WISE- Practice Test #7- Money Management

One of the benefits of holding an investment for over a year rather than selling it in less than a year is that the A. capital gains on the investment will be taxed at a lower rate. B. fees will not be charged by brokers for selling the investment. C. money earned on the investment will be considered tax-free. D. profits on the investment can be averaged over the length of time the investment is held.

Correct Answer A Reason Capital gains are profits made from the sale of capital assets such as stocks and bonds and are tax deferred until the asset is sold. Capital assets that are held over one year are considered long-term capital gains and are taxed at a lower tax rate or in some cases are not taxed at all.

A person's debt ratio shows the relationship between debt and net worth. The lower the ratio the A. better off financially the person is. B. worse off financially the person is. C. more liquid assets the person has. D. less liquid assets the person has.

Correct Answer A Reason Since the debt ratio is calculated by dividing liabilities by net worth, the lower the debt ratio the better; that is the better off the person is financially

You want to gain control over your income and spending so that you will be able to save money. Which step will help you the most? A. developing a retirement plan B. developing a budget C. getting advice from a friend D. applying for a loan

Correct Answer B Reason A budget is a realistic estimate of your sources and amounts of income and your expenses for a period of time. Developing and using a realistic budget can help you gain control over your income and spending. Developing, but not using a budget, does not help you gain control. Expenses may need to be reduced or eliminated, in order to develop have money left over (discretionary) to use for savings

An important consideration when saving money for emergencies is: A. high growth potential B. high degree of safety and liquidity C. diversification D. return on investment

Correct Answer B Reason An emergency fund account needs to have a high degree of safety and liquidity. High safety means that there is very little chance of losing the principal (dollar amount in the account). High liquidity means it is easy to get cash out of the account quickly.

Ben's annual income is $30,000, and he contributed $3,000 to a traditional IRA in his local bank. What is his taxable income? A. $33,000 B. $30,000 C. $27,000 D. $0 because he contributed to an IRA

Correct Answer C Reason Ben's annual income is low enough that he can deduct his IRA contribution from his taxable income. His taxable income after deducting the contribution is $27,000 ($30,000 - $3,000), so the amount of tax he has to pay is lower than it would have been if he hadn't made the contribution.

Expenditures that remain constant from one time period to another are: A. Variable expenses B. Current expenses C. Fixed expenses D. Steady assets

Correct Answer C Reason Fixed expenses remain constant and usually cannot be reduced or eliminated from one period to another. These include rent or mortgage payments, car payments, installment loans, and insurance premiums.

Julian is a single and recent college graduate who just got his first full-time job. Which of the following should be his first financial goal? A. buying a house B. buying a life insurance policy C. establishing a fund for emergencies D. creating a stock portfolio

Correct Answer C Reason Julian should first build an emergency fund, equal to 3 to 6 months' income, so that there will be money to cover major unforeseen expenses, such as car repairs, or travel expenses to visit an ailing family member. An emergency fund should be held in a statement savings account or other liquid investment so that it can be accessed quickly and easily when needed. After he has built the emergency fund, Julian can set and start working toward other financial goals, such as buying a house, buying an adequate life insurance policy, or building a stock portfolio.

A man budgeted $200 a month for clothing. This month the man spent $150 on clothing therefore that budget item is considered to have A. an outflow deficit. B. an income overage. C. a budget variance. D. a budget deficit.

Correct Answer C Reason The difference between the amount of money budgeted for items ($200 for clothing) and the actual amount of money spent for those items ($150 for clothing) is called a budget variance.

Which of the following is necessary for successful budgeting? A. A copy of credit card report B. The location of your banks C. The ability to adjust spending to money available D. A list of unexpected income

Correct Answer C Reason The steps in developing a realistic, usable budget once goals have been established are (1) identify the source and amount of all expected income, (2) identify probable fixed and variable expenses, and (3) adjust spending to match the expected income.

A person complains about how expensive it is to be a cigarette smoker. One of the reasons cigarettes are so expensive is that A. the tobacco supply is controlled by the Federal Trade Commission (FTC). B. the tobacco industry imports most of the tobacco. C. their cost is controlled by the Food and Drug Administration (FDA). D. the government imposes an excise tax on them.

Correct Answer D Reason The government may impose a tax on specific goods and services such as alcohol, cigarettes, gasoline, and airline services, which are called excise taxes. These taxes produce revenue for the government and are usually placed on items not considered necessities. Often, as in the case of alcohol and cigarettes, these taxes are also levied as away to try to deter certain behaviors. As a result, these taxes have become known as 'sin taxes.'