Savings Strategies and Emergency Fund Planning Flashcards
7 cards from real AFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Savings Strategies and Emergency Fund Planning flashcards as text
A self-employed freelancer with irregular income wants to build an emergency fund. Which approach is most appropriate for determining the target amount?
Answer: Target 6-12 months of expenses due to income volatility
Self-employed individuals with variable income should target 6-12 months of expenses to account for income gaps between contracts or clients.
Which savings vehicle offers both liquidity and FDIC insurance, making it appropriate for an emergency fund?
Answer: High-yield savings account at an FDIC-insured bank
A high-yield savings account at an FDIC-insured bank provides immediate access to funds and federal deposit insurance up to $250,000.
A couple has a combined monthly income of $7,000 and monthly expenses of $4,500. Their employer offers a 401(k) match up to 4% of salary. What should they prioritize first?
Answer: Contribute enough to the 401(k) to capture the full employer match, then build emergency savings
Capturing the full employer 401(k) match is an immediate 100% return, making it the top priority before other savings goals.
What is the primary disadvantage of keeping an emergency fund in a traditional checking account?
Answer: It typically earns little to no interest, reducing its real value over time
Checking accounts typically pay near-zero interest, so inflation gradually erodes the purchasing power of emergency funds kept there.
A client asks whether to use windfalls (tax refunds, bonuses) to build an emergency fund or pay down credit card debt at 22% APR. What is the AFC's best guidance?
Answer: Build the full emergency fund first to avoid future borrowing
While high-interest debt is costly, having no emergency fund risks new high-interest debt when emergencies arise, so building a starter fund first (then aggressively paying debt) is often recommended.
The 'pay yourself first' savings strategy refers to which practice?
Answer: Automatically transferring a set amount to savings before spending on discretionary items
Paying yourself first means automating savings transfers at the beginning of each pay period so savings occur before discretionary spending.
Which of the following best describes a 'sinking fund' in personal financial planning?
Answer: A dedicated savings account for a specific anticipated future expense
A sinking fund is money set aside regularly for a known future expense (e.g., car replacement, home repair), distinct from an emergency fund for unexpected costs.