AFC Budgeting & Debt Management 2

Question 1

A client has $45,000 in total debt across four credit cards with varying interest rates. Which debt repayment strategy focuses on paying off the smallest balance first regardless of interest rate?

Accepted Answer

Snowball method

Answer

The snowball method prioritizes paying off the smallest balance first to build psychological momentum, regardless of interest rates.

Question 2

When constructing a zero-based budget for a client, what must the total income minus total expenses equal?

Accepted Answer

Zero

Answer

In zero-based budgeting, every dollar of income is assigned a purpose, so income minus expenses (including savings) equals zero.

Question 3

A client's debt-to-income ratio is 48%. According to standard financial counseling guidelines, this ratio indicates:

Accepted Answer

The client is over-indebted and needs immediate intervention

Answer

A debt-to-income ratio above 43% is generally considered over-indebted, requiring immediate attention and a structured repayment plan.

Question 4

Which budgeting approach allocates 50% of after-tax income to needs, 30% to wants, and 20% to savings and debt repayment?

Accepted Answer

50/30/20 rule

Answer

The 50/30/20 rule provides a simple framework dividing after-tax income into needs (50%), wants (30%), and savings/debt repayment (20%).

Question 5

A financial counselor discovers that a client is making only minimum payments on a $10,000 credit card balance at 22% APR. What is the most important concept to explain to the client?

Accepted Answer

How compound interest dramatically increases total repayment cost

Answer

Understanding how compound interest works on revolving debt is crucial because minimum payments barely cover interest charges, resulting in decades of repayment and thousands in additional interest.

AFC - Accredited Financial Counselor Practice Test

AFC - Accredited Financial Counselor Practice Test

AFC Budgeting & Debt Management 2