Review Saving & Systems of Equations

1. Which of the following statements accurately describes the relationship between interest rates for savings accounts and inflation?

• Savings accounts earn a negative real return because interest rates are higher than inflation

• Savings accounts earn a negative real return because interest rates are lower than inflation

• Savings accounts earn a positive real return because interest rates are higher than inflation

• Savings accounts earn a positive real return because interest rates are lower than inflation

Answer explanation

Savings accounts earn a negative real return because the interest rates are lower than inflation. This means that the purchasing power of the money in savings decreases over time.

2. What happens to the money that you deposit in a savings account at a bank?

• The bank lends out the money at a higher interest rate than what they are paying you

• The bank lends out the money at a lower interest rate than what they are paying you

• The money sits at the bank until you are ready to withdraw or use it

• The money is sent to the Federal Reserve, where it sits until you’re ready to withdraw or use it

Answer explanation

When you deposit money in a savings account, the bank uses those funds to lend to other customers at a higher interest rate than what they pay you, allowing them to profit from the difference.

3. What is a disadvantage of saving for your retirement in a traditional savings account?

• Savings accounts are not very safe, and you could lose all your money

• Savings accounts earn very little interest, and your growth may not keep pace with inflation

• Savings accounts are very costly to maintain, and the fees will reduce your savings in the long-term

• Savings accounts are traditionally used for bill pay, and you will likely change accounts before your retirement bills are due

Answer explanation

The correct choice highlights that traditional savings accounts earn very little interest, which means your savings may not grow enough to outpace inflation, ultimately reducing your purchasing power over time.

4. Which of the following is true about the comparison between credit unions and banks?

• Credit unions are owned by shareholders and banks are owned by customers

• Credit unions are structured to maximize profits and banks are non-profit entities serving their members

• Credit unions tend to be large organizations and banks are often smaller/more local organizations

• Credit unions compete mostly on services relationships and banks try to offer a one-stop-shop for products

Answer explanation

The correct choice highlights that credit unions focus on building service relationships with members, while banks aim to provide a comprehensive range of products, making them more of a one-stop-shop.

5. What does it mean if a person lives paycheck-to-paycheck?

• They use their entire paycheck to cover monthly expenses and have very little money saved

• Their income varies month-to-month and they save a large portion of their biggest paychecks

• They use direct deposit, so their paycheck is automatically split between their checking and savings accounts

• They have high-paying jobs, so don’t have to worry about how much is in each paycheck

Answer explanation

Living paycheck-to-paycheck means a person spends their entire paycheck on monthly expenses, leaving them with little to no savings. This highlights financial instability and reliance on each paycheck for basic needs.

6. Using the 50/30/20 budgeting plan can help you save money because…

• It limits your spending to $50 per month

• It recommends that 20% of your budget goes to debt repayment or savings

• It recommends that 50% of your budget goes to debt repayment or savings

• For every $50 you save, a bank will give you $30 or a credit union will give you $20

Answer explanation

The 50/30/20 budgeting plan suggests allocating 20% of your budget to debt repayment or savings, which helps in building financial security and saving money effectively.

7. Tre just got a part-time job, and his sister recommends he “pay himself first.” What is she talking about?

• Tre should deposit his check as quickly as possible before taxes can be taken out

• Tre should set aside part of every paycheck for savings before he does any spending

• Tre should spend the money he needs before he lends any to friends or gives to charity

• Tre should start his own business rather than being someone else’s employee

Answer explanation

When Tre's sister says to "pay himself first," she means he should set aside a portion of his paycheck for savings before spending on anything else. This helps build financial security.

8. Misty is going to use the 50/30/20 rule in order to save $3000 for her family’s next big vacation. Her monthly income is $2500. How many months will it take her to reach her savings goal?

• 2.4 months

• 4 months

• 5 months

• 6 months

Answer explanation

Misty saves 20% of her $2500 income, which is $500 per month. To save $3000, she needs 3000/500 = 6 months. Thus, it will take her 6 months to reach her savings goal.

9. How much do personal finance experts recommend having saved in an emergency fund?

• 1-3 month of expenses

• 3-6 months of expenses

• 6-9 months of your salary

• 1-2 years of expenses

Answer explanation

Personal finance experts recommend having 3-6 months of expenses saved in an emergency fund. This amount provides a financial cushion to cover unexpected expenses or loss of income.

10. Over the last twenty years, how have wages changed compared to the costs of housing, healthcare, and education?

• Wages have increased at a slower rate than those costs

• Wages have increased at the same rate as those costs

• Wages have increased at a faster rate than those costs

• Wages have decreased as those costs have increased

Answer explanation

Over the last twenty years, wages have not kept pace with the rising costs of housing, healthcare, and education, leading to the conclusion that wages have increased at a slower rate than those costs.