Personal Finance Exam #1
If you desire your savings to double in 6 years, what rate of return would you need to earn?
12%
When preparing her monthly budget, Maria Kent has projected income of $3,700. Each month she pays $1,200 in rent, $42 for life insurance, and $240 for her auto loan. What percentage of her budget goes for these fixed expenses?
40%
RULE OF 72: If you earn 15 percent on your investments, how long will it take for your money to double?
72/15 = 4.8 years
RULE OF 72: At an annual interest rate of 4 percent, how long will it take for your savings to double?
72/4 = 18 years
RULE OF 72: If the value of land in an area is increasing 6 percent a year, how long will it take for property values to double?
72/6 = 12 years
Reductions from gross income for such items as individual retirement account contributions and alimony payments will result in:
Adjusted Gross Income
George Washburn had earnings from his salary of $52,000, interest on savings of $1,200, a contribution to a traditional individual retirement account of $750, and dividends from mutual funds of $340. George's adjusted gross income would be:
Adjusted Gross Income = Gross Income + Savings + Dividends - Retirement Account Contribution = $52,790
What is the annual opportunity cost of a checking account that requires a $300 minimum balance to avoid service charges? Assume an interest rate of 3 percent.
Annual opportunity cost= Minimum balance × Interest rate = $9
Which of the following financial documents would most likely be stored in a safe-deposit box?
Birth certificates
Calculate the debt ratio for an individual who has $45,000 in assets and $17,500 in liabilities.
Debt Ratio = liabilities/assets = 0.39
Taxable income =
Gross salary + Interest earning + dividend income - adjustments to income - standard deductions
Which one of the following would reduce gross income to obtain adjusted gross income?
IRA contributions
Sophia Martin has decided to retire and use the time she has earned to travel around the world. She has decided to start her trip around the world in Europe by train and bus and will use her savings to pay for her trip. Which step in the financial planning process does this scenario demonstrate?
Implementing her financial plan
Catherine Jones has determined the following information about her own financial situation. Her checking account is worth $500 and her savings account is worth $900. She owns her own home that has a market value of $98,000. She has furniture and appliances worth $12,000 and a home computer and laptop worth $3,300. She has a car worth $12,500. She has recently purchased an annuity worth $5,500 and she has a retirement account worth $38,550. What is the value of her liquid assets?
Liquid assets in this case would include checking and savings accounts = $500 + $900 = $1,400
Monthly fee, $3.75; processing fee, $0.25 per check; checks written, an average of 22 a month.
Net annual cost= (Monthly fee × 12) + (Fee per check × Number of checks per month × 12) = $111
Interest earnings of 6 percent with a $500 minimum balance; average monthly balance, $600; monthly service charge of $15 for falling below the minimum balance, which occurs three times a year (no interest earned in these months).
Net annual cost= Service charges − Interest earnings = $18
The financial planning process concludes with efforts to:
Review and revise your financial plan
If $3,970 was withheld during the year and taxes owed were $4,260, would the person owe an additional amount or receive a refund? What is the amount?
Tax due = tax liabilities - taxes paid = $290
What would be the yearly earnings for a person with $8,000 in savings at an annual interest rate of 4.5 percent?
Yearly Savings = savings amount x interest rate = $300
A certificate of deposit usually has:
a penalty for early withdrawal of funds.
The earnings you receive as a saver or an investor reflect:
a risk premium based on length of the savings period
The main goal of personal financial planning is managing your money to:
achieve personal economic satisfaction
Developing financial goals does not involve:
allowing others to decide which goals you should pursue
Liquid assets refer to:
cash and items of value that can be easily converted to cash
A personal check with guaranteed payment is called a:
certified check
A tax ____________ is an amount subtracted directly from the amount of taxes owed.
credit
David Wynn gets an auto loan from his credit union for $11,500. David will make monthly payments over the next five years to repay the loan. What type of financial service is David using?
credit service
Current Checking Account Balance =
current checkbook balance + interest earned - service fees OR current bank statement balance + deposits in transit - outstanding checks
The first step of the financial planning process is to:
determine your current financial situation
Sophia Martin wants to travel after she retires as well as pay off the balance of the loan she has on the home she owns. Which step in the financial planning process does this situation demonstrate?
developing her financial goals
Money received by an individual for personal effort is classified as ______________ income.
earned
Thomas Franklin claimed an additional $3,000 in deductions he knowingly knew he did not qualify for so he could reduce his tax bill. This is referred to as tax:
evasion
A regular savings account usually offers a higher rate of return to savers than a certificate of deposit.
false
Elaine's Embroidery Emporium which is run out of Elaine's home is visited by an IRS agent who wants to verify the office expenses Elaine claims are valid. What type of IRS audit is this?
field audit
Joan Martin expects interest rates to decline over the next few months. To achieve her long-term financial goals, she will trade off liquidity for a higher return by using a:
five-year-certificate of deposit
Payments that do not vary from month to month are ____________ expenses.
fixed
The interest is deductible on your tax return for which of the following?
home equity loan
The time value of money refers to:
increases in an amount of money as a result of interest earned
Patrick Jones is interested in purchasing a 65" LED TV for his living room. Patrick knows that right now the TV will cost approximately $500. He is not sure he can afford this TV right now but is worried that if he waits, the cost of the TV will rise to $800. Which type of risk is Patrick worried about?
inflation risk
The following are examples of intangible-purchase goals:
losing weight, obtaining a college degree, getting more sleep, & going on a cruise vacation
A trust has the purpose of:
managing the assets of a person
Discretionary income is:
money left over after paying for housing, food, ad other necessities
Which of the following would be considered a long-term liability?
mortgage
A decrease in net worth could be the result of:
outflows exceed inflows for a month
Earnings from a limited partnership would be an example of ____________ income.
passive
To determine a person's solvency, which financial document should be consulted?
personal balance sheet
Tim Bridges owns a fishing boat. His state imposes an annual 3.25 percent tax on the current value of this boat. What type of tax is this most likely to be?
personal property tax
Changes in personal, social, and economic factors make it necessary to:
review and revise your financial plan
When an individual makes a purchase without considering the financial consequences of that purchase, he/she ignores the ______________ aspect of financial planning.
spending
Which one of the following items is a set amount of income on which no taxes are paid?
standard deduction
A persons net worth is computed by:
subtracting total liabilities from total assets
Most people pay the following taxes:
taxes on wealth, earnings, purchases, and properties
Opportunity costs refer to:
trade-offs associated with money management decisions
An asset management account provides a complete financial services program for a single fee.
true
Flexible payments that change from month to month are referred to as:
variable expenses
Earned income is money received from:
wages
