Budgeting Basics
What is the term for money left over after paying all expenses?
Disposable income
What does "compound interest" mean?
Interest is earned on both the initial deposit and previously earned interest
Name one factor that influences your credit score. Why is it important to build a high credit score?
Examples include payment history, credit utilization, and length of credit history.
Credit score impacts ability to secure loans. Perks include rewards, insurance coverage, cash back.
What does "gross income" mean?
Income before taxes and deductions.
What is the term for spending more than you earn?
Overspending
How does inflation impact a household budget?
Inflation increases the cost of goods and services, reducing purchasing power and potentially requiring adjustments in spending
What is the term for spreading investments across different types of assets to reduce risk? Name 2 asset classes to invest in.
Diversification. Stocks, bonds, real estate, precious metals.....
What is the term for the total amount of money borrowed on a credit card that hasn’t been paid back? Why is it unwise to be in such a situation?
Outstanding balance. The interest rate, APY, charged by credit card companies are typically extremely high compared to other financing sources and should be the last resort.
Name two types of income other than wages or salary.
Examples include rental income, dividends, interest, or freelance/side hustle income.
What is the "time value of money" and how could this affect your spending decisions?
Money today is worth more than the same amount in the future due to its earning potential. Considering this could help you decide to postpone big purchases until necessary.
What are opportunity costs and how can tracking opportunity costs improve budgeting decisions?
Opportunity cost is the value of the largest foregone alternative action or decision. Tracking OCs helps individuals evaluate what they’re giving up when they spend money in one area versus another
What is the difference between stocks and bonds? Which one would you invest in and why?
Stocks are shares of ownership in a company, while bonds are loans to companies or governments
What is credit utilization, and how does it affect your credit score?
Credit utilization is the percentage of available credit used. Lower utilization improves credit scores
How can contributing to pre-tax retirement accounts lower current taxable income?
Contributions reduce gross income, which lowers the amount subject to income tax.
What is the concept of “pay yourself first,” and how does it encourage savings?
It involves saving a portion of income before spending on anything else, ensuring consistent savings.
What is the primary advantage of maintaining a 3-6 month emergency fund?
It provides financial security during job loss, emergencies, or unexpected expenses
What is a 401(k) and what is an "employer matching plan" in this context?
An employer-sponsored retirement savings plan with tax benefits. A matching plan is when your employer matches your contribution to your 401k. This is essentially a bonus that adds to your 401k account.
What is a credit report freeze, and when should it be used?
A credit freeze restricts access to your credit report to prevent identity theft. It’s used when personal data is compromised
What is the purpose of a W-2 form?
It reports wages earned and taxes withheld.
What is confirmation bias and how could it impact investment decisions?
Confirmation bias causes individuals to seek out information that confirms their existing beliefs while ignoring or dismissing contradictory evidence. This can hinder effective investment decision-making by clouding judgment and preventing objective analysis and research.
What is the difference between zero-based budgeting and envelope budgeting?
Zero-based budgeting allocates every dollar of income, while envelope budgeting involves physically or virtually dividing money into categories
Explain the concept of dollar-cost averaging.
Dollar-cost averaging involves regularly investing a fixed amount of money regardless of market conditions, reducing the impact of volatility.
What are the main differences between installment credit and revolving credit?
Installment credit involves fixed payments over a set term, like a car loan, while revolving credit allows flexible borrowing, like a credit card
What’s the difference between a tax deduction and a tax credit?
A deduction reduces taxable income, while a credit directly reduces the amount of tax owed.
What is the "anchoring bias" in financial decision-making?
Anchoring bias is relying too heavily on the first piece of information encountered, like an initial price.