D363 Personal Finance - Set 1 - Part 1

Correct Answer: 20% debt repayment

The 50/30/20 method divides income into 50% for essentials and needs, 30% for lifestyle, and 20% for savings. Debt repayment is not a separate category in this method but may be part of the essentials or lifestyle expenses.

Correct Answer: Tangible assets

Tangible assets are personal property whose primary purpose is to maintain one’s everyday lifestyle, such as furniture or vehicles. They often depreciate in value over time.

Correct Answer: To cover unplanned financial emergencies

An emergency fund is set aside specifically to handle unexpected financial situations like medical bills, car repairs, or sudden job loss. The recommended amount is typically 3-6 months of living expenses.

Correct Answer: Cash flow statement

A cash flow statement tracks income and expense transactions over a specified period, showing where money was earned and spent. The balance sheet answers "Where are you financially right now?"

Correct Answer: Credit card debt

A short-term liability is any obligation that is due to be paid within one year, such as credit card debt. Mortgages and student loans are considered long-term liabilities.

Correct Answer: Easily convertible to cash

Monetary assets, also known as liquid assets or cash equivalents, are assets that can be quickly and easily converted to cash with little or no loss in value.

Correct Answer: Net worth

Net worth is the difference between an individual’s assets and liabilities. It represents their financial position at a specific point in time.

Correct Answer: 20%

According to the 50/30/20 method, 20% of income should be allocated to savings. The rest is split into 50% for essentials and 30% for lifestyle expenses.

Correct Answer: The price a willing buyer would pay a willing seller

Fair market value is the amount that a buyer and seller, both having reasonable knowledge of the asset and acting in their own interest, would agree upon.

Correct Answer: Owes more than they own

An individual is insolvent when their liabilities exceed their assets, resulting in a negative net worth.

Correct Answer: Surplus/Deficit = Total Income - Total Expenses

A surplus occurs when total income exceeds total expenses, while a deficit occurs when expenses exceed income. This formula calculates the net gain or loss over a period.

Correct Answer: Utility bill

Fixed expenses are typically consistent and predictable, such as rent or mortgage payments. Utility bills, however, can vary based on usage and are considered variable expenses.

Correct Answer: Equifax, TransUnion, Experian

The three major credit bureaus in the U.S. are Equifax, TransUnion, and Experian. They track individuals' credit history and provide reports to lenders.

Correct Answer: A conditional offer based on a pre-qualification

A pre-approved offer is extended after a lender has pre-qualified the applicant based on a credit report. Final approval depends on more detailed financial checks.

Correct Answer: The amount of credit used compared to the credit card limit

The credit utilization ratio measures how much credit you're using compared to your total available credit. A lower ratio is better for credit scores.

Correct Answer: A contract that specifies the repayment terms for a loan

A promissory note is a legal document that outlines the amount of the loan, interest rate, and repayment terms. It is used for loans, not credit cards.

Correct Answer: Someone with poor credit history who is charged higher interest rates

Subprime borrowers have poor credit histories and are considered higher-risk borrowers by lenders. As a result, they are often charged higher interest rates.

Correct Answer: 300-850

FICO scores, one of the most commonly used credit scoring systems, range from 300 to 850. A higher score indicates better creditworthiness.

Correct Answer: Income level

FICO scores are based on factors such as payment history, amounts owed, and credit mix. Income is not directly used in the calculation of a FICO score.

Correct Answer: The lender may take possession of the collateral

Secured loans require collateral, such as a house or car. If the borrower defaults, the lender may take possession of the collateral to recover their losses.