Personal Finance Final
List Dave Ramsey's first 3 baby steps:
-$1000 in emergency fund -Pay off all debt -3-6 months of expenses saved
Percentages of FICO Scorers
-Debt History 35% -Debt Levels 30% -Duration of Debt 15% -Type of Debt 10% -New Debt 10%
List two ways a person can make money from owning stocks:
-Dividends paid by company -Buying low and selling high
3 Major Credit Bureaus
-Experian -Equifax -Transunion
A stock market index that measures the daily stock price movements of some of the largest 30 companies in the US
Dow Jones
Because of their size, large national banks are normally able to offer better interest rates and lower fees compared to local banks and credit unions
False
Dave Ramsey recommends preparing a written cash flow plan once a year
False
T/F: According to Dave Ramsey when you pay with cash it is hard to negotiate a better deal because you did not use the store's credit
False
T/F: According to Dave Ramsey you cannot qualify for a mortgage without a FICO score
False
T/F: Both Ryan and Danielle Quilling leased 2 brand new cars in the past year to help lower their monthly car payments
False
T/F: By co-signing a loan I am helping a friend or relative
False
T/F: Car payments are a way of life and you'll always have one
False
T/F: Dave Ramsey is a big believer in investing in individual stocks and certificates of deposit
False
T/F: If I loan money to a friend or relative, I will be helping them
False
T/F: If your monthly payment on a 30 year mortgage is $800, then your monthly payment on a 15 year mortgage would be $1,600 for the same loan amount
False
T/F: Leasing your car is a smart idea because of the tax advantages it offers
False
T/F: The best way to automatically "pay-yourself-first" is to remind yourself to write a check each month to transfer money from your checking account to your savings account
False
T/F: The cornerstone to becoming wealthy is earning an high income. The more you earn the more you save
False
T/F: The lottery and other forms of gambling will make me rich
False
T/F: The median price for the most recent vehicle purchase of a millionaire is $61,367 according to the book "Stop Acting Rich"
False
T/F: You can get a good deal on a new car
False
When studies are done on the lottery, it's always higher-income zip codes that generate the highest sales revenue
False
An investment where investors pool their money to invest, a portfolio manager manages the pool, and your return comes as the value of the fund is increased
Mutual fund
What is the equation for calculating a person's net worth?
Net worth = assets - liabilities
A written plan, if actually lived on and agreed on, will show if you are ______overspending in a certain area.
Overspending
The concept of ______ is a simple one: putting money into one of his many savings vehicles so he is forced to live below his means
Paying yourself first
With virtually all investments, as the ______ goes up, so does the potential return
Risk
Any earnings in your account grow tax-free
Roth
R/4: You can set this account up on your own
Roth
The maximum amount you can put in per year is $5,500
Roth
You no tax break now, but pay no taxes when you take the money out
Roth
A basket of 500 stocks consisting of the largest companies in the US. It is the main performance gauge of the stock market
S & P 500
"Building wealth," Dave says, "is not a matter of how much you make as to how much you _______"
Spend
An investment where you receive a piece of ownership in the company
Stock
Debt to credit limit ratio
Sum of debt / sum of credit limits for each debt (See quiz 6)
Give 2 examples of things that would be considered assets under the definitions in an accounting textbook, but are actually liabilities based on the definitions in the book Rich Dad, Poor Dad?
