UNIT 2 STUDY GUIDE - Financial Planning & Responsibility

What is the difference between gross income and net pay?

• Gross income is the total amount earned before deductions; net pay is the amount left after all deductions.

• Gross income is the amount after taxes; net pay is before deductions.

• Gross income is only bonuses; net pay is only salary.

• Gross income and net pay are the same thing.

Why is net pay the number that matters when budgeting?

• Net pay is the amount that actually arrives in your bank account after deductions, making it the accurate figure for budgeting.

• Net pay is the total amount you earn before any deductions are made, so it is the highest possible figure.

• Net pay includes only your bonuses and not your regular salary, making it more important for budgeting.

• Net pay is the amount you wish to earn, regardless of actual deductions or taxes.

What types of deductions reduce gross income?

• Above-the-line deductions such as student loan interest, HSA/IRA contributions, and educator expenses reduce gross income.

• Only itemized deductions such as mortgage interest and charitable contributions reduce gross income.

• Tax credits such as the Child Tax Credit and Earned Income Tax Credit reduce gross income.

• Standard deduction is the only deduction that reduces gross income.

What is a surplus? What is a deficit?

• A surplus occurs when income exceeds expenses; a deficit occurs when expenses exceed income.

• A surplus occurs when expenses exceed income; a deficit occurs when income exceeds expenses.

• A surplus and a deficit both occur when income equals expenses.

• A surplus and a deficit are unrelated to income and expenses.

How can “paying yourself first” help with budgeting?

• The pay yourself first method focuses on prioritizing savings and investments. Steps: Allocate a portion of income to savings first (e.g., 20-30%). Use the remaining money for expenses. Encourages long-term financial growth. This builds strong savings habits and helps with retirement and emergency fund goals.

• It encourages spending on entertainment before saving, which can lead to less financial stress.

• It suggests paying all bills and discretionary expenses first, then saving whatever is left over.

• It focuses on using credit cards for all purchases to maximize rewards, rather than prioritizing savings.

Why should retirement savings start early?

• This sets aside money over time that only increases as that time goes on.

• It is required by law to start saving early.

• Early savings guarantee a higher salary.

• Retirement savings cannot be started later in life.

Housing is usually the largest expense because:

• It typically involves high monthly payments or rent.

• It is always optional.

• It is less important than entertainment.

• It is a one-time cost.

Additional costs that come with renting or owning a car include:

• Insurance, maintenance, fuel, and registration fees

• Only the rental or purchase price

• Free roadside assistance for all cars

• No additional costs beyond the initial payment

How can lifestyle choices like dining out or “fun spending” affect your budget?

• In moderation, this is okay but if this becomes a common thing this takes a lot of money out of your budget.

• They have no impact on your budget at all.

• They always save you money in the long run.

• They guarantee you will never run out of money.

Earning more money automatically means financial stability.

• No, because financial stability depends on how money is managed, not just how much is earned.

• Yes, earning more money always guarantees financial stability.

• No, financial stability is only about having a high income, not management.

• Yes, anyone who earns more money is always financially stable.