#1
Which of the following is a basic principle of personal finance?
Save and invest regularly
ExplanationRegular saving and investing are fundamental for financial stability and growth.
#2
What is the purpose of a credit score in personal finance?
To evaluate creditworthiness
ExplanationCredit scores assess an individual's creditworthiness, influencing borrowing terms and access to financial products.
#3
What is the concept of 'inflation' in personal finance?
A general rise in the prices of goods and services
ExplanationInflation refers to the overall increase in prices of goods and services over time, eroding purchasing power.
#4
What is the purpose of diversification in investment portfolios?
To spread risk across different assets
ExplanationDiversification reduces investment risk by spreading capital across various assets, minimizing the impact of individual asset underperformance.
#5
What is the primary purpose of a certificate of deposit (CD) in personal finance?
To earn a fixed interest over a specific term
ExplanationCDs offer a fixed interest rate over a set term, providing a secure investment option with predictable returns.
#6
What does the term 'compound interest' refer to in personal finance?
Interest calculated on the initial principal and also on the accumulated interest
ExplanationCompound interest refers to earning interest not only on the initial investment but also on the interest accumulated over time.
#7
What is the purpose of an emergency fund in personal finance?
To cover unexpected expenses
ExplanationEmergency funds provide financial security by covering unforeseen expenses without resorting to debt.
#8
In personal finance, what does the term 'debt-to-income ratio' represent?
The proportion of debt relative to income
ExplanationThe debt-to-income ratio indicates the percentage of income used to repay debts, a measure of financial health and risk.
#9
What is the primary purpose of a 401(k) retirement account?
Long-term retirement savings
Explanation401(k) accounts are designed to facilitate long-term retirement savings through tax advantages and employer contributions.
#10
What does the term 'liquid assets' refer to in personal finance?
Assets that can be easily converted to cash
ExplanationLiquid assets are readily convertible to cash without significant loss in value, providing financial flexibility and emergency funds.
#11
What is the purpose of a Roth IRA in retirement planning?
To offer tax-free withdrawals in retirement
ExplanationRoth IRAs provide tax-free withdrawals in retirement, offering tax advantages on contributions and earnings.
#12
What is the 50/30/20 rule in budgeting?
50% spending, 30% saving, 20% investing
ExplanationThe 50/30/20 rule suggests allocating 50% of income to necessities, 30% to discretionary spending, and 20% to savings and investments.
#13
What is the concept of 'opportunity cost' in personal finance?
The cost of missed opportunities
ExplanationOpportunity cost represents the potential benefit sacrificed when choosing one option over another.
#14
What is the concept of 'tax deduction' in personal finance?
A reduction in taxable income
ExplanationTax deductions decrease taxable income, lowering the amount owed in taxes and potentially increasing refunds.
#15
What is the significance of a will in personal finance planning?
To distribute assets after death
ExplanationWills dictate the distribution of assets upon death, ensuring wishes are honored and minimizing legal complications for heirs.
#16
What is the role of a financial advisor in personal finance?
To provide investment advice
ExplanationFinancial advisors offer personalized investment advice, financial planning, and guidance to help individuals achieve their financial goals.
#17
How does the 'snowball method' work in debt repayment?
Paying off the smallest debts first
ExplanationThe snowball method prioritizes paying off the smallest debts first, providing psychological motivation and momentum for debt reduction.