Financial Literacy Flashcard

Front

What is the relationship between investment risk and potential returns?

Back

In general, investments that are riskier tend to provide higher returns over time than investments with less risk.

Front

What is a key restriction on withdrawing money from a 401(k)?

Back

Unless you are undergoing significant hardship, you cannot withdraw money from a 401(k) without penalty until you reach a certain age.

Front

What is the benefit of employer matching in a 401(k) plan?

Back

If you contribute up to 5% of your salary, the employer match is equivalent to a 100% return on your contribution.

Front

If both income and prices double, what happens to purchasing power?

Back

You will be able to buy the same amount as today.

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Front

How does diversification affect investment safety?

Back

Usually, investing in a fund which invests in shares of many companies in different industries is safer than investing in shares of a single company.

Front

What is the definition of financial literacy?

Back

Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.

Front

What is a 401(k) plan?

Back

A 401(k) plan is a tax-advantaged retirement savings account offered by many employers that allows employees to save and invest a portion of their paycheck before taxes are taken out.

Front

What is the significance of compound interest in investing?

Back

Compound interest allows your investment to grow at a faster rate because you earn interest on both the initial principal and the accumulated interest from previous periods.

Front

What does it mean to diversify an investment portfolio?

Back

Diversifying an investment portfolio means spreading investments across various financial instruments, industries, and other categories to reduce risk.

Front

What is the impact of inflation on purchasing power?

Back

Inflation decreases purchasing power, meaning that as prices rise, the same amount of money buys fewer goods and services.