Personal Finance (Chapter 4)

If you invest $1,000 at 12% interest, how much money will be in the account after two years, compounded annually?

$1,254.40

For most people, a fully-funded emergency fund will be about

$10,000 - $15,000

If you invested $250 at 16% interest, how much will you have after 18 years? (hint: how many years will it take to double? This problem will take more than one step.)

$4000

Using the sinking fund approach, how much do you have to save to buy a $5,000 car next year?

$416.66 a month into savings

What would Dave say? Use what you know about Dave and the lessons you've watched to respond to the following case study. Hannah is about to get a raise at work that will add $200 to her monthly paycheck. She wants to buy a new car to replace the four-year-old car she is driving. She has $1,000 in her emergency fund and a credit card balance of $650. If she trades in her car and buys a new one, her current payment will only increase by $75. She is leaning toward doing this because she would still have $125 extra per month. What would Dave say?

- Hannah needs to pay off her credit card before she does anything. - Hannah needs to pay off her current car and keep driving it until she saves enough money to pay cash for a used car. - Hannah should be aware of the fact that new cars lose 70% of their value in the first four years.

Which statement is true?

- People spend more money when they pay with cash - When you pay with cash, you can almost always negotiate a better deal. - When you pay with cash, it is hard to negotiate a deal because you didn't use their credit. - Using a credit card is safer than carrying cash around When you pay with cash, you can almost always negotiate a better deal.

Emily got a new job that guarantees her a 6% raise every year. If she started out making $25,000, how long will it be before she doubles her current salary?

12 years

Tanner has invested $500 for college. What rate of return must Tanner earn for his investment to double in six years?

12%

What annual interest rate will cause your money to double in four years?

18%

Because Jerrod missed a payment, the credit card company automatically raised the interest rate to 24%. How many years would it be until his balance doubles, assuming he continues to make no payments?

3 years

Jerrod owes $2000 on a credit card that charges him an annual percentage rate of 18%. If Jerrod stopped making payments, how long would it be before the balance on his credit card reached $4000?

4 years

Ron and Amie invested $5000 in an educational savings account for their daughter when she was born. They were unable to ever add anything else to the account. What was the rate of return if they had $10,000 in the account after 12 years?

6%

How many baby steps are there?

7 steps

Rule of 72

72 / Interest rate = # of years to double investment 72 / # of years to double investment = interest rate

Compound interest formula

A = P ( 1 + r/n) ^nt A = final amount P = initial principle balance r = interest rate n = number of times interest applied per time period t = number of time periods elapsed

Sinking Fund

A fund containing money set aside or saved to pay off a debt or bond

Money is neither good nor bad

Amoral

In the Ben & Arthur story, why did Ben's savings outperform Arthur's even though Arthur deposited more money than Ben?

Ben starting investing earlier Both Ben and Arthur are getting the same interest rate Arthur just didn't have enough time to catch up with his brother even though he invested a considerable amount more than him.

Dave says that wealth is a marathon; it's not a sprint. Select the best explanation of what he means.

Building wealth is a process that takes considerable amount of time and effort.

Which investments are safe for building a savings portfolio?

CD Savings Account Money Market Account

Systematic savings and investing is the strategy of regularly setting aside _____ that can be used to achieve a _____.

Cash Goal

Interest on Interest

Compound interest

The Ben and Arthur example from Dave Ramsey illustrate which principle of saving?

Compound interest

According to Dave Ramsey, __________ is the key ingredient for wealth building.

Discipline

Long-term needs can be accomplished through both savings and investing. What long-term goals can be accomplished through saving or investing over a period of time?

Education Buying a house Financial Security Retirement Plan

You should save for...

Emergency fund Purchases Wealth building

Dave's 80/20 rule says that when it comes to money, 80% is head knowledge and 20% is behavior

False

Murphy's Law is more likely to strike if you are prepared for the unexpected events that occur throughout life.

False

The correct order for using your money is: pay bills, save, then give

False

The first thing you should save for is your retirement fund.

False

You should invest 10% of your household income into Roth IRAs and pre-tax retirement plans.

False

Your first "Baby Step" is to pay off all of your debt.

False

Your income level greatly affects your savings habits.

False

Pay yourself _____

First

The difference between saving and investing is that savings is accumulating money for ______ needs and investing is the attempt to make money ______ .

Future Grow

The following is true for PAC's

Helps build discipline when saving Stands for Pre-Authorized Checking

What is the next step after you have a fully funded emergency fund?

Invest 15% of your income into Roth IRA's and pre tax retirement plans

Emergency fund goes here

Money Market

If it can go wrong, it will; unexpected events

Murphy's Law

The typical American has a ____ savings rate.

Negative

Saving must become a ___.

Priority

What are the three reasons Dave Ramsey says you should save?

Purchases Emergency Fund Wealth Building

Unit 4

Saving

Baby steps 1 and 3 have to deal with

Saving and emergency fund

A sinking fund approach means

Saving and paying cash

Which of the following is true about the concept of saving?

Saving must become a priority

Saving money for a purchase and letting the interest work for you rather than against you

Sinking fund

What approach does Dave Ramsey recommend for saving for purchases?

Sinking fund approach

Which statement is most true about a one-time investment for 40 years?

The annual interest rate does matter when making a one time investment.

According to Dave Ramsey, how much should you save to fully fund your emergency fund (Baby Step 3)

Three to six months worth of expenses

Interest is money paid to a saver by a financial institution

True

Pre-authorized checking helps to build discipline in saving.

True

The saving habits of Ben and Arthur help to illustrate the principle of compound interest

True

What are the different reasons for using a savings account?

Vacation Short term financial goals Liquidity Emergency