Introduction
True or False: When it comes to personal finance, knowledge is more important than self control.
True
True or False: Credit card companies make more money if you are slower to pay off your debt. They want you in debt, not out of debt.
Explain the tradeoff between risk and expected return.
Higher risk = higher reward
What is a mutual fund?
A mutual fund is a type of investment where you pay experts to invest for you, instead of making individual investment decisions yourself.
What types of companies are traded in the stock market: public or private?
Public companies are traded in the stock market.
How often are budgets typically done?
Monthly
If you were going to receive a loan, is it better for you if it is secured or unsecured and why?
It is better for you if it is unsecured- that means if you are unable to pay, the bank or whatever group gave you the loan will not be able to take any of your property as collateral.
What is liquidity?
Liquidity refers to how easily an asset can be turned into cash. If something is more liquid, it can easily be turned into cash, while if something is less liquid, it is more difficult to turn it into cash.
How does compound growth help you build wealth?
You get returns on your returns, instead of only getting a return on your initial investment, so your money builds up faster over time.
What is it called when a previously-private company goes public and makes their shares available to purchase to anyone for the first time?
IPO: initial public offering
Explain the difference between fixed and variable expenses.
Fixed expenses are the same each time, while variable expenses can change from month to month, week to week, etc.
If you worked at a bank that was about to give a loan to a customer, would it be better for you and the bank to give a secured or unsecured loan and why?
Which typically has a higher rate of return, savings or investments? Which typically comes with more risk?
Investing is the correct answer for both- higher risk equals higher expected return. With savings, you generally will not lose your money, while investing always comes with some risk of losing your money. To compensate for this, it needs to have a higher expected return or no one would invest.
Rank the following types of investments from highest to lowest expected return: real estate, stocks, bonds.
Why is the stock market so important for retirement planning for many people?
For a lot of people, the stock market is one of the best ways to get a good enough return to have the money needed for retirement.
Explain the difference between essential and discretionary expenses.
Essential expenses are those that are not optional- food, utilities, rent/mortgage, etc. Discretionary expenses are optional or at your discretion- you can choose whether or not to spend money on them.
What is bankruptcy and what is one example of a way it can negatively impact you?
Bankruptcy is when a person or business legally declares that they are not able to pay their debts. This can impact them negatively in a lot of ways- for example, it can make it harder to get loans in the future, it can affect one's ability to get certain jobs, it can come with a stigma, and many other drawbacks. Even though some of your debts may be cleared, it is not good for you or your finances.
What is diversification? How does it relate to the phrase "don't put all your eggs in one basket?"
Diversification is the idea of spreading out your investments so that you don't lose all your money if one of your investments fails. This is one of the most important concepts of personal finance. The phrase "don't put all your eggs in one basket" illustrates this point- if you put all your eggs in one basket and it breaks, you lose all your eggs. However, if you spread the eggs around to different baskets, if one breaks, the others will likely still be okay.
Rank the following types of investments from highest risk to lowest risk: real estate, stocks, bonds
Highest to lowest: stocks, real estate, bonds
What does it mean that the stock market runs on speculation?
People's expectations determine the stock price for the companies in the stock market, and their expectations affect their actions in terms of what they buy and sell. In other words, speculation affects the stock market directly by determining prices and indirectly by impacting people's actions.
What is meant by the phrase "managing finance without a budget is like playing darts blindfolded?"
If you don't use a budget to manage your finances, you are just hoping things will work out without a real plan to make them work.
Explain why the incentives offered to car salespeople often result in them putting themselves before the customer.
Car salespeople (and salespeople in general) often receive incentives that encourage them to sell more expensive items or just to make more sales. When this happens, the salespeople feel pressure to make more money instead of doing what is best for the customer, and so they might try to manipulate customers into buying things that are more expensive than they want or buying things that aren't really what they need.
Who can probably afford more risk: an older person who is just about to retire, or a young person just beginning their career?
Younger person- they have more time to build their wealth back up if anything happens.
Rank the following types of investments from highest to lowest liquidity: real estate, stocks, bonds
Highest to lowest: stocks, bonds, real estate
Why is it a better idea for most people to invest in a mutual fund than to try to "beat the market" themselves?
Most people do not have the knowledge or time to make the same quality of investments that a mutual fund would make on their behalf- in other words, mutual funds are more likely to invest well and get you a better return.