Personal Finance Unit 4 Review - Budgeting & Saving

How much should Samantha be saving each month (minimum)?

• $300
• $28.00
• $280.00
• She can't afford to save.

Answer explanation

Financial planners suggest that you save at least 10 PERCENT of your income.

10% of Samantha's monthly income is $280.

What is Samantha's Wealth?

• $2800
• $3700
• $16,200
• $2530

Answer explanation

Samantha's wealth is the same as her Possessions (which totals $3700).

What is Samantha's net worth?

• $3700
• $16,200
• -$12,500
• $270

Answer explanation

Net Worth is the value of your Possessions minus your Total Debt.

Samantha's Possessions are $3,700 and her debt is $16,200.

$3,700 - $16,200 = $12,500

What kind of budget balance does Samantha have?

• A surplus
• A deficit
• A balanced budget
• Not enough information provided to answer

Answer explanation

To calculate a budget balance, you subtract monthly expenditures from monthly income.

In this case $2800 - $2530 = $270

She earns more than she spends, so Samantha has a budget SURPLUS.

When expenses are more than income in a budget, it has a budget DEFICIT.

Why are mutual funds a popular form of saving for many people?

• They offer a guaranteed return on your investment.
• They are the safest of all the investments.
• They ensure that your money is invested in a variety of stocks and bonds.
• They are high risk, but carry the potential of a high return.

Answer explanation

Experts say your portfolio of investments should be DIVERSIFIED, meaning that you are invested in a variety of stocks and bonds.

Mutual funds are invested in many different stocks and bonds, so diversification is built in.

Which of the following is the best description of a municipal bond?

• This investment is safe, because you are lending money to the U.S. government.
• This investment is FDIC insured for up to $150,000.
• This investment represents ownership in a corporation.
• This tax-exempt investment is issued by state and local governments to raise funds.

Answer explanation

Many cities and local governments fund improvements to schools, road, etc. through municipal bonds.

The are considered safe, and. their earnings are tax deductible.

Which of the following lists assets from MOST risky to LEAST risky?

• Certificates of Deposit, Treasury Bonds, Junk Bonds, Traditional IRA's
• Treasury Bonds, Municipal Bonds, Roth IRA's, Mutual Funds
• Junk Bonds, Mutual Funds, Certificates of Deposit, Treasury Bonds
• Municipal Bonds, Junk Bonds, Treasury Bonds, Certificates of Deposit

Answer explanation

Remember that Junk Bonds are the MOST risky asset and Treasury bonds are the LEAST risky.

What is the main difference between a traditional and a Roth IRA?

• With a Roth IRA, funds are deposited tax-free, but you must pay income tax when you withdraw the funds in the future. With a traditional IRA taxes are paid before funds are deposited, and are accessed tax-free when you're older.
• With a traditional IRA, funds are deposited tax-free, but you must pay income tax when you withdraw the funds in the future. With a Roth, taxes are paid before funds are deposited, and are accessed tax-free when you're older.
• Roth IRA's are only appropriate for younger investors, and traditional IRA's are better for older people.
• Traditional IRA's have significant tax benefits, but Roth IRA's do not.

Answer explanation

Both types of IRA's have tax benefits, and both are meant for long-term saving. Both have a similar rate of return.

The big difference is WHEN the taxes are paid.

With a traditional IRA - you pay the taxes when you are older.

With a Roth IRA - you pay the taxes when you are younger (before you put the money in the IRA).

When choosing an investment, what is the relationship between risk and return?

• High risk investments have a low return and low risk investments will tend to provide a higher rate of return.
• Safer investments are riskier because you loose the opportunity to make more money.
• High risk investments come with the potential for a high return and low risk investments will yield a lower return.
• High return investments are considered low risk.

Who tracks your credit information and determines your credit score?

• Equifax, Experian, and Transunion
• Your bank
• The Consumer Protection Bureau
• Creditors and Lenders