W!SE Financial Literacy Certification Test Questions with Complete Solutions

Earned Income - Income derived from active participation in a trade or business, including wages, salary, tips, commissions and bonuses. Unearned Income - Any income that comes from investments and other sources unrelated to employment services. Examples: interest from a savings account, bond interest, alimony, and dividends from stock Exemptions (aka allowance) and how they work - If you are not claimed as a dependent on another taxpayer's return, then you can claim one personal tax exemption. The exemption reduces your taxable income just like a deduction does, but has fewer restrictions to claiming it. If you are married and file a joint tax return, both you and your spouse each get an exemption. Exemptions (aka allowance) and how they work PART 2 - The IRS allows you to take additional exemptions for each dependent you claim. Frequently, the source of these exemptions are the children who live with you for more than half the year, are under 19 years old (or under 24 if a full-time student) and who don't provide more than half of their own financial support during the tax year. Liquidity - what does it mean? - The ability to convert an asset to cash quickly and with minimal impact to the price. Liquidity - what financial products are liquid? - Examples: Cash, Most stocks, money market instruments and government bonds. Gift cards - how do they work? - A gift card is a restricted monetary equivalent is issued by retailers or banks to be used as an alternative to a non-monetary gift. Gift cards - how do they work - fees? - Prepaid cards, gift cards, and gift certificates cannot expire within five years of activation or unless the terms of the expiration are clearly disclosed. The law bans dormancy fees, inactivity fees or service fees on gift cards unless there has been no activity in a 12-month period and the issuer clearly discloses all fees before the gift card is purchased. Gift cards - how do they work - fees? (Exclusions) - Prepaid phone cards , re-loadable cards, loyalty or rewards cards, cards issued for admission to special events or venues and certificates issued in paper form only are exempt. Discretionary income and budget surplus - The amount of an individual's income that is left for spending, investing or saving after taxes and personal necessities (such as food, shelter, and clothing) have been paid. Discretionary income includes money spent on luxury items, vacations and non-essential goods and services. Money orders - high rate of counterfeits - A certificate that allows the stated payee to receive cash on-demand, usually issued by governments and banking institutions. A money order functions much like a check, in that the person who purchased the money order may stop payment. Why does the US currency have value? - Its value is only based on what we can get in exchange for it. Or put it another way, money has value as long as other people believe the money you give them can be exchanged for the goods and services they desire in the future. Opportunity cost - The second-best alternative (or the value of that alternative) that must be given up when scarce resources are used for one purpose instead of another Who is hurt the most and least with inflation - Inflation is a general increase in prices and a corresponding decrease in money's purchasing power. Who is hurt the most with inflation? - Those on fixed incomes (retired people) Who is hurt the least with inflation? - Borrowers and producers Role of the treasury department - The United States Department of the Treasury is the government (Cabinet) department responsible for issuing all Treasury bonds, notes and bills. Role of the treasury department - The U.S. Treasury is responsible for the revenue of the U.S. government, but here are some other key functions: - Printing of bills, postage, Federal Reserve notes, and minting of coins - Collection of taxes and enforcement of tax laws (through the IRS) - Management of all government accounts and debt issues - Overseeing U.S. banks - Identifying and targeting the financial support networks of national security threats Pay yourself first (savings) - Put money into savings each month as if it were a bill. At least 10% of your income should go into savings. It's recommended you have 6-8 months of expenses saved. CD - Sold by financial institutions, low-risk -- and relatively low-return — investments suitable for cash you don't need for months or years. If you leave the money alone during the investment period (known as the "term" or "duration"), the bank will pay you an interest rate slightly higher than what you would have earned in a money market or checking account. All gains are taxable as income. CD - among the safest investment a person can make. The interest rate is determined ahead of time, and you're guaranteed to get back what you put in, plus interest once it matures. Traditional CD - You receive a fixed interest rate over a specific period of time. When that term ends, you can withdraw your money or roll it into a new account Liquid CD - This kind of account allows you to withdraw part of your deposit without paying a penalty. The interest rate on is usually is a little lower than others, but the rate is still higher than the rate in a money market account. Zero-coupon CD - does not pay out annual interest, and instead re-invests the payments so you earn interest on a higher total deposit. The interest rate offered is slightly higher than others, but you'll owe taxes on the re-invested interest. Institutions that give loans- Pawnshops - You are given a short-term loan in exchange for leaving a personal item, such as jewelry or an electronic device, as collateral. If you pay back the loan, including interest, on time, you get the item back. You may be able to renew the loan by paying the interest. However, if you fail to repay or renew the loan, your item can be sold. The APRs for pawn shop loans are typically around 120-300 percent, much higher than the rate charged on credit cards. Many pawn shops also charge additional fees for insurance and storage. Institutions that give loans- Payday lenders - A payday lender allows you to borrow against your future income. You give them a postdated check, which is deposited if you do not pay back the loan. The APR (interest expressed as an annual percent rate) is usually over 200 percent and can go much higher if you refinance the loan instead of paying it off as soon as it comes due. Institutions that give loans- Banks vs. credit unions - Credit unions generally charge lower interest rates. Institutions that give loans- Tax preparers - short-term consumer loans, usually 24 to 48 hours, secured by a taxpayer's expected tax refund, and designed to offer customers quicker access to funds. What is a credit union? - Member-owned financial co-operative. These institutions are created and operated by its members and profits are shared among the owners.