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Personal Finance-Ch2
Chapter 2 Savings
| Question | Answer |
|---|---|
| What is the first step of the First Foundations? | Save a $500 emergency fund ($1,000 if you are an adult) |
| What is the second step of the First Foundations? | Pay off debt |
| What is the third step of the First Foundations? | Save 3 -5 months of expenses |
| What does it mean to have a negative savings rate? | Spending more money than you make and acquiring debt |
| This principle says that an amount of money today has different buying power than the same amount of money in the future. This is due to interest and inflation changing the "value" of the money. | Time value of money |
| Using a sinking fund approach, how much money do you have to save each month to buy a $4,800 car one year from now? | $400 |
| At your age, a fully funded emergency fund should be | $500 |
| What are top reasons people do not save money? | Lack of focus, lack of discipline, not making saving a habit/priority |
| Name 3 basic reasons for saving money | To have an emergency fund, for large purchases, to build wealth |
| Why is having a fully funded emergency fund so important when it comes to your financial well-being? | The purpose of an emergency fund is to have money set aside for unexpected financial emergencies and to provide a sense of financial security. |
| Why should interest earned not be a factor with your emergency fund? | The emergency fund is not intended to grow wealth. |
| What two things do you consider when evaluating the time value of money? | Inflation and interest rate (or rate of return) |
| What are the essentials of wealth building? | Discipline, time, and compound interest |
| Why do you need an emergency fund at your age? | Emergencies can happen at any age |
| Explain why establishing an emergency fund should be your first savings priority before large purchases and wealth building | Having an emergency fund allows you to have money available for any surprise expenses and can help you avoid debt. |
| What is the First Foundation? Explain how and why the dollar amount will change as you get older. | Save $500 for emergency fund. As you get older, your responsibilities become greater and more expensive. |
| Money set aside and left alone for a "rainy day." | Emergency fund |
| Saving money over time for a large purchase | Sinking fund |
| Percentage paid to a lender for the use of borrowed money, or the percentage earned on invested principal | interest rate |
| Money today has different buying power than the same amount of money in the future | time value of money |
| Interest paid on interest previously earned | compound interest |
| Compares after-tax income to the money people spend on a variety of items | savings rate |
| When a person intentionally invests money in a place where it can earn more money | wealth building |
| The persistent rise in the cost of goods and services | inflation |
| What is a negative savings rate? | spending more money than you make |
| What does FDIC insured mean? | The government insures the bank and you are guaranteed up to $250,000 of your money even if the bank fails |
| What does having an emergency fund help prevent? | crisis living |
Created by:
gcowing
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