TV and Computer
"Temperamentally, Dave has always been frugal, but what really got him thinking about finances was reading _____"
The Millionaire Next Door
A 5-year Certificate of Deposit (CD) normally pays a higher interest rate than a 1-year CD
True
Online savings accounts pay a higher interest rate than normal savings accounts at traditional banks
True
T/F: A "rewards checking account" typically allows you to earn just as good of an interest rate as a 5-year CD, or better, as long as you meet certain monthly requirements
True
T/F: A recent survey found that 79% of credit reports had some sort of mistake or error
True
T/F: Cash advances and payday lenders are greedy rip-offs and should be avoided
True
T/F: Dave Ramsey recommends having two savings accounts: one for your emergency fund and another for other purchases/expenses
True
T/F: More than half of millionaires operate on an annual household budget
True
T/F: Never take out more than a 15-year fixed rate mortgage
True
T/F: Ryan and Danielle Quilling set aside more than 20% of their $108,000 a year earnings for savings and investing
True
T/F: Single stock investing carries an extremely high degree of risk
True
T/F: When you use cash instead of plastic you spend 12-18% less because spending cash hurts
True
T/F: You are able to get one free credit report a year from each credit bureau
True
T/F: You can use a debit card to rent a car or make purchases online or by phone
True
Website where you are allowed to obtain a credit report for free once per year from each credit bureau
annualcreditreport.com
List 3 main reasons why stock prices increase/decrease and list the one that is most important first
-What the prediction of future earnings for a company is -Overall economic health -Headlines/current events
Top 10 Home Buying Tips
1. Use buyer's agent 2. Shop around for mortgage 3. Get pre-approved 4. Needs/wants list 5. Know your budget 6. Be aware of extra costs 7. Talk to neighbors 8. Send personal statement w/ offer 9. Get home inspection 10. Don't forget costs after purchase
Dave Ramsey's Baby Step #4 is: "Investing ____ percent of your household income into Roth IRA's and pre-tax retirement plans.
15%
Rule of 72: How many years will it take for your money to double if your investment earns a rate of return of 4%
18 years (72/rate of return--> 72/4)
How many FICO scores do you have?
3
Investment choices are limited to the options given to you by your employer
401k
R/4: Tha maximum amount you can put in per year is $18,500
401k
R/4: You must take out a minimum amount of money starting at age 70.5
401k
R/4: Your employer may match the money you put in the account
401k
This account is considered "tax-deferred"
401k
You can only get this through your employer
401k
Lisa & Joe have an annual household income of $60,000 and are following Dave Ramsey's 7 Baby Steps. How much money should Lisa & Joe have in their emergency fund if they have a $3,000 credit card balance and a mortgage A) $1,000 B) 3-6 months of expenses C) 10% of their credit card balance D) No emergency fund until the credit card is paid off
A) $1,000
The current average interest rate on a savings account is around: A) 0.1% B) 1% C) 3% D) 5%
A) 0.1%
Which of the following is NOT a type of mutual fund category? A) 401K funds B) Income funds C) Growth funds
A) 401k Funds
An advantage of mutual funds is: A) Automatic diversification- a mutual fund can easily have over 100 stocks in its portfolio B) An investor is guaranteed not to lose money because mutual funds are only offered by banks C) All mutual funds are FDIC insured by the government up to $250,000
A) Automatic diversification- a mutual fund can easily have over 100 stocks in its portfolio
Clark Howard recommends this type of mutual fund for intermediate investors. "You can make it ultra simple with just 3-5 of these types of funds." A) Index Funds B) Growth Funds C) Balanced Funds D) Large-cap Funds
A) Index Funds
Which of the following is NOT a piece of advice we mentioned in class regarding choosing a mutual fund to invest? A) Invest only in mutual funds that have averaged at least a 20% return over the past 6 months B) Invest in no-load funds that have an expense ratio below .75% C) Use Morningstar.com's star ranking system to narrow down your decision to a few top funds D) See how long the mutual fund manager has been in charge of handling the mutual fund
A) Invest only in mutual funds that have averaged at least a 20% return over the past 6 months
If you have a checking account with Associated Bank, but you withdraw money from an ATM operated by Chase Bank: A) Most likely, both U.S. Bank and Chase Bank will charge you an ATM fee B) You will not be charged any fees C) The ATM will reject your card D) You cannot withdraw any cash, but you can make a deposit
