Personal Finance – Chapter 2 Review – Flashcards
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What is the first foundation step?
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Save for an emergency fund
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At your age, what should a fully funded emergency fund be?
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$500
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Using the sinking fund approach, how much do you have to save each month to buy a $6,000 car one year from now?
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$500 a month
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Instead of borrowing money for large purchases, you should set money aside in a _________ over time and pay with cash.
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Sinking fund
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What are the 3 reasons to save?
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-Emergency Fund
-Purchases
-Wealth Building
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What does it mean to have a negative savings rate?
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Spending more than you make
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Explain the time value on money principle.
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Suggests that a certain amount of money today has different buying power than the same amount of money in the future.
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What are 3 keys to saving money?
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-Self discipline
-Focus and a goal
-Habit and a priority
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Why should interest earned not be a factor with your emergency fund?
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It's not an investment
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What are 3 reasons that people don't save money?
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-No discipline
-Spend money they don't have
-No focus or budget
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Saving is about ________ and ________.
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Contentment and emotion
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What are some reasons your emergency fund should be kept in a separate saving account away from your spending money?
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It's not an emergency if it's a regular purchase.
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Why is having a fully funded emergency fund so important when it comes to your financial well-being?
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Money is set aside for unexpected events and it provides financial security.
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Is the first thing you should save for retirement?
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No
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Should you wait to invest for retirement until you have college or other education paid for?
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Yes
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What is an interest-bearing account?
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An account that generates interest income on the available balance in the account
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What 2 things do you consider when evaluating the time value of money?
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Interest rate and inflation
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What is the first foundation and explain how and why the dollar amount will change as you get older.
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Emergency Fund
-bigger financial unexpected events and bigger responsibilities
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What are the 3 essential elements of wealth building?
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-Discipline
-Time
-Compound Interest
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List and describe each of the 5 foundations.
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Emergency Fund
-No debt
Get Out and Stay Out of Debt
-Can't build wealth with debt
Pay Cash for Car
-Use sinking fund
Pay Cash for College
-No student loan debt
Build Wealth and Give
-Good feeling
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Money set aside and left alone for a "rainy day."
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Emergency Fund
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The persistent rise in the cost of goods and services.
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Inflation
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When a person intentionally invests money in a place where it can earn more money.
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Wealth Building
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Saving money over time for a large purchase.
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Sinking Fund
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Compares after tax income to the money people spend on a variety of items.
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Savings Rate
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Interest paid on interest previously earned.
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Compound Interest
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Money today has different buying power than the same amount of money in the future.
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Time Value of Money
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Percentage paid to a lender for the use of borrowed money, or the percentage earned on invested principal.
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Interest Rate
