Personal Finance (D363)

Correct Answer

B. Personal diaries

Explanation

Personal diaries are not generally considered part of the essential financial records to keep. While they might contain personal reflections or thoughts, they do not provide necessary financial documentation for tax, legal, or financial planning purposes. Financial records typically include tax filings, balance sheets, and receipts for donations.

Why other options are wrong

A. Tax filings

Tax filings are an essential part of financial records. They are important for future reference, especially when filing taxes or for audits. Keeping records of tax filings is recommended for at least several years.

C. Balance sheets

Balance sheets are a key component of financial records. They provide a snapshot of an individual's or a business’s financial position by detailing assets, liabilities, and equity. They are necessary for financial planning and reporting.

D. Receipts for donations

Receipts for donations are important financial records. They are needed for tax purposes as they can be used to claim charitable deductions on income taxes. It is advisable to keep receipts for donations for record-keeping and potential auditing.

Correct Answer

B. The understanding of financial principles that enables individuals to make informed decisions about their money

Explanation

Financial literacy refers to a broad understanding of financial concepts, such as budgeting, saving, investing, and managing debt. It empowers individuals to make informed decisions about their financial well-being, helping them manage money effectively, plan for the future, and avoid financial pitfalls.

Why other options are wrong

A. The ability to calculate interest rates on loans and savings accounts: While knowing how to calculate interest is a part of financial literacy, the concept itself is much broader, involving a wide range of financial principles beyond just interest calculations.

C. The process of filing taxes and understanding tax codes: Tax knowledge is an important financial skill, but financial literacy encompasses more than just tax filing. It includes understanding various aspects of personal finance such as budgeting, saving, and investing.

D. The knowledge of how to invest in the stock market: Investing is an aspect of financial literacy, but it is just one part of the broader concept. Financial literacy includes many other topics, such as budgeting, debt management, and saving for retirement.

Correct Answer

D. Aetna

Explanation

Aetna is a well-known provider of health and life insurance. It offers various health plans, including medical, dental, and life insurance options, making it a leader in the insurance industry.

Why other options are wrong

A. Schwab

Schwab is primarily known for its investment services and brokerage accounts. It does not focus on providing health or life insurance.

B. Fidelity

Fidelity is a financial services company that offers investment, retirement planning, and wealth management. While it may offer some insurance products indirectly, it is not primarily known as a health or life insurance provider.

C. Vanguard

Vanguard is known for investment management and mutual funds. It does not provide health or life insurance but focuses on financial and investment products.

Correct Answer

B. It means the person is unable to save any money due to their income being fully allocated to necessary expenses.

Explanation

Living paycheck to paycheck refers to a financial situation where an individual spends most, if not all, of their income on necessary expenses such as rent, utilities, and food, with little to no money left for savings or discretionary spending. This condition typically indicates financial instability and can lead to difficulties in handling unexpected expenses or emergencies. People in this situation often find it challenging to build a financial cushion or save for long-term goals.

Why other options are wrong

A. It signifies that the individual is financially secure and can easily manage their expenses.

This option is incorrect because living paycheck to paycheck is actually a sign of financial insecurity, not financial security. Individuals in this situation are not in a position to manage expenses easily, as their entire income is allocated to immediate needs, leaving no room for savings or emergencies.

C. It refers to a situation where a person has a surplus of funds after covering their monthly expenses.

This is incorrect because living paycheck to paycheck means there is no surplus of funds. In fact, the person is struggling to cover necessary expenses, with no extra money available after bills are paid. A surplus would be indicative of financial stability, which is not the case here.

D. It describes a scenario where an individual is waiting for their paycheck to make significant financial decisions.

This is not a correct description of living paycheck to paycheck. While it is true that some individuals may be living paycheck to paycheck and rely on their paycheck to cover financial decisions, this option doesn't capture the broader financial strain and inability to save that defines living paycheck to paycheck.

Correct Answer

C. 80% behavior/20% knowledge

Explanation

The 80/20 rule in wealth building suggests that the majority of financial success (80%) comes from behavior—how you manage your spending, saving, and investing—while the remaining 20% comes from knowledge. Having the right financial knowledge is crucial, but your actions, such as disciplined saving, investing, and budgeting, are what ultimately determine your wealth-building success.

