Personal Finance Chapter 7 Study Guide

With savings of $4,300 and monthly expenses of $9,600, what is your emergency fund ratio?

0.4479.

At which type of firms can you establish a Roth IRA?

Banks, credit unions, and mutual fund companies.

As a general rule, how much money should be kept in an emergency fund?

Between 3 and 6 months of expenses.

Which of the following is a threat associated with keeping cash at home?

Loss of interest, theft, and no protection against impulse purchases.

Lannie funded her Roth IRA yesterday. Unfortunately, today she had an unexpected financial emergency. When can she take out her contribution to the Roth IRA without a penalty?

Today.

Which of the following is an appropriate investment vehicle or source from which to draw emergency funds?

A savings account held at the local bank or an online checking account.

Tony struggles to save money. He knows it is important, but his immediate needs and wants make it difficult for him not to spend the money he has set aside. Which of the following options would be most effective for him to start building savings?

Automatically having money deposited into a restricted account each month.

Which of the following is not a wise use of emergency fund money?

Buying gifts.

Which of the following statements best describes the concept of tax-deferred growth?

Earnings within an account are not taxed as income until the earnings are withdrawn from the account, which could be many years after the earnings were first credited to the account.

Which of the following statements is true when you invest in a federally insured bank account?

Even though there is federal insurance in place, you still face inflation risk.

Which of the following should Taylor have to invest at Level 3 of her investment pyramid?

High risk tolerance.

Which of the following has the highest level of liquidity?

Savings accounts.

Which of the following sources of emergency funds will have the least negative impact on your lifetime financial situation if the source is used to meet emergency expenses?

Taking money from your savings account.

Which of the following is a benefit of holding money in a CD for an emergency fund?

The money is earning a higher rate of return than a savings account.

When interest rates increase, which of the following outcomes is most likely?

The rate of return on a bank or credit union savings account will increase, and holding cash in an emergency fund is more attractive.

Generally speaking, you should build the base of your investment pyramid using low-risk assets. Which of the following assets would be most appropriate for building Level 1 of an investment pyramid?

U.S. savings bonds, certificates of deposit, and treasury bills.

One way to become more motivated to save for emergencies is to:

consider how the people you love would be affected if you could not pay for an emergency.

All of the following are true about Roth IRAs, except:

contributions to a Roth IRA are made with pretax dollars.

Roth IRA accounts are unique because:

investment earnings receive unique tax treatment.

All of the following charge a depositor an early withdrawal fee, except a:

money market savings account.

Tony has $3,000 saved in a money market account. He just received a birthday gift and is deciding what to do with the money. He has narrowed down his options to either increasing his savings or purchasing a subscription to an online video streaming service. If he chooses the video streaming service, the savings alternative is:

the opportunity cost.

Borrowing money in the event of job loss is a bad idea because:

you may not have access to credit or other means to repay the debt, and it may lead to bigger problems.

With a very stable profession, if your monthly expenses totaled $3,300, approximately how much should you have in an emergency fund?

$10,000.

Leonard and Louise have been married for 14 years. They have combined annual incomes of $87,000. After taxes and other payroll deductions, they bring home $56,555 annually. If they save 10% of their take-home pay and use the rest for household living expenses, how much should they have in an emergency fund to meet the 3-month emergency fund requirement (round your answer)?

$16,900.

Your neighbor has monthly expenses totaling $3,725. His employer has indicated that the firm is expecting to announce layoffs soon. How much should your neighbor have in an emergency fund if he wants to cover 6 months of living expenses?

$22,350.

Lucy and Doug are engaged and hoping to get married in a few months. Lucy has been developing a budget. She knows that their combined income will be about $80,000 per year. After paying taxes and other employer withholdings, she thinks they will have take-home pay of approximately $55,000. Lucy is an aggressive saver. She thinks that she and Doug can save at least $500 per month in an emergency fund. Currently, they have about $5,000 of savings in a savings account. What type of account do you recommend to Lucy and Doug for their current and new savings to earn the highest interest rate?

Dedicated savings account.

James established a Roth IRA and funded it with $5,500. By the next year, the Roth IRA was valued at $7,230. Yesterday, James found out emergency car repairs will cost him $3,000. What is the maximum that James can withdraw tax- and penalty-free?

$5,500.

Joe has cash in a savings account totaling $7,500, and his monthly expenses are $2,500. What is his emergency fund ratio?

3.

Tula, age 33, is thinking about investing for retirement. She plans to retire when she turns age 62. She will need $1.2 million today's dollars in assets. If she can earn an average annual 7.75% rate of return, what will be her real rate of return?

4.50 %.

Which of the following assets would be an appropriate choice for Evan, who is building a portfolio at Level 2 of his investment pyramid?

Mutual fund.

Who of the following may establish a Roth IRA?

Nelda, who is still in college and has a part-time job as a sales clerk.

Luigi has saved $4,500 in an online savings account. Does he meet the basic emergency fund ratio guideline if his monthly living expenses are $1,800?

No, because he has only enough in the account to cover 2.5 months of expenses.

Tula, age 33, is thinking about investing for retirement. She plans to retire when she turns age 62. She will need $1.2 million in today's dollars in assets. If Tula has $300,000 currently saved and can earn an annual average real rate of return of 4%, will she meet her retirement goal?

No, because her money will double every 18 years, leaving her short of her goal.

An account that pays greater than savings account interest but limits the number of withdrawals per month is known as a:

certificate of deposit and dedicated savings account.

All of the following bank products allow a depositor to make additional contributions to the account, except a:

certificate of deposit.

Roth IRAs allows individuals to:

set money aside for emergencies, reduce the opportunity costs of an emergency fund, and receive potential tax-free growth.

All of the following are true of traditional IRAs, except:

they are appropriate accounts to hold emergency funds.

An effective way to motivate yourself to save involves:

visualizing where you want to be in the future.

The variability of returns associated with investing is called:

volatility.

A qualified distribution from a Roth IRA can take place:

when you reach 59½ years old and the Roth IRA account has been open for at least 5 years.