Financial Literacy and Personal Finance: Key Concepts and Practice Questions

All taxpayers have an equal probability of having their tax returns audited.

False

Avoiding alcoholic beverages while driving is an example of loss prevention.

True

One can hold a credit card issued by a stock brokerage firm.

True

Retirement planning includes taking advantage of and managing employer-sponsored benefits.

True

Tangible assets are earning assets that are held for the returns they promise.

False

It is best to prepare your financial statements at least once a year, ideally when drawing up your budget.

True

The Federal Deposit Insurance Corporation (FDIC) covers consumer accounts at credit unions.

False

Life insurance proceeds paid to your heirs are not usually subject to state or federal income taxes.

True

Amit lists his gross salary in the income portion of his income and expense statement, and he includes his income taxes and Social Security taxes in the expenses portion.

True

Standard of living is defined as the necessities, comforts, and luxuries desired by an individual or a family.

True

The minimum amount that you must keep in an account every day is an important criterion when comparing the features and requirements of different checking accounts offered by a bank.

True

Only one agent should be consulted for discussing personal financial needs and insurance requirements while buying life insurance.

False

If you have a high-risk hobby, then you could be required to pay more for life insurance than others pay.

True

Adjustments to gross income will decrease your taxable income.

True

The need for financial planning declines as your income increases.

False

Interest earned for a period should be added to the ending balance shown in your checkbook while reconciling your account.

True

If you are legally separated from your spouse by a separation decree, you can legally file as a single taxpayer.

True

Cash is the only kind of liquid asset.

False

Accumulating wealth for later years is called estate planning.

True

Fee-only financial planners charge commission for the products they sell.

False

The most effective way to achieve financial objectives is through personal financial planning.

True

The market price of a house is $125,000, and the home buyer borrows $100,000. Two points are equal to $2,000.

True

The decisions you make in career planning are independent of the decisions you make in financial planning.

False

Financial planning takes place in a dynamic economic environment created by the actions of the government, business, and consumers.

True

Dwayne and Gayle were divorced on September 29. They have not remarried since and have no dependents. Their filing status for the year will be married filing separately since they were married for more than half of the year.

False

Economic trough

The lowest point of an economic cycle, after which the economy will often enter an expansion.

Needs analysis method

A method to determine the amount of life insurance coverage needed based on financial resources and needs.

Balance sheet

A financial statement that describes your financial position at a given point in time.

Human life value method

The most detailed method of determining the amount of life insurance coverage needed for an individual.

Individual retirement account (IRA)

A savings account that allows individuals to invest for retirement with tax advantages.

Standard deduction

A fixed dollar amount that reduces the income on which you are taxed, available if you do not itemize deductions.

Business

An entity that provides goods and services and receives payment in money.

Budget deficit

A situation where expenses exceed income, requiring adjustments to balance the budget.

Compounded annually

Interest calculated on the initial principal and also on the accumulated interest from previous periods.

Solvent

A financial state where your assets exceed your liabilities.

Multiple Listing Service (MLS)

A service that consists of a comprehensive listing of properties for sale in a given community area.

Liquid asset

An asset that can be quickly converted into cash without significant loss of value.

Financial resources

Assets or funds available to an individual or entity for investment or expenditure.

Investment returns

The profit or loss generated from an investment over a period of time.

Economic cycles

Fluctuations in economic activity characterized by periods of expansion and contraction.

Scholarship

A financial grant awarded to a student for educational purposes, which does not require repayment.

Tax deduction

An expense that can be deducted from taxable income to reduce the total tax owed.

Net worth

The difference between total assets and total liabilities.

Financial performance

An evaluation of how well an entity is managing its financial resources over a period of time.

Retirement account

A savings account specifically designed for retirement savings, often with tax benefits.

Savings account

A bank account that earns interest on deposits and allows for easy access to funds.

Fixed deposit

A financial instrument where money is deposited for a fixed term at a specified interest rate.

Employee benefits

May include all of the following EXCEPT asset purchases.

Murray's capital gain tax liability

Computed on $400,000.

Needs analysis approach for life insurance

You should deduct available resources from your family's total economic needs.

Insurance underwriting

Insurance underwriters help insurers determine the insurance needs of the potential insured.

Subject to federal income tax

Tips received.

