Consumers: Chapter 2: Saving

Why are emergency funds important?

Emergencies will happen (78% in the next ten years) and you don´t want them standing in the way of your financial goals. A fund makes a crisis into a inconvenience

What is the time value of money and why is it important?

It suggests that a certain amount of money today will have a different buying power than the same amount in the future. It is important because you must consider your rate of return, or the interest rate on your investment

When should you begin investing?

After you have college completely payed for and are debt free. If you pay it off sooner the quicker you should invest.

How much should you have in an emergency fund at your age? How about once you get a full-time job?

$500, 3-6 months of living expenses set aside

Is your emergency fund intended to grow wealth?

No, it is insurance for when unexpected things happen

What is a sinking fund? How does it work?

A way to save when you know you have a large purchase coming up. Total cost by number of months until the purchase

What are some reasons why people do not save money?

No patience, no discipline, dont have the chance because all their money goes to bills

What did we learn from the example of Ben & Arthur?

Start investing now because compound interest is a mathematical explosion

Why should your emergency fund be kept in an account apart from your spending money?

So you leave it alone and do not keep it handy for spending

What is a savings rate? What does it mean to have a negative savings rate?

Compares after tax income to the money people spend on a variety of items. It turn negative when people take on additional debt and are spending more than they make

What advice would you give to a person who want to be a better save?

Start an emergency fund and set goals. Also be eager to find new ways to make money and have patience and discipline.

What are three reasons why you should save?

1. Emergency Fund

2. Purchases

3. Wealth Building

Does income affect savings habits?

As income grows your savings should grow if you are managing your money wisely

What are some keys to saving money?

patience and disipline

How well does the average American save?

-.6% in 2006

Now around 4%

What are the five foundations in order?

1. save a 500 emergency fund

2. get out of debt

3. cash for car

4. cash for college

5. build wealth and give

How can interest be both good and bad?

Bad: debt builds interest

Good: interest bearing account,

Sinking Fund

Saving money over time for a large purchase

Savings Account

a bank account that earns interest

Installment loan

a loan that is repaid over time with a set number of scheduled payments;

Interest Rate

Percentage paid to a lender for the used of borrowed money or percentage earned on invested money.

Savings Rate

the amount of money, expressed as a percentage or ratio, that a person deducts from his disposable personal income to set aside as a nest egg or for retirement.

Compound Interest

interest paid on interest previously earned

Five Foundations and the order

1. Save a 500 emergency fund

2. get out of debt

3. pay cash for car

4. pay cash for college

5. build wealth and give

Wealth Building

Its a marathon?

Interest

the money the principal earns. Percentage of the principle

Deflation

drop in the prices of goods and services

Inflation

persistent rise in the price of goods and services over a period of time

Emergency Fund

500 dollars for insurance

Time Value of Money

a certain amount of money today has different buying power than the same amount of money in the future

The saving habits of Ben and Arthur best illustrate which principle of saving?

The length of time money is invest matters, rate of return matters, BOTH A AND C

Which of the following is not one of the three basic reasons for saving money?

Have money available to lend to friends

Instead of borrowing money for large purchases, you should set money aside in a ____________ over time and pay with cash.

Sinking Fund

Using the sinking fund approach, how much do you have to save each month to buy a $4,800 car one year form now?

$400

What does it mean to have a negative savings rate?

Spending more money than you make and acquiring debt.

Which of the following is a reason that people don't save money?

They lack discipline, they do not live on a budget, they lack focus, ALL OF THE ABOVE

Which of the following steps is the First Foundation?

Save a $500 emergency fund

Why should interest earned not be a factor with your emergency fund?

The emergency fund is not intended to grow wealth

At your age, a fully funded emergency fund should be

500

Which of the following is not a reason your emergency fund should be kept in a separate savings account away from your spending money?

So that your emergency fund savings can earn a lot of interest

This principle suggests that a certain amount of money today has different buying power than the same amount of money in the future. This is due to both the opportunity to earn interest on the money and because inflation will drive prices up, thereby changing the "value" of the money.

Time value of money

For which of the following should you save

Purchases, wealth building, emergency fund, ALL OF THE ABOVE

Which of these is not a key to saving money?

Your income

Why is having a fully funded emergency fund so important when it comes to your financial well-being?

The purpose of an emergency fund is to set money aside for unexpected financial emergencies and to provide a sense of financial security.

Saving is about:

Contentment and emotion

You should keep your emergency fund in the same account as your spending money.

False

The first thing you should save for is your retirement fund.

false

You should hold off on investing for retirement until you have college or other post-secondary education paid for.

True

When it comes to saving money, the amount you save is determined by how much you have left at the end of the month once all of your spending is done.

False

Americans typically maintain a very high savings rate.

False

When you're older and out of school, you'll need to grow your emergency fund into a full three to six months' worth of expenses.

True

an interest-bearing account is an account that generates interest income on the available balance in the account.

True

You should save money for three basic reasons: emergency fund, purchases, and wealth building.

True

Your income level greatly affects your saving habits.

False

When you're in high school, you won't have the same emergency expenses as your parents.

True

Why do you need an emergency fund at your age?

So we can "fix a flat or replace a cell phone."

What two things do you consider when evaluating the time value of money?

Interest and inflation