Personal Finance Unit 2

List and describe each of the five foundations

1) Save a $500 emergency fund so that you do not have to go into debt if a financial emergency arises 2) Get out of debt and stay out of debt. Debt prevents you from building wealth 3) Pay cash for your 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

Explain why establishing an emergency fund should 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

A savings account that is set aside to be used only for emergency expenses

Emergency fund

An account that generates interest income on the available balance in the account

Interest-bearing account

What is the first foundation? Explain why and how the dollar amount will change as you get older.

Save a $500 emergency fund. As you get older, your financial responsibilities will grow. Your emergency fund should increase as well to 3-6 months worth of expenses

Interest paid on interest previously earned

compound interest

The persistent increase in the cost of goods and services or the persistent decline in the purchasing power of money

inflation

A rate which is either charged (on debt) or paid (on investment accounts) for the use of money

interest rate

Compares after-tax income to the money people spend on a variety of items

savings rate

Saving money over time for a large purchase

sinking fund

The five steps to financial success

the five foundations

When a person intentionally invests money in a place where it can earn more money

wealth building