Personal Finance Test

Advice to someone who is going to use prepaid cards for their spending, what would you say? Why would you recommend this?

Always read the fine print behind prepaid cards because fees will hurt you financially if you are not careful.

What is in a budget?

Expenses and income.

Unusual Activity Alert

This alert notifies you if there is any unusual behavior on your bank account and helps you avoid fraud.

What is the benefit of automating your savings account contributions?

Your money will be transferred automatically and guarantees you will be contributing to your savings.

Four methods of depositing money into your checking account?

-At a bank branch -Through an ATM -Direct deposit from your employer -Electronic transfer in from another account.

Four types of direct compensation?

1. Salary 2. Hourly 3. Commission 4. Bonuses

How much of your income should you devote to savings?

20% of your income, split across multiple categories.

Which strategy will help you save the most money?

As soon as you receive your paycheck, put a fixed amount or percentage of your money directly into your savings.

Safe places to save money?

Bank savings account Bank checking account Certificate of Deposit

What is the purpose of a bank statement?

Bank statements provide you with a list of all your transactions from a certain time period in your account, including withdrawals, deposits, and fee charges.

What are the potential risks of having all three of these buckets (50-20-30), belong in the same category?

By lumping all of the three types of savings in one category, an individual risks under-allocating for any one of the three areas.

What does it mean to "pay yourself first"?

Deposit money into your savings account before spending on anything else.

Explain why it's so important to take advantage of the FDIC insurance offered by (almost all) banks?

FDIC Insurance is a government backed policy that protects your deposited money in the case of a bank failure. If the bank goes out of business, you would receive all of your money (up to $250,000).

Your Social Security number is listed on each paystub?

False

Explain what the dollars from each withholdings payment are used for?

Federal withholding dollars are taxes on your income. These taxes help pay for public education, transportation, and defense. Social Security dollars are used for retirement and disability payments. Medicare funds are used for health coverage for people over 65. They also help support Medicaid, health coverage for low income family's and individuals.

Gross and net income differ?

Gross Income/Pay: Total earnings before any deductions are taken out, money you make before taxes. Net Income/Pay; Total earnings after payroll taxes and other deductions; also called take-home pay

State income taxes are withheld?

In most states.

What should be included in your budget?

Income; wages/salary, allowances, any financial source of income you receive Expenses; rent, credit card debt, car payments, and other financial items that you send out/pay

How do you fix a deficit budget?

Increase income and decrease expenses.

Emergency funds help with unexpected events like?

Job Loss Sudden illness or disability Home or car repairs

What are some advantages of having a debit card?

Less fees More established system More protection

How to tell if someone is truly wealthy?

To know if someone is wealthy you need to know their assets and their amount of debt.

What goes into making a budget?

Track income and expenses for a particular period of time, usually 30 days.

Five methods of withdrawing money from your checking account?

-At a bank branch -Through an ATM -Use debit card to make a purchase in-person/online -Write a check -Electronic transfer out to another account.

Why is a checking is useful in the realms of saving, budgeting, and/or other financial tasks?

-Direct deposit allows people to automatically send a portion of their paycheck to a saving account . -Create multiple checking accounts in order to divide money to help create a successful and balanced budget. -Pay your bills for free online, which means you shouldn't have late payments shop online with your debit card, and maybe get better prices

What is an overdraft fee?

-Fee for withdrawing more money than you have in the account. -Fee for writing a check without sufficient funds. -Fee for going below your minimum balance requirement.

How does inflation affect your savings?

-Inflation is the rate at which prices for goods/services are increasing. -The purchasing power of your money decreases over time. -Seek out investments; where the rate of return is as high as the rate of inflation, so your money grows. -Savings accounts are good for the short term.

How are prepaid cards similar to debit cards?

-Is limited by the amount of money that you currently have. -No credit is required. -Can be used to shop online or in stores that take card payments. -Is safer than carrying large amounts of cash.

