W!SE Financial Literacy Certification Test Topic Checklist Questions with Complete Solutions Rated A+

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 - 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. Money market accounts: - A money market account is an interest-bearing account that typically pays a higher interest rate than a savings account, and which provides the account holder with limited check-writing ability. A money market account thus offers the account holder benefits typical of both savings and checking accounts. This type of account is likely to require a higher balance than a savings account, and is FDIC insured. Bonds - A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer. 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 - 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 - 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 - What you give up when you make one choice over another. Example: You decide to spend $80 on some great shoes and do not pay your electric bill. The opportunity cost is having the electricity turned off, having to pay an activation fee and late charges. You might also have food in the fridge that gets ruined and that would add to the total cost. Inflation - is a general increase in prices and a corresponding decrease in money's purchasing power. Consumer Price Index - The economic indicator for stable prices is the Consumer Price Index (CPI). The CPI measures inflation in consumer goods. Inflation is an increase in the overall price level— sometimes referred to as an increase in the cost of living. Inflation is not when gas prices rise or coffee prices rise—it is when prices in general are rising. Who is hurt the most and least with inflation? - The biggest losers due to inflation are those willing to lend money. An extreme example would be during the hyperinflation of 1923 in Germany. If you had loaned a friend enough money to buy a car in early 1923 and he had repaid it at the end of 1923 you might have been able to buy a box of matches with it. So it is easy to see that the borrower got a car and he was able to repay it with pocket change. The lender of course was the big loser. Who is hurt the most and least with inflation- People hurt the most - Those on fixed incomes (retired people) Who is hurt the most and least with inflation- People hurt the least - Borrowers and producers Who is hurt the most and least with inflation - When individuals, businesses, and governments borrow, it is usually at a fixed rate of Interest that had some expected level of inflation built into it. If higher than expected inflation occurs, then the real value of the borrower's debt is reduced. Assume that banks lend billions of dollars at a fixed nominal interest rate of 5%. If inflation were to unexpectedly increase from 2% to 4%, then borrowers' real interest rate paid would be reduced from 3% to 1%. In simpler terms, the money that was lent was more precious than the money being repaid.