Personal finance term 1 exam

What does the statement period on a bank statement indicate?

The statement period on a bank statement indicates the specific time frame during which transactions were recorded. It typically outlines deposits, withdrawals, fees, and the balance for that period.

What is the primary trade-off of using a checking account?

The primary trade-off of using a checking account is the convenience of easy access to funds and payments, often at the expense of lower interest rates compared to savings accounts.

What is the difference between simple and compounded interest?

Simple interest is calculated only on the principal amount, while compounded interest is calculated on the principal and any accrued interest over time.

What is a canceled check?

A canceled check is a check that has been paid and processed by the bank, indicating that the funds have been deducted from the payer's account. It serves as proof of payment for the recipient.

What features do MMAs have that savings accounts don’t?

Money Market Accounts (MMAs) typically offer higher interest rates and provide limited check-writing abilities, which savings accounts usually do not.

What is a common limitation of both MMAs and savings accounts?

Both Money Market Accounts (MMAs) and savings accounts often have withdrawal limits, restricting the number of transactions that can be made within a specific time period.

Why do banks offer higher interest rates during economic growth?

Banks offer higher interest rates during economic growth to attract deposits, as increased lending activity creates a greater need for funding. This helps banks to maximize profits while consumers benefit from improved savings rates.

What is the most common feature of a checking account?

The most common feature of a checking account is the ability to make unlimited withdrawals and deposits, providing easy access to funds for everyday transactions.

What kind of endorsement is used if a check is only deposited?

A restrictive endorsement is used if a check is only deposited, which limits the check's use to one specific purpose, usually requiring the funds to be deposited into a bank account.

Why choose a CD over a savings account?

Choosing a Certificate of Deposit (CD) over a savings account typically offers higher interest rates in exchange for committing funds for a fixed term. This can lead to better earnings if the investor does not need immediate access to their money.

What does the FDIC protect?

The FDIC protects depositors by insuring deposits at member banks, safeguarding their money up to $250,000 in case of bank failure.

What kind of bank serves large businesses and corporations?

A commercial bank serves large businesses and corporations, providing a range of financial services such as loans, treasury management, and investment services.

What account has the highest interest rate?

A high-yield savings account typically offers the highest interest rates compared to other accounts, providing better earnings while maintaining liquidity.

What account is used for frequent transactions?

A checking account is designed for frequent transactions, allowing easy deposits and withdrawals while typically offering lower interest rates.

Why would a bank balance and a check register balance not agree?

A bank balance and a check register balance may not agree due to outstanding checks, bank fees, or transactions that have not yet cleared the bank.

What account grants immediate access to funds?

A money market account grants immediate access to funds while typically offering higher interest rates than a regular savings account, allowing for both withdrawals and deposits.

What is a MMA?

A MMA, or money market account, is a type of savings account that typically offers higher interest rates while allowing limited check-writing and withdrawal capabilities.

What is restrictive endorsement?

A restrictive endorsement is a type of endorsement on a check that limits how the check may be used, often specifying that it can only be deposited into a particular account.

Why is money a unit of measure?

Money serves as a unit of measure by providing a standard numerical value that allows for the comparison of the value of goods and services, facilitating trade and economic calculations.

How do economic conditions influence financial values and practices?

Economic conditions affect financial values and practices by impacting interest rates, inflation, and consumer confidence. These factors determine savings, investment behaviors, and spending patterns among individuals and businesses.

What does FUTA do?

FUTA, or the Federal Unemployment Tax Act, provides funding for state unemployment insurance programs. It helps to ensure that workers who lose their jobs can receive unemployment benefits.

What is the W-2 deadline?

The W-2 deadline is January 31st each year, by which employers must provide employees with their W-2 forms reporting annual earnings and tax withholdings.

Which tax is a progressive system?

A progressive tax system is one where the tax rate increases as the taxable amount increases, effectively imposing higher rates on higher income earners.

What income is recorded on a 1099 NFC?

A 1099 NFC2 reports non-employee compensation, including income earned by freelancers, independent contractors, or other self-employed individuals for services rendered during the tax year.

