Financial Literacy Practice Test
questions & correct answers passed
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. - ANS ✔✔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. - ANS ✔✔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. - ANS ✔✔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. - ANS ✔✔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. - ANS ✔✔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. - ANS ✔✔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. - ANS ✔✔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. - ANS
✔✔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. - ANS ✔✔Fixed expenses include
fixed expenses - ANS ✔✔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. - ANS ✔✔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. - ANS ✔✔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. - ANS ✔✔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
questions & correct answers passed
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. - ANS ✔✔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. - ANS ✔✔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. - ANS ✔✔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. - ANS ✔✔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. - ANS ✔✔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. - ANS ✔✔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. - ANS ✔✔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. - ANS
✔✔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. - ANS ✔✔Fixed expenses include
fixed expenses - ANS ✔✔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. - ANS ✔✔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. - ANS ✔✔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. - ANS ✔✔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
