Money in Review Chapter 2

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Questions and Answers

What are the five foundations?

Types of investment accounts

Ways to budget effectively

The five steps to financial success (correct)

The basic principles of accounting

What is an interest rate?

A rate which is either charged on debt or paid on investment accounts for the use of money.

What is a sinking fund?

Saving money over time for a large purchase.

What is compound interest?

Interest paid on interest previously earned. Signup and view all the answers

What is an emergency fund?

A savings account that is set aside to be used only for emergency expenses. Signup and view all the answers

What is inflation?

The persistent increase in the cost of goods and services leading to a decline in purchasing power. Signup and view all the answers

What is an interest-bearing account?

An account that generates interest income on the available balance. Signup and view all the answers

When it comes to saving money, the amount you save is determined by how much you have left at the end of the month once all of your spending is done.

False Signup and view all the answers

Your income level greatly affects your saving habits.

False Signup and view all the answers

At your age, a fully funded emergency fund should be:

$500 Signup and view all the answers

Which of the following is not one of the three basic reasons for saving money?

Having money available to lend to friends Signup and view all the answers

Instead of borrowing money for large purchases, you should set money aside in a ______ over time and pay with cash.

sinking fund Signup and view all the answers

What is the first foundation?

To set aside $500 in an emergency fund. Signup and view all the answers

How did Ben come out ahead in the 'Ben and Arthur' story?

Ben started his savings at a younger age than Arthur, allowing him to accumulate more wealth over time. Signup and view all the answers

What two things do you consider when evaluating the time value of money?

Interest rate and inflation rates. Signup and view all the answers

Why do you need an emergency fund at your age?

You need an emergency fund to cover unexpected expenses like car repairs. Signup and view all the answers

Study Notes

Financial Foundations

The Five Foundations represent essential steps to achieve financial success.
Establishing an emergency fund is the first foundation, starting with $500.

Interest and Savings

Interest Rate refers to the cost of borrowing money or the earnings on investments.
Compound Interest is defined as earning interest on previously accrued interest.
Sinking Fund involves systematically saving for future large purchases, avoiding debt.

Emergency Fund

An Emergency Fund is designated for unexpected expenses, ensuring financial security.
At a young age, a $500 emergency fund is recommended.

Economic Concepts

Inflation signifies a rise in the cost of goods and services, eroding purchasing power.
An Interest-Bearing Account allows you to earn interest on your savings balance.

Savings Principles

Savings amounts should be determined by a proactive focusing on income and expenses, not leftovers at month’s end.
Your income level does not solely dictate your saving habits.

Key Insights

Evaluating the time value of money involves considering both interest and inflation rates.
Early investing, as illustrated in the "Ben and Arthur" story, can lead to greater wealth accumulation, despite lower initial contributions.

Practical Applications

It's advisable to save for large purchases in a Sinking Fund rather than relying on loans.
Assessing the reasons for saving includes not only personal security but also avoiding financial liabilities such as lending money to friends.

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Description

Test your knowledge on personal finance concepts with this quiz based on Chapter 2 of Money in Review. The flashcards cover essential financial terms including the Five Foundations, interest rates, sinking funds, and compound interest. Perfect for students looking to enhance their financial literacy!