Financial Literacy Unit 2 Test

Online Summer Financial Literacy Unit 2 Test Study Guide

What are some ways individuals can make income?

Earning a paycheck or collecting rent payments for properties they own.

What is gross income?

The total income you earn before taxes or any other expenses are taken out of the paycheck.

What is disposable income?

The money you actually receive in a paycheck after taxes and other deductions have been taken out.

Why is financial planning important?

It helps individuals handle significant life events, make informed decisions, and protects savings from inflation.

What can poor financial planning lead to?

It can limit life choices and result in being stuck in less than ideal housing due to lack of savings.

What is inflation?

The general increase in prices over time.

How does early retirement planning benefit individuals?

It allows for saving little by little to reach a long

What are three benefits of financial planning?

1. It can help you enjoy your retirement years. 2. It can help you achieve career and personal goals. 3. It can help you spend less than you make in income.

What does the SMART method stand for in goal setting?

Specific, Measurable, Achievable, Relevant, Timely.

What does 'Specific' mean in the SMART method?

Goal statements should give details without being overwhelming.

Why is it important for goals to be measurable?

Measurable goals allow you to track progress, like having a specific savings account balance.

What does 'Achievable' mean in the SMART method?

Goals should be realistic and attainable within the desired time frame.

What does 'Relevant' mean in the SMART method?

Goals should matter to you personally, such as saving for a vacation you are excited about.

What does 'Timely' mean in the SMART method?

Goals should have a target deadline to help monitor progress and success.

What is the first step in making a financial plan?

Understand what you want and chalk out your life plan.

What is the second step in making a financial plan?

Understand your current finances by developing a balance sheet of assets, liabilities, expenses, and income.

What is the third step in making a financial plan?

Attach goal costs to each goal, indicating the total money, time, and effort needed.

How does financial planning protect your savings?

It helps safeguard against inflation and ensures your savings grow over time.

What is the importance of monitoring progress in achieving financial goals?

It helps you know when you have been successful and keeps you accountable.

What might happen if you do not plan for unexpected life events?

You may struggle to handle situations like health issues or job loss due to lack of financial preparation.

How can financial planning affect your life choices?

Well

What is a balance sheet?

A financial statement that shows your assets, liabilities, expenses, and income.

Why is it important to attach costs to financial goals?

It helps clarify the resources needed to achieve each goal.

What is an example of a specific financial goal?

Saving $500 for a vacation planned for December.

What is the SMART approach in goal setting?

The SMART approach involves making goals Specific, Measurable, Attainable, Relevant, and Timely.

What should you do to ensure your financial plan is effective?

Keep your plan flexible to handle unexpected expenses and financial emergencies.

What is the importance of reviewing your financial plan periodically?

Periodic reviews help redefine goals, assess financial situations, and revise plans as needed.

What are long

term goals in financial planning?

How can short

term goals contribute to long

What is a salary?

A salary is a fixed compensation paid to employees, usually once or twice a month.

What are dividends?

Dividends are distributed profits that a company pays to its shareholders.

What generates interest income?

Interest is generated by investing money in savings accounts or bonds.

What are capital gains?

Capital gains are profits earned by selling assets for higher prices than they were purchased.

What does a stock represent?

A stock represents ownership in a corporation, allowing stockholders to claim part of the business profits.

What is a bond?

A bond is a debt instrument created by a company or government to raise capital, with interest paid to the lender.

What is a mutual fund?

A mutual fund invests in a pool of stocks and bonds to diversify risk while maximizing return.

What is a derivative?

A derivative is a contract whose value derives from the market value of a commodity or currency.

How can investors generate income from real estate?

Investors can generate income by buying and selling properties for profit or earning rental income.

What is passive income?

Passive income is earned through rental activity or trade, including rental income and business income.

What is rental income?

Rental income is earned from renting out apartments, houses, or other properties.

What is business income?

Business income is earned from a limited ownership stake in a business.

What does creating or selling intellectual property involve?

It involves earning income from inventions, books, movies, and similar creative works.

What is multilevel marketing income?

Income earned by increasing a company's sales and recruiting other salespeople.

What is portfolio income?

Portfolio income is received through dividends, interest, or capital gains from investments.

What is earned income?

Earned income is income from jobs, consultation, or owning a business.

What is a major drawback of earned income?

Once you stop working, you stop receiving earned income.

What are other sources of income besides salary or wages?

Other sources include portfolio income and passive income.

What is a compensation package?

The combination of salary and benefits that an employer offers an employee.

What are some examples of benefits included in a compensation package?

Health insurance, paid time off, pension plans, and stock options.

Why should job seekers evaluate the entire compensation package?

Because one employer may offer a lower salary but include more valuable benefits than another employer.

What are job skills?

Skills acquired from previous jobs or life experiences, or gained through programs like apprenticeships.

What factors affect consumer spending habits?

Income levels, prices of goods and services, tastes, preferences, and customs.

How does inflation impact consumer spending?

