W!SE FINANCIAL LITERACY CERTIFICATION TEST Topic Check List Questions with Correct Solutions A+

Sources of income - wages, rentals, interest, capital, profits, investments, entrepreneurship Exemption (aka an allowance)) and how does it work - allowance is used to reduce amount of taxed income Liquidity—what does it mean; what products are liquid - the degree of ease in which assets can be sold Gift cards and how they work (a monthly inactivity fee may begin after 12 months) - closed loop system and open loop system Discretionary income or budget surplus - not allocated for food or shelter Money orders (high rate of counterfeits) - A money order is a payment order for a pre-specified amount of money and is purchased at different types of stores - it is used like a check. They are usually limited in maximum face value to some specified figure (for example, the United States Postal Service limits domestic postal money orders to US $1,000.00. US Postal money orders are hard to counterfeit. Why does the U.S. currency have value even though it is not tied to a commodity - there is a belief that money has value and therefore is accepted Opportunity cost - next best alternative - it is what is given up when a choice is made Who is hurt the most and the least with inflation - most hurt are lenders (banks) and people living on a fixed income. Least hurt are those who owe large amounts of money. Role of the Treasury Department - collects taxes, prints money, issues treasury bonds Pay Yourself First - automatically route money from paycheck to savings (before paying bills). CD: What is it and what happens if you cash it before maturity - it is a time deposit offered at financial institutions - penalty if cashed before maturity Institutions that give loans - banks, credit unions, pawnshops, finance companies, payday lenders, tax preparers Which institution(s) charge the highest interest rates on loans - pawnshops, payday lenders, tax refund lenders, finance companies What is a credit union and the advantage of using a credit union - member owned co-operative financial institution - advantage is lower interest rates on loans Overdraft protection (opt in regulation) and how it works - Overdraft protection is a feature offered by banks to keep your checking account from over-drafting when you write a check or swipe your debit card buy don't have enough money in your account. It is the loan that is paid back. Compound Interest - interest added to principal - interest earned on interest Time value of money - is calculated by value of money with given amount of interest earned over a period of time; the longer the time you keep your money invested, the more interest you will earn. Liquid financial products vs. products that are less liquid - savings and checking accounts are most liquid certificate of deposit and money market accounts are less liquid Rule of 72 - how long (many years) will it take to double an investment? Divide 72 by the interest rate to be earned: 72 divided by 3% interest = 24 years (if you are given the number of years and need to determine the interest rate needed to double your money, then divide 72 by the given number of years: 72 divided by 24 years = 3% interest). Reconciling a Checking account-- why and when - to view what activity has occurred in your account. Keep current with your check register to know what your current balance is at all times. When you receive your bank statement, you reconcile your check register against the statement to be sure no errors have been made and to record any bank fees and/or interest earned in your register. Repayment of student loans - 6 month grace period (after leaving school) before you start making payments. Tax anticipation loans - A refund anticipation loan (RAL) is a short-term consumer loan secured by a taxpayer's expected tax refund Credit card cash advances - provided by credit card companies - withdraw cash with credit card - you pay a higher interest rate Truth in Lending Act - Also called the Consumer Credit Protection Act, legislation enacted in 1968 requiring money lenders to be explicit about the true costs of credit transactions. The Truth-in-Lending Act also outlaws the use of threatened or actual violence to collect debts Consequence of paying the minimum payment due on credit card bill or paying a bill late - impacts credit score if paid late. If you are only paying minimum payment each month you will take a much longer time to pay off balance - you will greatly increasing the total amount paid back to APR charged per month. How does the degree of risk influence the interest rate charged for credit - if you have a low credit score, it demonstrates you are a poor credit risk, and you will pay a much higher