D363 Personal Finance Compressed Notes
and actual test questions and answers
Western Governors University
,Compressed Notes:
Section 1 L 1 -3
1. Financial Institutions & Their Services:
● Depository Institutions (Banks, Mutual Savings Banks, Credit Unions):
Checking, savings, lending, credit cards, investments, and trust advice. (Examples:
Bank of America, Citibank, Chase, Wells Fargo)
● Mutual Funds: Money market funds, tax-exempt funds, bond funds, stock
funds. (Examples: Fidelity, T. Rowe Price, Vanguard)
● Stock Brokerage Firms: Securities investments, mutual funds, real estate
investment trusts. (Examples: Fidelity, Schwab)
● Financial Services Companies: Comprehensive services including checking,
savings, lending, investments, insurance, and financial planning. (Examples: American
Express, Edward Jones, Raymond James)
● Insurance Companies: Offer property, liability, health, life insurance, credit
services, and financial planning. (Examples: Allstate, Aetna, State Farm)
3. CD Laddering Strategy:
● CD Laddering: A strategy to spread investments into Certificates of Deposit (CDs)
with different maturity dates to reduce interest rate and reinvestment risks.
○ Example: Invest $10,000 into five CDs with staggered terms (1 year, 2 years,
3 years, etc.). Renew each CD after maturity at the best market rate available.
○ Benefit: Ensures access to money annually and averages the interest rate
over time.
4. Debt & Income Ratios:
● Debt-to-Income Ratio (DTI): Measures total debt burden compared to income. A
key figure to know when evaluating financial health.
● Debt Payment to Disposable Income: Should not exceed 36%. The 28/36 rule
expands on the 28% rule by also considering your total debt-to-income ratio. It suggests
limiting your mortgage costs to 28% of your gross monthly income and keeping your
total debt payments, including your mortgage, car loans, student loans, credit card debt
and any other debts, below 36%.
5. Setting Financial Goals:
● Components of Financial Goals: Spend less than you make, save, and invest
the difference.
● Financial Planning: The process of defining what is important (values), setting
goals, developing action plans, and reviewing progress via budgeting and feedback.
, 6. Emergency Fund:
● Definition: An account for use in emergencies such as job loss or illness.
● Recommended Amount: 3-6 months of living expenses.
7. Examples of Financial Goals:
● Pay off credit card debts, save for retirement, buy a home, take a vacation,
fund children’s education, etc.
8. Measure of Wealth:
● Net Worth is considered the most useful measure of personal wealth.
9. Difference Between Balance Sheet & Cash Flow Statement:
● Balance Sheet: Shows assets, liabilities, and net worth at a specific point in time.
● Cash Flow Statement: Summarizes income and expenses over a period
(month/year), showing where money came from and went.
10. Components of a Balance Sheet:
● Assets: What you own.
● Liabilities: What you owe.
● Net Worth: Assets minus liabilities.
11. Examples of Assets:
● Monetary Assets: Cash, checking/savings accounts, money market accounts.
● Tangible Assets: Cars, home, appliances, jewelry.
● Investment Assets: Stocks, bonds, real estate, retirement accounts.
12. Fixed vs. Variable Expenses:
● Fixed Expenses: Consistent costs such as rent or loan payments.
● Variable Expenses: Costs that fluctuate like food, entertainment, or clothing.
13. Liquidity Ratio:
● Question Answered: "Do I have enough liquidity to pay for emergencies?"
● Formula: Monetary assets divided by monthly expenses.
14. Debt-to-Income Ratio:
● Question Answered: "Is my total debt burden too high?"
● Formula: Annual debt repayments divided by gross income, multiplied by 100.
and actual test questions and answers
Western Governors University
,Compressed Notes:
Section 1 L 1 -3
1. Financial Institutions & Their Services:
● Depository Institutions (Banks, Mutual Savings Banks, Credit Unions):
Checking, savings, lending, credit cards, investments, and trust advice. (Examples:
Bank of America, Citibank, Chase, Wells Fargo)
● Mutual Funds: Money market funds, tax-exempt funds, bond funds, stock
funds. (Examples: Fidelity, T. Rowe Price, Vanguard)
● Stock Brokerage Firms: Securities investments, mutual funds, real estate
investment trusts. (Examples: Fidelity, Schwab)
● Financial Services Companies: Comprehensive services including checking,
savings, lending, investments, insurance, and financial planning. (Examples: American
Express, Edward Jones, Raymond James)
● Insurance Companies: Offer property, liability, health, life insurance, credit
services, and financial planning. (Examples: Allstate, Aetna, State Farm)
3. CD Laddering Strategy:
● CD Laddering: A strategy to spread investments into Certificates of Deposit (CDs)
with different maturity dates to reduce interest rate and reinvestment risks.
○ Example: Invest $10,000 into five CDs with staggered terms (1 year, 2 years,
3 years, etc.). Renew each CD after maturity at the best market rate available.
○ Benefit: Ensures access to money annually and averages the interest rate
over time.
4. Debt & Income Ratios:
● Debt-to-Income Ratio (DTI): Measures total debt burden compared to income. A
key figure to know when evaluating financial health.
● Debt Payment to Disposable Income: Should not exceed 36%. The 28/36 rule
expands on the 28% rule by also considering your total debt-to-income ratio. It suggests
limiting your mortgage costs to 28% of your gross monthly income and keeping your
total debt payments, including your mortgage, car loans, student loans, credit card debt
and any other debts, below 36%.
5. Setting Financial Goals:
● Components of Financial Goals: Spend less than you make, save, and invest
the difference.
● Financial Planning: The process of defining what is important (values), setting
goals, developing action plans, and reviewing progress via budgeting and feedback.
, 6. Emergency Fund:
● Definition: An account for use in emergencies such as job loss or illness.
● Recommended Amount: 3-6 months of living expenses.
7. Examples of Financial Goals:
● Pay off credit card debts, save for retirement, buy a home, take a vacation,
fund children’s education, etc.
8. Measure of Wealth:
● Net Worth is considered the most useful measure of personal wealth.
9. Difference Between Balance Sheet & Cash Flow Statement:
● Balance Sheet: Shows assets, liabilities, and net worth at a specific point in time.
● Cash Flow Statement: Summarizes income and expenses over a period
(month/year), showing where money came from and went.
10. Components of a Balance Sheet:
● Assets: What you own.
● Liabilities: What you owe.
● Net Worth: Assets minus liabilities.
11. Examples of Assets:
● Monetary Assets: Cash, checking/savings accounts, money market accounts.
● Tangible Assets: Cars, home, appliances, jewelry.
● Investment Assets: Stocks, bonds, real estate, retirement accounts.
12. Fixed vs. Variable Expenses:
● Fixed Expenses: Consistent costs such as rent or loan payments.
● Variable Expenses: Costs that fluctuate like food, entertainment, or clothing.
13. Liquidity Ratio:
● Question Answered: "Do I have enough liquidity to pay for emergencies?"
● Formula: Monetary assets divided by monthly expenses.
14. Debt-to-Income Ratio:
● Question Answered: "Is my total debt burden too high?"
● Formula: Annual debt repayments divided by gross income, multiplied by 100.