Inflation can alter spending habits as rising prices mean consumers can buy fewer goods and services.

How does inflation affect those on fixed incomes?

Inflation negatively impacts them because their incomes do not rise at the same rate as prices.

What services do retail banks provide to individual customers?

Checking accounts, savings accounts, certificates of deposit, debit cards, credit cards, home and car loans, personal loans, and safe deposit boxes.

What is a line of credit in the context of commercial banks?

A loan arrangement that helps a business manage cash flows.

What is a credit union?

A not

What are the key benefits of a savings account?

Interest income on deposits, low minimum balance requirements, and the ability to withdraw money with some restrictions.

What does the FDIC do for savings account deposits?

Insures deposits up to $250,000 per account.

What is the primary purpose of a checking account?

To park money intended for spending, not saving.

What types of expenses do consumers typically pay using a checking account?

Monthly expenses such as groceries, transportation, clothing, and bills.

What is the difference between retail banks and commercial banks?

Retail banks serve individual customers, while commercial banks serve businesses.

How can consumers access banking services?

At physical branches, over the internet, or using smartphones.

What is the role of commercial banks in foreign exchange transactions?

They convert money from one currency to another.

What is the significance of analyzing disposable income in relation to inflation?

As prices rise, individuals must adjust their spending habits based on their disposable income.

What happens to the purchasing power of consumers as inflation increases?

They can buy fewer goods and services than before.

How does inflation influence consumer decisions?

It forces individuals to alter their spending habits due to rising prices.

What is the impact of inflation on consumer savings?

It can decrease the real value of savings if the rate of inflation exceeds interest earned.

What are the benefits of checking accounts?

Debit cards, checkbooks, access to ATMs, online and mobile banking services.

What is an interest

bearing checking account?

What is a money market deposit account (MMDA)?

An account that pays interest based on the money market rates, offers higher interest than savings accounts, and has a higher minimum balance requirement.

What is the primary purpose of a basic checking account?

To park money intended for spending, such as paying monthly expenses and bills.

What is a certificate of deposit (CD)?

A savings product that guarantees a fixed interest rate for a specified duration until maturity.

What are the advantages of a certificate of deposit (CD)?

FDIC insurance and higher interest rates compared to savings accounts.

What are the disadvantages of a certificate of deposit (CD)?

Penalty fees for early withdrawal, no ATM service, no debit card, and no checks.

What does FDIC stand for and what does it insure?

Federal Deposit Insurance Corporation; it insures deposits up to $250,000.

What is a key feature of online banking?

Allows customers to conduct financial transactions 24/7 from anywhere.

What is the typical interest rate comparison between savings accounts and money market accounts?

Money market accounts generally offer higher interest rates than savings accounts.

What happens if a bank goes bankrupt regarding savings accounts?

Account holders will receive up to $250,000 of their money back due to FDIC insurance.

What is a common requirement for interest

bearing checking accounts?

What types of transactions can be conducted through online banking?

Most financial transactions, including checking balances and transferring funds.

What is the typical maturity range for a certificate of deposit (CD)?

From one month to five years.

What are the typical uses of funds in a checking account?

Paying for groceries, transportation, clothing, bills, and loans.

What is a disadvantage of money market deposit accounts (MMDAs)?

They have a higher minimum balance requirement than savings accounts.

What is the main difference between a savings account and a checking account?

A savings account is for saving money, while a checking account is for spending.

What services do checking accounts typically provide?

Debit cards, checkbooks, access to ATMs, and online/mobile banking.

What is the primary benefit of a money market account?

Higher interest rates compared to traditional savings accounts.

What is a potential penalty associated with early withdrawal from a CD?

A penalty fee may be charged if the CD is cashed out before maturity.

What is the benefit of having a low minimum balance in savings accounts?

It makes savings accounts accessible to more customers.

How does the interest rate of a money market account vary?

It varies based on the prevailing interest rate in the money market.

What are the disadvantages of mobile banking?

The need for a reliable internet connection and possible security breaches from hackers.

What does mobile banking allow customers to do?

Use their smartphones to send money or check their account balance.

How do the advantages and disadvantages of mobile banking compare to online banking?

They are similar because both require an internet connection to access account information.

What is online bill pay?

A service that allows bank customers to set up recurring payments to companies, such as rent or cell phone bills.

How do banks typically handle online bill payments?

They send money to the company either electronically or by check when the payment is due.

What fees might banks charge for online bill pay?

While some banks offer it for free with checking accounts, they may charge fees for extra services like same

What is a debit card?

A card that withdraws money directly from the customer's checking account at the time of purchase.

What is the purpose of a PIN on a debit card?

It serves as an extra security feature that must be inputted to withdraw cash at ATMs.

How do debit cards differ from credit cards?

Debit cards only allow spending what is available in the checking account, preventing debt accumulation.

What are daily purchase limits on debit cards?

Limits set by banks to prevent customers from making excessively large purchases.