Chapter 5, 6, & 7 Review

Chapter 5, 6, & 7 Review

Banking, Consumer Credit, Housing

Chapter 5

Banking

Multiple Choice

Which type of savings account usually offers check writing and debit card privileges?

• Regular Savings Account

• Money Market Accounts

• Certificates of Deposit

Multiple Choice

Which account is the most liquid?

• Regular Savings Account

• Money Market Account

• Certificate of Deposit

Regular Savings Account

• A regular savings account is a type of bank or credit union account where you can store money securely while earning some interest. Their safety and reliability make them a great option for storing cash you want available for short-term needs.

• Benefits: Low or no minimum balance. Your access to funds will remain extremely liquid. FDIC insured. Can be linked to your primary checking account. Many institutions allow you to open more than one savings account.

• Drawbacks: Low rate of return. Ready availability of funds may tempt you to spend what you’ve saved. Only six outgoing transactions per statement cycle. The rate you’ll earn is generally variable.

Certificates of Deposit

• A certificate of deposit (CD) is a savings alternative in which money is left on deposit for a stated period of time to earn a specific rate of return. This period of time is called the term. The date when the money becomes available to you is called the maturity date.

• Benefits: Offers a higher interest rate. Pays a guaranteed, predictable rate of return. FDIC insured. Can help fend off spending temptations since withdrawing the funds early triggers a penalty.

• Drawbacks: Cannot be liquidated before maturity without incurring an early withdrawal penalty. Typically earns less than stocks and bonds can over time. Earns a fixed rate of return regardless of whether interest rates rise during the term.

Money Market Account

• A money market account is a savings account that requires a minimum balance and earns interest that varies from month to month. The rates float, or go up and down, as market rates change.

• Benefits: Higher interest rates than a regular savings account. FDIC insured. Often include checkwriting and debit card privileges.

• Drawbacks: Minimum balance, typically $1,000. Many will impose monthly fees if the balance falls below the minimum. Limited transactions, usually 6 per month.

Multiple Choice

An account that is compounded yearly will have a HIGHER rate of return than an account that is compounded monthly.

• True

• False

Compounding

• Compounding is the process in which interest is earned on both the principal – the original amount deposited – and on any previously earned interest.  

• Compounding may take place every year, every quarter, every month, or even every day.

• The more frequently your balance is compounded, the greater your yield, or rate of return, will be.

Evaluating a Savings Plan

• Tax Considerations: taxes reduce the interest earned on savings. To avoid this, you can look into tax-exempt and tax-deferred saving plans.

• Liquidity: Check the savings plans you are considering to determine whether they charge a penalty or pay a lower rate of interest if you withdraw your funds early. Liquid accounts are better for short-term saving.

• Restrictions and Fees: Be aware of any restrictions or fees, such as minimum balance or withdrawal fees.

Multiple Choice

How much of your take-home pay should go towards savings?

• 10%

• 20%

• 30%

Multiple Choice

You ALWAYS have to have a minimum deposit to open a checking account.

• True

• False

Evaluating a Checking Account

• Restrictions: The most common restriction is that you keep a minimum balance. Other restrictions may include the number of transactions allowed and the number of checks you can write.

• Fees and Charges: you may pay a monthly service charge as well as fees for check printing, overdraft, and stop-payment orders.

• Interest: Interest rates, frequency of compounding, and the way in which interest is calculated all affect an interest-bearing checking account.

• Special Services: Checking account services include using ATMs, online banking, and overdraft protection – an automatic loan made to an account if the balance will not cover a payment.

Chapter 6

Consumer Credit

Multiple Choice

Which of the following words best describes how credit works?

• Loan

• Savings

• Payment

Consumer Credit

• Credit is an arrangement to receive cash, goods, or services now and pay for them in the future. Consumer credit is the use of credit for personal needs.

• Having the ability to borrow funds allows us to buy things we would otherwise have to save for years to afford: homes, cars, or a college education.

• While using credit may increase the amount of money you can spend now, it decreases the amount of money you will have in the future as you have to pay back money you borrow along with any charges for borrowing that money.

Evaluating Credit Cards

• Most credit card companies offer a grace period, a time period during which no finance charges will be added to your account. 

• A finance charge is the total dollar amount you pay to use credit.  The finance charge is calculated using the annual percentage rate (APR).

• Some credit card companies charge card holders and annual fee. However, many companies have eliminated annual fees.

• Compare rewards, interest rates, and restrictions and fees between credit cards before choosing one.

Multiple Choice

What is a safe debt payments-to-income ratio?

• 10% or less

• 20% or less

• 30% or less

• 40% or less

Debt Payments-to-Income Ratio (DPR)

• Although you cannot measure your credit capacity exactly, you can use the debt payments-to-income ratio formula to determine whether you can safely take on the responsibility of credit.

•  $\frac{Monthly\ Debt\ Payments}{Monthly\ Net\ Income}=$  Debt Payments-to-Income Ratio
  

• You should aim for a DPR of 20% or less.

Chapter 7

Housing

Multiple Select

What should you look for when considering a rental? Select all that apply.

• Size

• Cost

• Location

• Amenities

• Length of Lease

Evaluating a Rental

• Location: Near school, work, place of worship, shopping, public transportation, parks and museums

• Finances: Amount of monthly rent, amount of security deposit, cost of utilities, length of lease

• Building: condition of building and grounds, parking facilities, security system, condition of hallways, stairs, and elevators 

• Layout and Facilities: size and condition of unit, plumbing, type and condition of appliances, condition of doors, locks, windows, closets, and floors

Pros and Cons of Renting

• Pros: low initial costs, mobility, limited maintenance responsibilities, tenants do not have to worry about property taxes or property insurance.

• Cons: few financial benefits, less freedoms and a more restrictive lifestyle, may cost more in the long-term as a tenant must continue to pay housing costs each month for as long as they continue to rent.

Multiple Select

What is an advantage of owning a home vs renting? Select all that apply.

• Mobility

• Tax Advantages

• Very little or no maintenance responsibilities

• Long-Term Investment

Pros and Cons of Owning a Home

• Pros: provides a certain amount of stability, provides privacy and some freedoms that may not available to renters, provides financial benefits, such as tax advantages, and provides a long-term investment as the value of a house may increase.

• Cons: limited mobility, large financial commitment, high living expenses, and all maintenance responsibilities fall on you.

The Cost of Buying a Home

• Down Payment: A large down payment can reduce your mortgage cost.

• Mortgage Rates and Points: You will also need to consider what type of mortgage to arrange.

• Closing Costs: Settlement costs may range anywhere from 2 to 6 percent of the total amount you borrow.  That is in addition to the down payment.

• Monthly Payments: Your monthly payment for interest, principal, insurance, and taxes will be among your largest, most enduring expenses. 

• Maintenance Costs: Homes require a lot of repair and maintenance.