Personal Finance Chapter 3 Test

47% of Americans have less than $1,000 saved for a(n) _______. Emergency Car Retirement fund New smartphone

Emergency

If you really want to save money, you've got to . . . Fly economy class Live on less than you make Invest in a Roth IRA Have a financial advisor

Live on less than you make

Debt is a tool to use to make you wealthy. True False

False

Once you're out of school, have started your career, and have zero debt, your emergency fund should have _________. 3-6 months of income 3-6 months of living expenses $3,000 $5,000

3-6 months of living expenses

The only place you should keep your emergency fund money is.. A savings account or money market account. A safe in your bedroom A Roth IRA An envelope in a safe place

A savings account or money market account.

The purpose of an emergency fund is to... Be able to cover an unexpected expense with cash and protect you from having to pile up debt when something goes wrong. Have some extra money in a checking account in case you need to transfer some to your spending categories. Teach you how to invest in growth stock mutual funds. Teach you discipline—saving is purely a good exercise in self-control.

Be able to cover an unexpected expense with cash and protect you from having to pile up debt when something goes wrong.

Compound interest is earned at a fixed rate, while ________ is an average based on an investment's past performance. The principal Interest rate The Fifth Foundation Compound growth

Compound growth

_______ is a millionaire's best friend Accrued interest Compound growth High returns Profit sharing

Compound growth

The first step you should take when you want to make a large purchase is . . . Ask your parents to loan you the money with low interest Get a new credit card Decide how much you'll need to save and the time frame you want to save it in Sell something and use the proceeds

Decide how much you'll need to save and the time frame you want to save it in

In order to outpace inflation when investing, your investments need to have a lower rate of return than the rate of inflation. True False

False

Most millionaires make over $100,000 a year. True or False

False

One of the main reasons we build wealth is so that we can . . . Give to those in need Spend it all on ourselves Impress the people around us Prove that we are successful

Give to those in need

The interest rate on a savings account determines . . . How quickly your money will grow over time How much money you need to have to open the account How much you will pay the bank to manage the account The amount of time your money will be in the account

How quickly your money will grow over time

Explain why making payments on a car is such a poor financial decision.

If you saved the equivalent of a car payment each month for a year or two (instead of spending it on payments and interest), you could have enough money to buy a car with cash for much cheaper

What are three questions to ask yourself before you spend your emergency fund?

Is it unexpected? Is it necessary? Is it urgent?

The best way to build wealth is to start investing early. You should start investing money . . . As soon as you have extra cash Once you have a fully-funded emergency fund Once you're out of college, living debt-free, and have 3-6 months of living expenses saved When the stock market is performing really well

Once you're out of college, living debt-free, and have 3-6 months of living expenses saved

What is the Third Foundation? Pay cash for your car. Pay cash for college. Save for retirement. Create a monthly budget.

Pay Cash For Your Car

Once you have a $500 emergency fund, you should . . . Start putting it toward debt Save it until you have an emergency Invest it in the stock market to grow your money Use the money to pay for health insurance

Save it until you have an emergency

Why should you avoid interest rate deals like zero-percent interest?

They make you think you can get a loan to finance your purchase without paying any extra interest. That really is too good to be true. Why? Because if you don't have enough money to pay the cash up front, odds are you'll struggle to make monthly payments on time. And that's what the businesses are counting on. If you make even one late payment or fail to pay off the balance before the zero-interest period ends, you'll have to pay interest back to the date you made the purchase. That's called accrued interest. It may not seem fair, but the details are in the contract most buyers overlook.

Which of these would count as a legitimate reason to use your emergency fund? You have a fancy event coming up but you already spent all of your Clothing budget category You forgot to budget for your mom's birthday gift The smartphone you've wanted just went on sale Your car battery died

Your car battery died

The amount of interest charged on a debt but not yet collected is called... Accrued interest Interest rate Same-as-cash Growth rate

Accrued Interest

How does Murphy's Law ("anything that can go wrong will go wrong") apply to saving money?

It says that anything that can go wrong will go wrong. And when you don't make saving money a part of your financial plan, you invite Murphy to make a mess of your finances.

What are the main differences between saving and investing?

Saving is putting money aside gradually, typically into a bank account.. While Investing is using some of your money to invest in your future or with the intention to make your money grow by purchasing assets that might increase in value, such as stocks, property or shares in a mutual fund. Saving is short term investing is long term

You'll have less freedom with your money if you . . . Invest in the stock market Are paying for things in your past Put money in a bank account Make less than $35,000

Are paying for things in your past

Why do some accounts, like savings accounts at your local bank, earn interest? Because you deposit money, adding to your principal each month Because the bank pays you to use your money Because of inflation Because those accounts always have great interest rates

Because the bank pays you to use your money

Why do stores rarely advertise the full price of big purchases like smartphones? They are trying to cheat you. They are trying to keep their prices competitive. Hiding the full price allows stores to change their pricing as the market fluctuates. By showing you only the monthly payment, they make the product seem affordable.

By showing you only the monthly payment, they make the product seem affordable.

While saving money isn't easy at first, it will make your life a lot _______ in the future if you make it a habit now. Easier Harder Poorer Longer

Easier

The main reasons for saving your hard-earned money are... Investing, indulging, and influencing Emergencies, large purchases, and wealth building Buying gifts, donating to charities, and building up a college fund for your kids Paying for your dream home, buying your dream car, and going on your dream vacation

Emergencies, large purchases, and wealth building

Which principle says that a certain amount of money today is worth more than the same amount in the future? Inflation Rate of return The time value of money Principal interest

The time value of money

T/F You should budget in this order: giving, savings, spending.

True

It's not IF an emergency will happen, but _______. How Where Why When

When

The top three careers reported among millionaires were _____________, _____________, and ___________. Pro athletes; bankers; CEOs Lawyers; surgeons; accountants Celebrities; developers; writers Accountants; engineers; teachers

Accountants; engineers; teachers

Think back to the story of Jack and Blake. Explain how Jack ended up with more money in his investment account by the time he retired, when Blake invested more money.

Jack came out ahead—more than $1 million ahead! Because He started investing earlier. Jack put in less money but started nine years earlier than Blake. As a result, Jack had more time for the magic of compound growth to do its thing. Compound growth is a millionaire's best friend! It's essentially free money.

Which two habits are the most important for building wealth and becoming a millionaire? Working a high-paying job and relying on a trust fund Investing into the right stocks and using a private CPA Consistently investing money and patience to give it time to grow Always paying off your credit card on time and putting extra money into a retirement account

Consistently investing money and patience to give it time to grow

How does planning and saving for your future help you build wealth?

Planning will allow you to plan out your purchases ahead of time. You can then save the money for the purchase and avoid debt. By saving you are also building wealth and preparing for your future. By consistently investing and giving time for the money to grow you can have successful investments.

What is the goal of an emergency fund? To pay for large purchases To save for your children's college expenses To have cash on hand for unexpected events To pay for health insurance

To have cash on hand for unexpected events

T/F If people saved the equivalent of a car payment each month for a year or two (instead of spending it on payments and interest), they could have enough money to buy a car with cash for much cheaper!

True