Time-Compound Interest
List and describe each of the 5 foundations. Emergency Fund-No debtGet Out and Stay Out of Debt-Can’t build wealth with debtPay Cash for Car-Use sinking fundPay Cash for College-No student loan debtBuild Wealth and Give-Good feeling
Money set aside and left alone for a “rainy day.” Emergency Fund
The persistent rise in the cost of goods and services. Inflation
When a person intentionally invests money in a place where it can earn more money. Wealth Building
Saving money over time for a large purchase. Sinking Fund
Compares after tax income to the money people spend on a variety of items. Savings Rate
Interest paid on interest previously earned. Compound Interest
Money today has different buying power than the same amount of money in the future. Time Value of Money
Percentage paid to a lender for the use of borrowed money, or the percentage earned on invested principal. Interest Rate

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