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Questions and Answers
What is the difference between saving and investing?
Saving is putting money away to keep and use later, while investing is putting money in, hoping that it will increase.
Liquidity is how easy it is to turn your money from the savings account into ______.
cash
Define interest.
The cost of using someone else's money.
What does the phrase 'pay yourself first' mean?
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What percentage of your net pay should be put into savings?
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How many months of expenses do the experts recommend saving in an emergency fund?
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What are the three factors in the concept of the time value of money?
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List and define the five types of savings tools.
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Why are savings tools considered secure?
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What is the Federal Deposit Insurance Corporation (FDIC)?
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Describe the relationship between liquidity and interest for savings tools.
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What is a tiered interest rate?
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What is the formula for figuring the rate of return?
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Define risk.
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List and define the six types of investment tools.
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Where do the six types of investments fall on the financial risk pyramid?
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What is the relationship between risk and return in investing?
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Why would you want to invest in a diversified portfolio?
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What is the formula for the Rule of 72?
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Study Notes
Saving vs. Investing
- Saving involves setting aside money for future use.
- Investing aims to grow money over time.
Financial Terms
- Liquidity: Ease of converting savings into cash.
- Interest: Cost incurred for using borrowed money.
- Compound Interest: Earning interest on previously earned interest.
- Opportunity Cost: Potential gains missed when choosing one option over another.
- Trade-off: Sacrificing one item for another.
Pay Yourself First
- Prioritizing savings by allocating a portion of income to savings before spending.
Savings Percentage
- Recommended savings rate is 10% of net pay.
Emergency Fund
- Experts recommend saving 6 to 9 months' worth of expenses in an emergency fund.
Time Value of Money
- Key factors include money, time, and interest rate.
Savings Tools
- Checking Account: Easily accessible account for daily transactions.
- Savings Account: Designed to hold money not intended for immediate use.
- Money Market Account: Requires minimum balance and offers tiered interest rates.
- Certificate of Deposit (CD): Restricted access account for a fixed term.
Security of Savings Tools
- Savings in banks are secure and protected against theft, with some tools limiting access to funds.
FDIC
- Insures deposits in banks and thrift institutions up to $250,000, fostering public confidence.
Liquidity vs. Interest
- As liquidity increases, interest rates typically decrease; checking accounts offer high liquidity but low interest.
Tiered Interest Rate
- Interest earned can vary based on account balance; higher balances may yield higher interest.
Rate of Return Formula
- Rate of Return = Total Return / Amount Invested.
Investment Terminology
- Risk: Chance of loss in investment.
- Principal: Initial investment amount.
- Inflation: General rise in price levels.
- Dividends: Cash distributions to stock shareholders.
- Market Price: Selling price of a good in a market.
- Financial Risk Pyramid: Hierarchical structure of risk levels in investments.
- Portfolio Diversification: Spreading investments to mitigate risk.
Types of Investment Tools
- Bond: Loaning money to organizations.
- Stock: Ownership share in a company.
- Real Estate: Holding property or land.
- Speculative Investments: High-risk investments with volatile returns.
- Mutual Funds: Investment pooling by companies for diverse asset allocation.
- Index Fund: Mutual fund that mimics a specific index to lower fees.
Financial Risk Pyramid
- Order of risk levels: Bonds (low), Mutual/Index Funds, Stocks/Real Estate, Speculative Investments (high).
Risk and Return Relationship
- Higher investment risk often correlates with the potential for higher returns.
Diversified Portfolio
- Investing in diverse assets minimizes overall investment risk.
Rule of 72
- Formula: Years to double = 72 / Interest Rate Percentage.
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Description
Test your knowledge of personal finance concepts with this quiz focused on saving, investing, and definitions of key terms. Learn about liquidity, interest, and opportunity cost to enhance your financial literacy. Perfect for students studying personal finance in Unit 5.