Financial Literacy Test 6

What is a "whammy"?

A whammy is a large, unpredictable expense (or income loss) that could occur at any time. These include major home and car repairs, large medical bills, and job losses.

What is depreciation?How does the rate of depreciation change over the course of a vehicle's life?

Depreciation is the decrease in a car's value over time. Depreciation does NOT happen at a constant rate. A car depreciates much faster in its first year than in subsequent years.

What costs more: preparing a meal at home with ingredients purchased at a grocery store or a meal purchased at a restaurant?

Eating out is almost always more expensive than preparing a meal at home with store-bought groceries. The average restaurant meal costs $13, while the average meal prepared at home costs $4.

Which utility bill is usually the most expensive?

Electricity is usually the most expensive utility bill.

What are examples of nonrecurring expenses?

Examples include an annual membership dues (e.g. Amazon Prime), car registration fees, vacations, holiday and birthday gifts, clothes

What are examples of recurring expenses?

Examples include groceries, dining out, gasoline, Amazon purchases, etc.

How much do financial advisors recommend spending on housing costs?

Financial advisors generally recommend spending no more than 30% of income on housing, including both rent and utilities.

What is a fixed monthly expense?

Fixed expenses are those that are incurred every single month for the same amount, and usually on the same day.

What are examples of fixed expenses?

Fixed expenses include rent, car payments, mortgage payments, and subscriptions to streaming services

Do gig workers receive the same protections and benefits as employees?

Gig workers are generally classified as "independent contractors" instead of employees, and are generally not given health insurance and other benefits, nor do they receive the same labor law protections as those classified as employees.

How does having a roommate save you money?

Having a roommate allows you to divide the total cost of a house or apartment with another person (or people!)

What is inflation? How does it affect the purchasing power of a fixed amount of money?

Inflation is an increase in the average level of prices of goods and services. Inflation reduces the purchasing power of a fixed amount of goods and services.

What is a nonrecurring expense?

Non-recurring expenses are those that might only happen once or few times per year per year.

What is a recurring expense?

Recurring expenses are those that reliably happen throughout the month, but are not as predictable as fixed expenses in terms of their dates and amounts

Who is hurt by inflation? Who benefits from it?

Since inflation reduces the purchasing power of a fixed amount of money, anyone who receives a fixed amount of money or expects to receive a fixed amount of money in the future is made worse off by inflation. E.g. lenders, fixed wage earners, savers, etc. Borrowers, on the other hand, are generally made better off by inflation, since the real value of their debts declines with inflation

What is the 50-30-20 budgeting rule?

Someone following the 50-30-20 budgeting rule is spending 50% of their monthly income on needs, 30% on non-essential wants, and saving the remaining 20%.

What are some of the ways grocery stores use psychology to get you to spend more?

Stores tend to put the most expensive items at eye level, they make their shopping carts larger to encourage you to fill them, they place necessities like eggs and milk at the back of the store, so you have to pass more merchandise on the way, they offer free samples to guilt you into buying things, and they place potential impulse purchases at the checkout stand when you're already experiencing decision fatigue

How does the cost of car ownership compare to the cost of riding public transportation?

Taking public transit is ALWAYS cheaper than owning a car. Even in New York, one of the most expensive American cities, a 30-day unlimited MetroCard costs $127, which is far cheaper than the monthly total ownership costs for even the least expensive cars.

What does the average American household spend the most money on?

The average American household spends the largest fraction of income on housing costs, which includes rent or mortgage payments AND utilities, such as electricity, gas, water, sewer, cable, and internet.

How much do utilities generally cost compared to rent?

The average combined utility cost is 20% of one's monthly rent.

What are some of the costs associated with owning a car? Which of these costs is the largest? How do the other expenses compare?

The largest monthly cost of car ownership is usually - but not always - the monthly car payment (if you finance) and/or depreciation (if you pay in cash), but these are a relatively small fraction of the total cost of car ownership. Insurance, maintenance, repairs, and fuel can combine for several hundred dollars per month, which might be a sizable portion of the total cost. Depreciation and financing only make up about 30% of the total 5 year ownership cost for a car.

calculate the real growth rate of someone's salary when given its nominal growth rate and the inflation rate.

The real growth rate of something expressed in dollars is approximately equal to its nominal growth rate minus the inflation rate. E.g. If you received a 7% pay raise from one year to the next and there was 5% inflation over the same period, your real pay increase was 2%. If you took out a one year loan from a bank at 10% interest, and there was 9% inflation over the year, the real interest rate on the loan was 1%. If you bought a stock that increased in value by 12% over the year, but there was 7% inflation over the same period, your real return on investment was 5%.

What is the best way to prepare for a whammy?

The single best way to prepare for a whammy is to build up an emergency fund containing 3 to 5 months of one's monthly expenses.

What is a zero-based budget?

Zero-based budgeting is a method where you allocate every penny of your monthly income toward a specific category, e.g. housing, utilities, car payment, emergency fund, retirement fund, etc. In other words, every dollar is accounted for - there is NO floating miscellaneous category. This method is inflexible and potentially inconvenient, but it can be very beneficial for those who are prone to overspending.