Question 1

Trevor is saving up to buy a drum set. The drum set costs $800, and he plans to put aside $50 each week. If he sticks to his plan, he will be able to buy the drum set in four months. This is an example of a(n) ________ goal.

Accepted Answer

This is an example of a short-term goal, which is any goal that can be achieved in two years or less. They may include saving for particular short-term objectives, such as a new car, a down payment for a house, a vacation, or other major consumer purchases.

Question 2

________ goals are those that can be achieved in two years or less.

Accepted Answer

Short-term goals are those that can be achieved in two years or less. They may include saving for particular short-term objectives, such as a new car, a down payment for a house, a vacation, or other major consumer purchases.

Question 3

What is a good example of a short-term goal that many people have?

Accepted Answer

For many people, short-term financial goals should include tightening up on household spending patterns and reducing outstanding credit. Planning for retirement and having an estate plan are long-term goals.

Question 4

________ goals are those that require substantial time to achieve.

Accepted Answer

Long-term goals are those that require substantial time to achieve.

Question 5

Blake and Samantha are a young couple who are planning to have children. As a result, they consider college savings to be a priority, and every month they set aside $100 for this purpose. This is an example of a(n) ________ goal.

Accepted Answer

This scenario is an example of a long-term goal. Those who have or anticipate having children will probably consider college savings a priority.

Question 6

Kathy has been married to Don for forty years. They have three children and seven grandchildren. All of the following are long-term goals Kathy would most likely have EXCEPT

Accepted Answer

Long-term goals are those that require substantial time to achieve. Kathy's long-term goals would most likely include planning for her retirement; protecting her loved ones from the financial hazards of her unexpected death, illness, or disability; and having adequate insurance and an estate plan.

Question 7

A cash flow table is different than a budget in that a cash flow table

Accepted Answer

A cash flow table tells you what you are doing with your money currently, while a budget shows what you plan to do with it in the future. A budget can be for any period of time, but it is common to budget in monthly and/or annual intervals.

Question 8

Ju Li is putting together a plan that forecasts how much she will earn and spend over the next year. This is called a(n)

Accepted Answer

This describes a budget, or a financial plan that forecasts expenses and income over a set period of time.

Question 9

Which process explains how to create a budget?

Accepted Answer

You can use your cash flow worksheet to create a budget. Begin with the amount of income you have for the month. Enter your nondiscretionary expenditures (that is, bills you must pay, such as tuition, rent, and utilities) and determine the leftover amount. Next, list your discretionary expenditures, such as entertainment and cable TV, in order of importance. You can then work down your discretionary list until your remaining available cash flow is zero.

Question 10

In the process of creating his budget, Thomas must consider his nondiscretionary expenditures before his discretionary expenditures. What would most likely be one of his nondiscretionary expenditures?

Accepted Answer

One of Thomas's nondiscretionary expenditures would most likely be his mortgage payments. Season tickets to his local sports team, an engagement ring for his girlfriend, a new suit to wear to his brother's wedding, and his cable TV bill are all discretionary expenditures. Nondiscretionary expenditures must be considered first because they are the bills a person must pay, such as tuition, rent, and utilities.

Question 11

In regard to budgeting, if you want to achieve your financial goals, it is essential that you

Accepted Answer

You cannot achieve your financial goals unless your budget process places a high priority on saving and investing. If you put a high priority on saving and you do not use credit to spend beyond your income each month, you will be able to accumulate wealth that can be used to meet your short-term and long-term financial goals.

Question 12

Noreen has created a budget to track her income and expenses throughout the year. Why is it important for her to identify budget items and track their variance from budget forecasts?

Accepted Answer

Businesses regularly identify budget items and track their variance from budget forecasts. People who follow a similar strategy in their personal finances are better able to meet their financial goals as well. If certain budgeted expenses routinely turn out to be under or over your previous estimates, then it is important to either revise the budget estimate or develop a strategy for reducing that expense.

