Saving Money - Money management Chapter 3

What is one of the basic reasons to pay yourself first and save money?

• To pay for daily expenses

• To invest in risky stocks

• For an emergency fund

• To avoid paying taxes

Answer explanation

Paying yourself first helps build an emergency fund, which is crucial for financial security. It ensures you have savings set aside for unexpected expenses, rather than relying solely on daily income.

Ramsey Chapter 3, lessons 2 and 3.

Which of the following is a characteristic of compound interest?

• Interest is calculated on the principal only

• Interest is calculated on the initial deposit and previously earned interest

• Interest rate is fixed for the entire period

• Interest is not earned on reinvested interest

Answer explanation

Compound interest is calculated on both the initial deposit and previously earned interest, allowing the investment to grow faster over time. This distinguishes it from simple interest, which is based only on the principal.

Discussed with JA presentation Spending and Savings and on 2.2 worksheet page 12 questions 1 and 3

What is the Rule of 72 used for?

• Calculating simple interest rates

• Determining how long it will take for an investment to double at a fixed annual rate of interest

• Estimating the future value of an investment

• Predicting inflation rates

Answer explanation

The Rule of 72 is a formula used to estimate how long it will take for an investment to double at a fixed annual interest rate. By dividing 72 by the interest rate, you can quickly find the approximate number of years needed.

Discussed in JA Spending vs Savings presentation and 2.2 worksheet page 12 question 4 we answered together

How does inflation affect the value of money over time?

• It increases the purchasing power of money

• It decreases the purchasing power of money

• It has no effect on the value of money

• It doubles the value of money every year

Answer explanation

Inflation decreases the purchasing power of money, meaning that over time, each unit of currency buys fewer goods and services. This is why the correct answer is that inflation decreases the purchasing power of money.

Dave Ramsey Chapter 3 lesson 6, page 84

What is accrued interest?

• Is the interest you make for opening up a money market account

• Interest paid on the principal only

• Interest that decreases over time

• Interest accumulated from the date a loan is issued

Answer explanation

Accrued interest refers to interest that is earned but not yet paid, and it accumulates from the date a loan is issued. This means it builds up over time until payment is made.

Dave Ramsey chapter 3 lesson 4 page 74

Why is setting a savings goal important?

• It helps reduce the amount of savings needed so you can spend it on other wants

• It provides motivation and gives clear amounts needed in a budget to achieve your goal

• It guarantees a high interest rate when you set your goals

• It eliminates the need for a budget, you already know what you want

Answer explanation

Setting a savings goal is important because it provides motivation and outlines specific amounts needed in a budget, making it easier to track progress and stay focused on achieving the goal.

Budgeting 2.4 in JA class discussions and overall learning standard/objective for Money management unit

What does the principal refer to in finance?

• The total interest earned

• The original amount of money invested or borrowed

• The person who borrows you money in a bank

• It is a type of bank account you put money into

Answer explanation

In finance, the principal refers to the original amount of money that is either invested or borrowed, not the interest earned on it.

Dave Ramsey chapter 3 lesson 6, page 82.

Which of the following best describes the time value of money?

• Money's value remains constant over time

• A dollar today is worth more than a dollar in the future

• A dollar in the future is worth more than a dollar today

• Money does not lose value over time

Answer explanation

The time value of money concept states that a dollar today is worth more than a dollar in the future due to its potential earning capacity. This is because money can earn interest, making it more valuable now than later.

Dave Ramsey Chapter 3 lesson 6 page 84

How is simple interest different from compound interest?

• Simple interest is calculated monthly, while compound interest is yearly

• Simple interest is calculated on the principal alone, while compound interest is on principal and accrued interest

• Simple interest compounds over time, while compound interest does not

• Simple interest is only for short-term investments

Answer explanation

Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and the interest that has already accrued. This key difference affects how much interest is earned over time.

JA - Spending vs savings slides, 2.2 worksheet page 12 questions 2 and 3.

Or Dave Ramsey ch 3 lessons 4 - 6 (pg 82)

Before Using your emergency fund, what are 3 questions you should ask yourself before spending your emergency fund? (mark the correct answers)

• Is this expense unexpected?

  (Completely a surprise you could not have planned for in your budget elsewhere)

• Is this a necessary (meaning a need, not a want) type of expense?

• Can you get a loan for this expense?

• Is this an urgent matter?

• Answer not given

Answer explanation

An emergency fund is specifically designed to cover unexpected expenses, such as medical bills or car repairs, ensuring financial stability during unforeseen circumstances.

Dave Ramsey Chapter 3 lesson 3, pages 69-70