Financial Literacy Practice Test Exam
Questions with Correct Answers
Create a budget of current income and expenses. Money- Purpose of a budget.
Rationale: When a person creates and follows a budget,
it helps to control spending. - Answer-In order to get spending under control, a person
should first.
Of the power of compounding and appreciation Money- Compounding interest.
Rationale: It is important to save and invest early because of the power of compounding
and appreciation. When money compounds, interest is earned on interest, which greatly
increases the value of the money. - Answer-Financial planners generally stress the
importance of starting to save and invest early because
The price for the car can vary a great deal. deal. Money- Purchasing strategies
(comparison shopping). Rationale: As with any large
purchase, a person should comparison shop for the best price. - Answer-Comparison
shopping for a car is necessary because
Has a specific time frame. Rationale: A person's financial goals should be S.M.A.R.T. -
Specific, Measurable, Attainable, Realistic, and
Timely. "Timely" means that a goal should be anchored to a timeframe. By establishing
a specific timetable to achieve the goal, it is more likely to be accomplished. A person's
goals are defined as short- term, intermediate, and long-term. - Answer-An important
feature of a good financial goal is that the goal
Inflation. Money- Inflation. Rationale: During times of inflation purchasing power is
decreased as the value of money declines and prices
rise. For example, if the cost of buying groceries for seven days increases from $100
last year to $105 this year, it is because of inflation. Thus, with the same level of income
this year the person is unable to purchase as many groceries as they did last year. -
Answer-Purchasing power decreases and it costs more money to buy goods when there
is
Following a budget that allows for savings Money- Budget with savings. Rationale:
Creating a budget that includes savings is the best
way to achieve a financial goal such as setting aside enough money for a down
payment (usually 10%-20% is required) to purchase a
house. If necessary, a person may need to reduce spending in order to save. A larger
down payment in cash may eliminate the
requirement for mortgage insurance. - Answer-What strategy can help a person achieve
her goal to buy a house?
,Is the new cell phone a need or want? Money -Needs vs. Wants. Rationale: Because
the student is on a tight budget, he has to be very
careful about spending his money. He already has a cell phone that meets his needs for
communication, so before making a decision to
exchange it for the newest product, he should ask himself whether he actually needs a
new one or whether he simply wants it because it
has the newest features and applications. - Answer-A college student has to live on a
tight budget. Before making a decision to buy the newest cell phone, which question
should he ask
himself first?
"A penny saved is a penny earned." Money-Savings. Rationale: The phrase a "penny
saved is a penny earned" means that it is a good
idea to save money because it can earn interest. We should not spend or waste money,
but try to save it. This represents the "time value of money." It is a quote from the 18th
century. - Answer-Which of the following quotes is sound financial advice?
Rent. Money- Budgeting - fixed expenses. Rationale: Fixed expenses are those
expenses that are the same amount each month such
as rent, a mortgage payment, or car insurance. Variable expenses are those expenses
that vary from month-to- month such as food,
vacation or entertainment costs. - Answer-Fixed expenses include
fixed expenses - Answer-Expenses that do not change from month to month, such as
auto insurance or rent.
Federal withholding tax and FICA Money- Payroll deductions. Rationale: Each pay
period, federal income taxes are withheld from an employee's paycheck. Other
withholding taxes may include state taxes, local taxes, Medicare and Social Security
(FICA). Voluntary
deductions may include a personal retirement savings plan (IRA, 401k) or flexible
spending plans for medical expenses. - Answer-Mandatory deductions from a person's
paycheck include
Federal withholding tax and FICA Money- Payroll deductions. Rationale: Each pay
period, federal income taxes are withheld from an employee's paycheck. Other
withholding taxes may include state taxes, local taxes, Medicare and Social Security
(FICA). Voluntary
deductions may include a personal retirement savings plan (IRA, 401k) or flexible
spending plans for medical expenses. - Answer-When should a person begin
contributing to a retirement plan?
Wages/salary. Money- Source of income. Rationale: For most people aged 20-35, the
major source of income is their earnings or wages
from a job. Rent and mortgage payments are expenditures, not sources of income for
the person who has to pay them. Dividends are
, monies earned through investments. While dividends provide income, it is not usually a
major source of income early in life. - Answer-Which of the following is the source of
income for most people aged 20-35?
U.S. Internal Revenue Service (IRS) Money- Power to assess taxes. Rationale: The IRS
is responsible for the collection of federal taxes
and the enforcement of tax laws. The Fed regulates banks and the money supply, the
SEC regulates the sale of stocks and bonds, and the CFPB educates consumers and
enforces laws and regulations about credit. - Answer-The U.S. government agency
responsible for the collection and enforcement of federal taxes is known as
Total expenses + savings = total income Money- Balanced budget. Rationale: In
creating a balanced budget a person should include a
portion of income as savings for future goals such as education, a car or a home. To
have a balanced budget, the income has to cover both
savings and expenses. - Answer-When a person has a balanced budget that includes
savings then
To build wealth. Money- importance of saving. Rationale: The advantage to saving 10%
of one's paycheck is to build wealth for the
future. Even if a person's take-home pay is $200 a week, if they put 10% or $20(each
week) in a savings account it will accumulate to
$1,040 in one year. This amount will also increase with interest over the course of one
year. - Answer-Why do financial advisors recommend that a person save at least 10%
of each paycheck?
Money received today is worth more than the same amount of money received in the
future Money- Time value of money. Rationale: A dollar received today is worth more
than a dollar received tomorrow because it can be saved, earn interest above the rate of
inflation and be invested. This is the concept of the time value of money. The "Rule of
72" is a convenient way to calculate the increased value of money
from interest. - Answer-The "time value of money" means that
Buy a book from that store Money- store gift cards Basic. Rationale: A store gift card is
only good for use in the store, on the store's
website, or at stores owned by that specific store company. In this case the card can
only be used for purchases in that particular book
store company. It is important to read the information on the card regarding an
expiration date, signature, and how to activate the card. A gift card from a credit card
company may be used for cash or to make a purchase in different stores. - Answer-
When a person receives a book store gift card, she can use it to
A will. Money - Will. Rationale: A will legally protects a person and distributes his/her
property based on his/her wishes and the needs of his/her family or survivors. It makes
clear how a person wants his/her property to be distributed after death. If there are
children under 18 years of age, the will indicates who will take care of the children. A will