Question 13

Wes works at an office where everyone spends a lot of money on breakfast, lunch, and coffee every day. How can Wes ensure that he sticks to his weekly budget?

Accepted Answer

For people like Wes, who have trouble adhering to their budget, a strategy that works fairly well is limiting themselves to cash payments. At the beginning of the week, withdraw a certain amount from checking to cover weekly budgeted expenses. For the rest of the week, leave your checkbook, ATM card, and debit and credit cards at home. When the cash is gone, don't spend any more.

Question 14

One of the cornerstones of your financial plan should be to keep

Accepted Answer

One of the cornerstones of your financial plan should be to keep credit usage to a minimum and to work at reducing outstanding debt. The use of credit for consumer and home purchases is entrenched in our culture and has arguably fueled our economy and enabled Americans to better their standard of living as compared to earlier generations.

Question 15

Which scenario is an example of a beneficial use of credit?

Accepted Answer

The scenario about Paula is an example of a beneficial use of credit. Borrowing money to buy an asset that appreciates in value by more than the cost of the debt is a terrific way to invest. A rule of thumb is that you should borrow only to buy assets that will appreciate in value or when your financing charges are less than what you are earning on the cash that you would otherwise use to make the purchase. This rule generally will limit your borrowing to home purchases and investments.

Question 16

What happens when you pay minimum payments on credit purchases?

Accepted Answer

If you pay minimum payments on credit purchases, it will take many years to pay back the original debt, and in the meantime, the interest paid will far exceed the original amount borrowed. Credit card debt in the amount of $1,000 will usually require a minimum payment of at least $15 per month. At this payment level, it will take 166 months (almost 14 years) to pay the debt in full, and the total interest paid will be more than $1,400.

Question 17

Which aspect of credit cards allows the credit card companies to make money?

Accepted Answer

An aspect of credit cards that you should be aware of is finance charges. Credit card companies make money by lending to you at a higher rate than it costs them to obtain financing. Because many of their customers don't pay back their debts in a timely fashion (default), they must charge enough to cover the risk of default as well. Interest is usually calculated on the average daily balance over the month, and payments are applied to old debts first. Although there are "teaser"
rates that may be less than 5 percent, most credit cards regularly charge 13 to 24 percent annual interest. The low introductory rates are an aspect to time limitations (often six months or less), and they revert to the higher rates if you don't pay on time.

Question 18

What statement is TRUE regarding credit card finance charges?

Accepted Answer

Credit card companies make money by lending to you at a higher rate than it costs them to obtain financing. Interest is usually calculated on the average daily balance over the month, and payments are applied to old debts first. Although there are "teaser"
rates that may be less than 5 percent, most credit cards regularly charge 13 to 24 percent annual interest. The low introductory rates are subject to time limitations, and they revert to higher rates if you don't pay on time.

Question 19

Reynaldo has been a credit card user for several years. He always pays his monthly balance in full on time. All of the following are things he can expect from his credit card company EXCEPT

Accepted Answer

In this scenario, Reynaldo can expect a higher credit line. As a customer shows the ability and intent to repay credit card purchases in a timely fashion, the credit limit can increase to many thousands of dollars. Additionally, since interest is usually calculated on the average daily balance, Reynaldo would most likely pay a lower interest rate than customers who don't pay on time. He also wouldn't incur any late fees or penalties because he pays his monthly bills on time. Finally, since Reynaldo uses his credit card as a cash management tool only, paying off his balance every month, the perks the credit card company offers are truly free to him.

Question 20

Which statement is TRUE regarding using a credit card to withdraw money from ATMs?

Accepted Answer

Most credit cards can be used to obtain cash from ATMs. Although this may be convenient, it contributes to your increasing credit card balance and may result in extra expenditures that you would otherwise have avoided. In addition, these withdrawals may have hidden costs, and you may incur a fee of $1 or $1.50 if you withdraw cash from a machine that is not owned by your credit card lender. The effective interest that this represents can be substantial if you are withdrawing small amounts of cash.

Quiz 17: Personal Financial Planning and Legal and Regulatory Environment