Which tax funds public services?

The tax that funds public services is typically a sales tax, property tax, or income tax, which is collected to support government operations and community services.

Which tax is only implemented on employers?

A payroll tax is imposed only on employers, calculated as a percentage of employee wages, to fund Social Security and Medicare programs.

What is a tax return?

A tax return is a document filed with a government authority that reports income, expenses, and other relevant tax information to determine a taxpayer's tax liability or refund for a given year.

What is a tax refund?

A tax refund is a reimbursement to taxpayers if they have overpaid their taxes, resulting from an excess amount of taxes withheld from their paychecks or paid through estimated tax payments.

What is adjusted gross income?

Adjusted gross income (AGI) is an individual's total gross income after certain deductions, such as contributions to retirement accounts and student loan interest, which affects the amount of taxable income.

What is a 1040?

A 1040 is a standard IRS form used by individual taxpayers to file their annual income tax returns. It reports income, deductions, and credits, determining the taxpayer's tax liability.

What is a tax deduction?

A tax deduction is an expense that can be deducted from an individual's or business's taxable income, reducing the amount of income that is subject to taxation. This can include expenses like mortgage interest, charitable contributions, and certain business expenses.

What tax is not levied on neccessties?

A tax not levied on necessities is called a sales tax exemption. This exemption typically applies to essential items such as food, medicine, and clothing, allowing them to be purchased without the additional tax burden.

What is tax credit?

A tax credit is an amount that taxpayers can subtract directly from the taxes they owe to the government, which can reduce their overall tax liability. Unlike deductions, which reduce taxable income, credits reduce the tax owed dollar-for-dollar.

What is the FUTA tax rate?

The FUTA tax rate is the federal unemployment tax rate, which is imposed on employers to fund unemployment compensation programs. As of now, the FUTA tax rate is typically 6.0% on the first $7,000 of each employee's earnings.

What is a deduction?

A deduction is an expense that taxpayers can subtract from their total income to reduce taxable income, which can lower the overall tax liability. Common deductions include mortgage interest, medical expenses, and charitable contributions.

What is an explanation of benefits?

An explanation of benefits (EOB) is a document provided by insurance companies detailing the services received, the amount billed, the amount covered by the insurance, and the patient's financial responsibility. It helps policyholders understand how their claims were processed and what they need to pay.

What is a premium?

A premium is the amount paid periodically to an insurance company to maintain coverage for a policyholder's insurance plan. It can be paid monthly, quarterly, or annually, and is essential to keep the insurance active.

Why choose higher premiums?

Choosing higher premiums often results in lower out-of-pocket costs when filing a claim, as you may have access to better coverage or lower deductibles. This can be beneficial for those who anticipate significant medical expenses or require frequent use of their insurance.

What is a W-2?

What is a common form of income for self employed people?

A common form of income for self-employed people is reported on a 1099 form. This form is used to report various types of income received by individuals who are not classified as employees.

What is capital gain?

A capital gain is the profit earned from the sale of an asset, such as stocks or real estate, when the selling price exceeds the purchase price.

What income comes from goverment programs?

Income from government programs includes social security, unemployment benefits, and welfare assistance, which provide financial support to eligible individuals.

What is a pre-tax deduction?

A pre-tax deduction is an amount that is taken from an employee's gross income before taxes are calculated, reducing their taxable income. Examples include contributions to retirement accounts or certain health insurance premiums.

How are transfer payments and unearned income different?

Transfer payments are funds distributed by the government to individuals without a reciprocal service, while unearned income refers to income received without work, such as interest, dividends, or rental income.

What credit requires monthly payments?

A credit that requires monthly payments is often referred to as an installment loan, which includes personal loans, auto loans, and mortgages, where borrowers make regular payments over time until the debt is paid off.

What is interest?

Interest is the cost of borrowing money, typically expressed as a percentage of the principal amount, or the earnings on an investment over a specified period.

What is installment credit?

Installment credit is a type of loan that requires borrowers to make regular monthly payments over a set period until the total loan amount is paid off. Examples include personal loans, auto loans, and mortgages.