A) Most likely, both U.S. Bank and Chase Bank will charge you an ATM fee
"He says he doesn't miss this money since it is _____ withdrawn from his paycheck or checking account every month"
Automatically
Paul and Kristie have an annual household income of $100,000 and are looking to purchase their first home. Using the rule of thumb for purchasing a home from the author of The Millionaire Next Door, the market value of the home they wish to purchase should be less than: A) $100,000 B) $300,000 C) $500,000 D) $700,000
B) $300,000 (Rule of thumb: <3 times income)
A lifecycle/target-date fund: A) Starts out safe and conservative and then gets more aggressive as it gets closer to the target date B) Automatically adjusts over time and invests more in bonds the closer it gets to the target date C) Is not recommended for investing fore retirement because these funds do not diversify enough across different stock categories
B) Automatically adjusts over time and invests more in bonds the closer it gets to the target date
Mutual funds carry a couple different kinds of fees. Which of the following is NOT a mutual fund fee? A) Expense ratio B) Interest rate C) Load
B) Interest rate
In part 2 of Dave Ramsey's video on budgeting, he mentions "if not managed and made to behave ____ is certain to become a budget buster." A) Not using coupons B) The debit card C) Using cash for purchases D) Your cable bill
B) The debit card
According to Dave Ramsey, what is the most sensible way to buy a $4,000 car? A) Put a down payment of $500 and use 90 days same-as-cash to pay the balance B) Use the sinking fund approach and save $400 a month for ten months C) Shop around for the best interest rate before taking out a $4,000 loan D) Ask your parents to co-sign a loan at your local credit union
B) Use the sinking fund approach and save $400 a month for ten months
An investment where you loan a company money and they pay you back later along with interest payments every year
Bond
"We are quite careful about _______," he says. "I don't feel like I'm living a millionaire's life, but I expect to be one in 12 or 14 years."
Budgeting
Dave Ramsey mentioned when it comes to investing the biggest mistake people make is: A) Investing in foreign companies B) Buying stock in the month of January because the stock market has historically not performed well during January C) Buying a stock through an online broker because of the risk of identity theft D) Being too sophisticated and complex in their investment choices
D) Being to sophisticated and complex in their investment choices
According to the author of The Millionaire Next Door, the greatest detriment to building wealth is: A) Not earning a high enough salary from one's employer B) Having children C) Taking a risk by being a self-employed professional D) Purchasing a pricey home and/or living in a pricey neighborhood
D) Purchasing a pricey home and/or living in a pricey neighborhood
Clark Howard recommends this type of mutual fund for beginning investors. "Set it and forget it." A) Growth Funds B) Balanced Funds C) Income Funds D) Target-Date Retirement Funds
D) Target-Date Retirement Funds
Which of the following is NOT a direct quote from the Dave Ramsey video stating why people do not do a cash flow plan? A) It has a straight jacket connotation B) They've never had a budget that worked C) They have paralysis from fear of what they will find D) The cash flow plan is complicated math. Most people can't calculate the numbers for a budget"
D) The cash flow plan is complicated math. Most people can't calculate the numbers for a budget
Which of the following is a direct quote from the reading "Millionaires in the Making - Ryan & Danielle Quilling"? A) "My biggest pet peeve is when people try to buy status," Danielle said. "They buy the fancy cars, the name brand clothing. Just overexerting what they can afford." B) "Ryan and Danielle have $5,000 in credit card debt, but their goal is to pay off their student loans first." C) "Living below our means is pretty tough to do since both Danielle and I really like to shop. We try to eat out no more than 3 times per week." D) "One of the Quillings' strategies is to invest all of their money in individual stocks rather than mutual funds. Ryan "turbo-charged" his retirement accounts by investing in individual stocks, a gamble that paid off well!"
A) My biggest pet peeve is when people try to buy status, Danielle said. They buy the fancy cars, the name brand clothing. Just overexerting what they can afford.