Why other options are wrong

A. 80% knowledge/20% behavior: This option reverses the actual emphasis. While knowledge is important, it is the behavior—how you apply the knowledge—that accounts for most of your financial success.

B. 80% knowledge/20% discipline: Discipline is important for wealth building, but the focus is on behavior in general, not just discipline. Knowledge supports disciplined behavior, but behavior is the primary driver.

D. this rule does not apply: The 80/20 rule is a widely accepted principle in wealth building, making this option incorrect. It highlights that behavior plays the most significant role in financial success.

Correct Answer: D. Medical records including immunization records and list of prescription drugs

Explanation:

Life insurance providers may require detailed information about your family medical history to assess the risk associated with insuring you. This would include a comprehensive list of medical conditions, immunization records, and prescription drugs, as these provide insight into the health risks within your family and your personal health history. The more detailed the medical records, the more accurate the life insurance needs calculation will be.

Why other options are wrong:

A. Only immunization records – Immunization records are important but insufficient on their own to calculate life insurance needs. A broader view of the medical history, including conditions and medications, is necessary.

B. Only prescription drug lists – Prescription drug lists provide helpful information but are not complete without other relevant medical records, including immunization and general health history.

C. General health insurance policies – Health insurance policies are helpful but do not provide the comprehensive health data (like family history, medications, or immunization status) needed to accurately assess life insurance needs.

Correct Answer

D. Both A and B are correct.

Explanation

When creating a financial plan or budget, it's essential to consider credit card debt as part of the overall strategy. Paying more than the minimum payments helps reduce the principal balance faster, minimizing interest expense over time. Additionally, evaluating the interest rates on your credit cards and loans allows you to prioritize higher-interest debts, ensuring that you're using your excess cash flow most efficiently to reduce overall debt and improve your financial position.

Why other options are wrong

A. You should include more than the minimum payments in the budget to pay off the balances as soon as possible and minimize interest expense: While this is an important part of financial planning, it doesn't encompass the full picture. Prioritizing payments and evaluating interest rates on all debts is also necessary for effective financial management.

B. Evaluate relative interest rates of all cards and other loans, and investments to understand how best to prioritize payments and decide on the best use of excess cash flow: This is correct but does not include the additional consideration of paying off balances faster, which is crucial for reducing interest.

C. The financial plan should really focus on investing excess cash flow for retirement: While retirement planning is essential, focusing solely on investing without addressing high-interest debt like credit cards can lead to higher long-term costs due to accumulating interest, which could harm your overall financial health.

Correct Answer

A. Stored Value Card

Explanation

A gift card is classified as a stored value card because it has a preloaded amount of money on it. The balance is stored electronically on the card, and it can be used for purchases until the balance is depleted.

Why other options are wrong

B. Debit Card: Debit cards are linked directly to a bank account and deduct funds from the account when used. Gift cards, however, are not linked to a checking account.

C. Smartcard: Smartcards have embedded chips that store information and are typically used for secure transactions, like in transit systems or credit cards with EMV technology. Gift cards do not usually contain these features.

D. Prepaid Card: While a gift card is technically a type of prepaid card, it is more accurately categorized as a stored value card, which focuses on the amount of money stored on the card for spending.

Correct Answer: C. The pawned item may be sold by Smallwell Emporium

Explanation:

When a borrower fails to redeem their pawned item, the pawn shop typically has the right to sell the item to recover the loan amount. If the loan is not paid back by the due date, the shop may choose to sell the pawned item.

Why other options are wrong:

A. The borrower is given an extension without penalty – Extensions may be offered, but they are typically not without penalty, and the item is not automatically held indefinitely.

B. The pawned item is returned to the borrower automatically – If the borrower fails to redeem the item, it is not automatically returned. Instead, it is usually sold.

D. The borrower can reclaim the item without any fees – If the borrower does not redeem the item in time, they are generally not allowed to reclaim the item without penalty or fees.