Personal Finance Exam 1

Question 1

Personal finance:

Answer 1

the process of planning your spending, financing, and investing to optimize your financial situation

Question 2

Personal financial plan:

Answer 2

a plan that specifies your financial goals and describes the spending, financing, and investing plans that are intended to achieve those goals

Question 3

How understanding personal finance can enhance your wealth.

Answer 3

Improving your finance skills and decisions

Helping you judge the advice of financial
advisors

Enhancing your job marketability

Entering a personal finance career

Question 4

6 Components of a Financial Plan

Answer 4

Budgeting and tax planning

Managing your liquidity
Financing your large purchases

Protecting your assets and income (insurance)

Investing your money

Planning your retirement and estate

Question 5

Budget planning:

Answer 5

The process of forecasting future expenses and savings

Question 6

Assets:

Answer 6

what you own

Question 7

Liabilities:

Answer 7

what you owe

Question 8

Net worth:

Answer 8

the value of what you own minus the value of what you owe

Question 9

Liquidity:

Answer 9

access to funds to cover any short-term cash deficiencies

Question 10

Money management:

Answer 10

decisions regarding how much money to retain in a liquid form and how to allocate the funds among short-term investment instruments

Question 11

Credit management:

Answer 11

decisions regarding how much credit to obtain to support your spending and which sources of credit to use

Question 12

Social Security and Medicare Taxes

Your employer matches the amount that is withheld from your wages

Answer 12

Social Security taxes equal 6.2% of your salary up to a maximum level of $128,400 as of 2018

Medicare taxes are 1.45 % of your earned income

Self-employed people must pay both parts of these taxes themselves—15.3%

Question 13

Filing Status Options

Answer 13

Single
Married filing jointly
Married filing separately
Head of household
Qualifying widow(er) with dependent child

Question 14

Gross income:

Answer 14

all reportable income from any source, including salary, interest income, dividend income, and capital gains received during the tax year

Question 15

Capital gain: income earned when an asset is sold at a higher price than was paid for it

Question 16

Short-term capital gain:

Answer 16

a gain on assets that were held less than 12 months

Question 17

Long-term capital gain:

Answer 17

a gain on assets that were held for 12 months or longer

Question 18

Personal balance sheet:

Answer 18

a summary of your assets (what you own), your liabilities (what you owe), and your net worth (assets minus liabilities)

Question 19

Current liabilities:

Answer 19

debts that will be paid within a year

Credit cards, monthly bills, etc.

Question 20

Long-term liabilities:

Answer 20

debts that will be paid over a period longer than one year

Student loan, car notes, etc.

Question 21

Liquidity Ratio

Answer 21

Liquid Assets / Current liabilities.

*liquid assets are things you can easily sell off that won’t lose it’s initial value. (Cash, Checking, Savings, etc).

Question 22

Debt to Asset Ratio:

Answer 22

Total Liabilities / Total Assets

(A higher ratio means higher debt relative to assets)

Question 23

Savings Rate:

Answer 23

Savings during the period / disposable income during the period.