#1
What is the primary goal of personal financial planning?
To achieve financial goals
ExplanationOptimizing strategies to fulfill financial objectives and aspirations.
#2
What does the term 'compound interest' mean in the context of personal finance?
Interest calculated on both the initial principal and the accumulated interest
ExplanationEarning interest not just on the initial sum but also on previously earned interest.
#3
What does the term 'net worth' represent in personal finance?
Total assets minus total liabilities
ExplanationCalculation of wealth by subtracting liabilities from total assets.
#4
What is the purpose of a 'credit score' in personal finance?
To assess creditworthiness and risk for lenders
ExplanationNumerical representation evaluating creditworthiness and lending risk.
#5
What is the 50/30/20 rule commonly used for in budgeting?
Allocating income for needs, wants, and savings
ExplanationGuideline for distributing income to essential expenses, discretionary spending, and savings.
#6
What does the term 'Emergency Fund' refer to in personal finance?
A fund for unexpected expenses or emergencies
ExplanationReserved funds to cover unforeseen financial challenges or urgent situations.
#7
What is the purpose of a 'Roth IRA' in retirement planning?
To enable tax-free withdrawals in retirement
ExplanationRetirement account allowing tax-free withdrawals during retirement.
#8
In the context of budgeting, what does the term 'discretionary spending' refer to?
Spending on non-essential items
ExplanationExpenditure on non-essential items or services beyond basic needs.
#9
In the context of investing, what is the purpose of diversification?
To spread investments across different assets to reduce risk
ExplanationRisk mitigation by distributing investments across varied assets.
#10
What does the term 'liquidity' refer to in financial planning?
The ease with which an asset can be converted to cash
ExplanationEase of converting an asset into cash without significant loss of value.
#11
What is the purpose of a '401(k)' in the context of personal finance?
A retirement savings plan sponsored by an employer
ExplanationEmployer-sponsored retirement savings plan offering tax advantages.
#12
What is the debt-to-income ratio used for in financial planning?
To assess the ability to manage debt relative to income
ExplanationMeasure evaluating the capacity to handle debt in proportion to income.
#13
What is the difference between a 'traditional IRA' and a 'Roth IRA'?
Taxable contributions but tax-free withdrawals
ExplanationContrast lies in taxable contributions and tax-free withdrawals.
#14
What role does insurance play in personal financial planning?
To protect against financial losses due to unexpected events
ExplanationShielding against financial losses arising from unforeseen events.
#15
What is the purpose of a '529 plan' in personal finance?
To fund education expenses
ExplanationFinancial tool designed to support education-related expenditures.
#16
How does inflation impact personal financial planning?
It decreases the value of money over time
ExplanationGradual reduction in the purchasing power of money over time.