Which of the following is NOT true concerning mutual funds? A) Overall, mutual funds are considered a more risky investment than buying individual stocks B) Mutual funds have professional money managers who decide what stocks to buy and sell in the mutual fund C) When you own shares in a mutual fund you and many other investors jointly own a whole basketful of different stocks
A) Overall, mutual funds are considered a more risky investment than buying individual stocks
What does the term "load" mean in relation to mutual funds? A) The sales charge (or commission) that investors may have to pay when buying a mutual fund B) The dividends paid to an investor in a mutual fund C) The interest rate mutual funds give investors
A) The sales charge (or commission) that investors may have to pay when buying a mutual fund
Describe what it means to have a zero-based cash flow plan.
Allocating every dollar of your income to something whether its expenses, paying debt, saving, etc. so that there are zero dollars left just sitting at the end of the month
What is the definition of an asset according to the book Rich Dad, Poor Dad
Anything that allows cash flow into your pocket
What is the definition of a liability according to the book Rich Dad, Poor Dad?
Anything that causes cash out flow from your pocket
What is the approximate average rate of return of US stock market over the long-term: A) 1% B) 5% C) 10%
C) 10%
A friend asks you the question, "What is the difference between a bank and a credit union?" Which of the following would be the best response to your friend: A) Both banks and credit unions offer deposit accounts, but you can only get a loan from a bank and not a credit union B) Banks have an FDIC insurance limit of $250,000 on their accounts while credit unions have a limit of $300,000 because they are not-for-profit C) Banks are for-profit and you are a customer at a bank, while credit unions are not-for-profit, usually offer better interest rates, and you are considered a member D) There really is no difference between a bank and a credit union. They both do the same thing
C) Banks are for-profit and you are a customer at a bank, while credit unions are not-for-profit, usually offer better interest rates, and you are considered a member
What is an advantage of investing in an index fund? A) Index funds usually have lower expenses than managed funds B) Index funds outperform most manage funds C) Both A & B are correct
C) Both A & B are correct
The prototypical millionaire in the United States: A) Actively trades their stocks on a day-to-day basis B) Invests mainly in bonds because they view stocks as being too risky of an investment C) Invests on average 15-20% of their income each year D) Holds on their stock investments for less than a year before selling the investments
C) Invests on average 15-20% of their income each year
If you earn less than $20,000/year Dave Ramsey's Baby Step #1 is: A) Paying off all your debt B) Saving 3-6 months worth of living expenses in an emergency fund C) Saving $500 in an emergency fund D) Investing 15% of your income into retirement accounts
C) Saving $500 in an emergency fund
Wisconsin Bank & Trust in the Sheboygan area offers a "rewards checking account." With this type of account you normally have to meet three requirements to receive the best interest rate. Which of the following is NOT one of the three requirements: A) Use your debit card a certain number of times per month B) Sign up for a monthly direct deposit into this checking account C) Sign-up for a credit card D) Receive your monthly statements through email
C) Sign-up for a credit card
Once you have bought a mutual fund, you should give the mutual fund a ____ rope before you determine whether to keep it or not. A) 1-month B) 3-month C) 1-year D) 3-year
D) 3-year
When comparing a mutual fund's performance with other mutual funds, look to see how a mutual fund has ranked vs. other funds over at least a ________ period. A) 1-month B) 6-month C) 1-year D) 5-year
D) 5-year
According to Dave Ramsey, never invest: A) Using borrowed money B) In investments you do not understand C) Purely for tax savings D) All of the above
D) All of the above
Which of the following is the best way to build discipline and get into the habit of saving by using the "pay-yourself-first" concept? A) Avoid daily expenses such as coffee B) Work a second job and use that money to put into your savings account C) Hire a financial advisor who will help remind you to save each month D) Automatically transfer money into your savings and/or investment account
D) Automatically transfer money into your savings and/or investment account
____ money goes farther.
Managed