Prepaid cards different from debit cards?

-Is not linked to a checking account. -Is not linked to a bank. -Typically charges a fee to put money ONTO the card. -Sometimes has fees for using the money on the card or viewing a statement.

What is the difference in savings and investing?

-Saving; Easier than investing, amount of your income you put away for emergencies, safety of your money is the number one goal, designed for short term goals -Investing; goal is to see your money grow, better for long term goals, safety of your money is not guaranteed, returns usually are more than inflation.

Why is it a good idea to set up mobile alerts for your checking account?

-Will warn you when your balance is low so you don't overdraw and/or you can modify your spending. -Might make you notice suspicious activity/fraud earlier than you'd otherwise notice. -Tells you if you've accrued a fee so you're aware and can adjust behavior or dispute the fee.

Three disadvantages of being locked out of, or choosing not to belong to, the traditional banking system?

-You are charged fees when utilizing the services of a check casher, -Fees are charged when using a prepaid card. -Gas must be spent to cash checks and pay bills.

Two ways that direct deposit provides convenience?

-You do not have to take any action to cash the check. -You don't have to worry about losing the paper check.

Out of all contestants surveyed, how much are living paycheck to paycheck?

50% of Americans surveyed.

50-20-30

50% of monthly after-tax income should be used for housing/fixed/essential/needs expenses. 20% of monthly after-tax income should be used for savings (emergency fund, retirement savings, investing, college savings plans). 30% of monthly after-tax income should be used for flexible/non- essential/wants expenses. If monthly expenses need to be cut, they should be cut from the 30% for flexible expenses.

How much does Ash Cash suggest for an emergency fund?

6-8 months worth.

What is a budget?

A financial plan that will help you make smart spending choices today while preparing for tomorrow.

An example of a voluntary deduction is?

A parking fee

Type of indirect compensation?

Benefits.

Your paycheck paystub lists your pay and deductions for?

Both current pay period and year-to-date period

Tax information stated on your paycheck includes?

Both your your marital status and the number of withholding allowances.

Explain how compound interest is different from simple interest?

Compound interest means interest is paid not only on the principal or money initially saved (as is the case with simple interest), but is also paid on interest already earned. Since a person earns interest on interest, the effective rate of return for an account that pays compound interest is greater than an account paying simple interest. This means for the same up-front investment and length of time, an account that pays compounded interest will grow faster than an account that pays simple interests.

Main difference between a debit card and a credit card?

Debit cards are cards that draw money from a checking account while credit cards are cards that make purchases with borrowed money, which you must then pay back after a certain amount of time has elapsed, probably with interest,

What other methods can be used to pay employees?

Employees can also be paid by direct deposit or payroll card.

what is a 401(k)

Employer sponsored retirement plan where employer matches some or all of your contributions.

Which of the following are items you might see on your paycheck stub?

Gross pay, net pay, social security

What are three examples of investing?

Individual Retirement Accounts (IRA's). Stocks. Mutual Funds.

How will a budget help you?

It will help you achieve your goals and prepare you for unexpected set backs.

An example of a mandatory withholding is?

Medicare

Why shouldn't you keep your emergency fund money in your checking account?

Money in a checking account could be used for day-to-day expenses, which is not the purpose of an emergency fund. Avoid the temptation to use money in an emergency fund for planned and expected expenses.

Which type of income - gross or net - would be most useful to know when creating a monthly budget?

Net income would be most useful in creating a monthly budget because it shows the actual amount that has been brought home after taxes and deductions.

Whether you receive your pay by check, direct deposit or payroll card, it is listed on the paystub as?

Net pay distribution

What are some advantages to having a prepaid card?

No bank hassle Often tailored for certain lifestyles

What are some examples of fees that can be seen on a bank statement?

