#1
What is the first step in creating a budget?
Determining income
ExplanationIdentifying how much money you have available to allocate.
#2
What is the key principle behind the 'Pay Yourself First' strategy?
Saving a portion of income before other expenses
ExplanationPrioritizing personal savings before allocating funds to other expenditures.
#3
What does the term 'emergency fund' refer to in personal finance?
Savings for unexpected expenses
ExplanationA reserve set aside to cover unforeseen financial challenges.
#4
Which type of debt typically has the highest interest rates?
Credit cards
ExplanationOften associated with high-interest rates, making them costly to maintain.
#5
What is the purpose of a sinking fund in budgeting?
To save for a specific future expense
ExplanationSetting aside money regularly to cover a planned expense, avoiding financial strain.
#6
What is the debt snowball method for paying off debts?
Paying off the smallest debts first
ExplanationEliminating smaller debts initially to gain momentum and motivation for larger debts.
#7
What is the difference between a fixed and variable expense in a budget?
Fixed expenses remain constant, while variable expenses can change
ExplanationExpenses that stay consistent versus those that fluctuate based on usage or other factors.
#8
What is the 50/30/20 rule in budgeting?
Allocation of income for needs, wants, and savings
ExplanationA guideline suggesting how to distribute income for optimal financial management.
#9
What does 'net worth' represent in personal finance?
Total assets minus liabilities
ExplanationThe value of what you own minus what you owe, indicating overall financial health.
#10
What is the purpose of a Roth IRA in personal finance?
Tax-free retirement savings
ExplanationA retirement account allowing tax-free growth and withdrawals under certain conditions.
#11
What does the term 'opportunity cost' mean in personal finance?
The value of the next best alternative forgone
ExplanationThe potential benefit sacrificed when choosing one option over another.
#12
What is the purpose of a 401(k) in retirement planning?
Tax-advantaged retirement savings
ExplanationA retirement savings plan offering tax benefits to encourage long-term investment.