Martha's financial concern

Her most pressing financial concern is probably estate planning.

Mutual association savings bank ownership

It is owned by the depositors.

Central purpose of insurance

To transfer the risk of serious losses.

Depreciation

The loss in the value of an automobile that occurs over its period of ownership.

Minimum denomination of T-bills

$1,000.

Tax audit

An Internal Revenue Service (IRS) attempt to verify the accuracy of a return.

Social Security taxes for Ben and Jack

Both earned $60,000 this year.

Social Security taxes

Taxes paid by individuals to fund the Social Security program.

conventional mortgage

A traditional home loan with fixed interest rates and terms.

convertible ARM

An adjustable-rate mortgage that can be converted to a fixed-rate mortgage.

buydown

A type of financing made available by a builder or seller to a potential new-home buyer at interest rates well below market interest rates, often only for a short period.

two-step ARM

An adjustable-rate mortgage that has two different interest rates during its term.

growing equity mortgage

A mortgage where the payments increase over time, allowing for quicker equity buildup.

cash budget

A budget that tracks actual income and expenses.

term life insurance

Insurance that provides coverage for a specified period, characterized by lower initial premiums than other types of insurance.

loss assumption

The choice to accept and bear the risk of loss.

credit unions

Depository financial institutions that charge lower rates on loans to their members.

tax strategy

A plan to minimize tax liabilities, such as a tax deferral strategy.

consumer price index (CPI)

A measure of inflation based on the price changes of a basket of goods and services.

capitalized cost

The price of the car you are leasing.

Federal Deposit Insurance Corporation (FDIC)

An agency that insures each depositor up to a stated maximum dollar amount at any given financial institution.

mortgage point

A fee paid to lower the interest rate on a mortgage, typically equal to 1% of the loan amount.

tax liability

The total amount of tax owed by an individual or entity.

Settlement option

The settlement option chosen by most policyholders is lump sum.

Income tax withholding

Your income tax withholding is dependent on your income level and the number of withholding allowances you have claimed.

Life insurance coverage determination

The preferred technique for determining how much life insurance coverage is needed for an individual is computing the human life value.

Inflation impact on purchasing power

Which of the following statements is true about Andy if the inflation rate is increasing every year by 1 percent and there is no growth in his salary? Andy's purchasing power will decrease.

Medical and dental expenses deductions

For those under the age of 65, medical and dental expenses may be included as itemized deductions when they exceed 10% of the adjusted gross income.

Present value

Present value is the value today of an amount to be received in the future.

Cafeteria plans

In cafeteria plans, the employer allocates a certain amount of money to each employee and lets the employee spend that money for benefits that suit him or her.

Correcting tax return errors

You can correct an error when you filed your tax return last year by filing Form 1040X.

Maximum mortgage payment calculation

The lender requires that the total installment of loan payments does not exceed 35% of the monthly income.

Cost of transactions for financial institutions

It costs financial institutions more if their customers perform teller transactions.

Real property

Land would be considered real property.

Negative equity

Negative equity is a situation where homeowners owe more to the lenders than what their properties are worth.

Maximum monthly mortgage payment

Based on Barb and Bob's financial data, the maximum monthly mortgage payment for which they can qualify is $1,208.

Deductions for medical expenses

Medical expenses may be included as itemized deductions when they exceed 10% of the adjusted gross income.

Interest only settlement option

Interest only is one of the settlement options available to policyholders.

Fixed amount settlement option

Fixed amount is another settlement option available to policyholders.

Fixed time settlement option

Fixed time is also a settlement option that policyholders can choose.

Life income settlement option

Life income is a settlement option that provides income for the lifetime of the policyholder.

Deductions based on age

Your income tax withholding is dependent on your age and educational qualification.

Deductions based on spouse

Your income tax withholding is dependent on the number of deductions claimed by your spouse.

Deductions based on employer

Your income tax withholding is dependent on the number of withholding allowances allowed by your employer.

Deductions based on standard deductions

Your income tax withholding is dependent on the number of standard deductions you have claimed.

A foreclosure

A legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments by forcing the sale of the asset used as collateral.

A restructure

The process of reorganizing the terms of a loan to make it more manageable for the borrower.

Inflation

The rate at which the general level of prices for goods and services rises, eroding purchasing power.