Overdraft fees ATM withdrawal fees (from a different ATM than the bank or credit union that you have an account with)

Savings/Checking Accounts

Pro; FDIC Insured Con; Low interest rates

Certificates of Deposit

Pro; Higher interest, FDIC Insured Con; Penalties for early withdrawal

Individual Savings Bonds

Pro; Interest exempt from state/local taxes Con; can not be redeemed for 1 year

Money Market Funds

Pro; Interest rate fluctuates Con; Limited withdrawals, no FDIC

Short Term Government Bongs

Pro; backed by US Govt (safer) Con; values fluctuate (could lose)

Money Market Deposit Accounts

Pro; higher interest, FDIC Insured Con; Limited withdrawals

Overdraft protection?

Protection for withdrawing more money then you might have.

'Keeping up with the Joneses'?

Refers to the tendency to want to spend more because we see others around us spending more and enjoying goods and services that we think we would enjoy as well. Social Media and our friends tend to influence some of our financial decisions (vacations, eating out, large financial purchases)

Might find on your bank statement?

Running balance, deposits, withdraws.

Whats difference between wages and salary?

Salary; the fixed amount of compensation which is paid for the performance of an employee. Wage; the variable amount of compensation which is paid on the basis of hours spent in finishing a certain amount of work.

Two ways you might benefit if you started saving today?

Save for emergencies, expensive items you need/want to purchase, your education, and retirement.

Two ways that saving and investing are different?

Saving is done for the short-term and usually doesn't earn substantial interest. - Investing is done in the long-term, is riskier, but can grow faster and may outpace inflation.

Why does it make sense to start savings right now?

Saving right now means your money will be able to grow for a longer period of time.

How are wealth and savings related?

Savings and wealth are related as the more savings someone has, the more that balances against their debt as an asset. Even if the person has no debt, their savings is still counted as an asset.

A solid budget will provide what three things?

Security, Flexibility, Efficiency

Low Balance Alert

Sends you an alert (usually a text or email) when your bank balance drops below a certain amount that you set. This can help you avoid overdraft fees.

A good budget can help you?

Stay financially grounded and save toward bigger financial goals such as buying a house or taking a vacation.

Gross pay refers to?

The amount you receive before your employer takes out withholdings and deductions

What is inflation?

The increase in the cost of living over time.

Mobile Deposit Alert

The mobile deposit alert gives you confirmation that a check has been successfully deposited. It's like having a receipt for your transaction. This alert will also notify you when a check you deposited has cleared, and the funds are available in your account.

What is misleading about the term "overdraft protection"?

The term "overdraft protection" implies something beneficial. You think that overdraft protection will keep your money safe when in fact, you are actually opting-in to another costly bank fee.

How to tell if budget works -

To ensure a budget works you need to subtract your EXPENSES from your INCOME. If your INCOME is greater than your EXPENSES, you are in a good place financially. If you spend more than you earn you will need to cut back on your EXPENSES and balance your budget. You might also find a way to increase your INCOME. Budgets are unique to each individual and can change from month to month.

What is opportunity cost?

Trade offs, what you are willing to give up in return with the potential to get something more later.

Funds for 401(k) retirement savings plans are taken from pre- tax wages?

True.

How much do financial specialists suggest for an emergency fund?

Try to have a minimum goal of 3-6 months of expenses in an emergency fund.

Provide two strategies for keeping your account safe if you use mobile banking, specifically?

Use strong passwords. Do not keep sensitive information on your phone.

Explain how an employee's take-home pay could be hundreds, or even thousands, less than their gross pay?

When an employee gets a paycheck, a sizable portion of it will have been deducted and paid to various levels of government, insurance, and retirement.

Examples of professions that would be paid a salary?

Workers that may be on salary are engineers, doctors, teachers, and managers.

What about professions who will be paid a wage?

Workers who may be paid a wage are seasonal workers, retail employees, food service employees, and maintenance workers.

Your withholdings for taxes are determined by?

Your W-4

Direct Deposit

Your paycheck funds are deposited electronically straight into your account. To use it, your employer will need your routing number and account number.