AFC Savings Strategies and Emergency Fund Planning 2 — Questions and Answers
Question 1: Which savings vehicle is specifically designed for education expenses and offers tax-free growth when funds are used for qualified education costs?
- Traditional IRA
- 529 Plan (Correct answer)
- Health Savings Account (HSA)
- Flexible Spending Account (FSA)
Correct answer: 529 Plan
A 529 Plan offers tax-free growth and tax-free withdrawals when funds are used for qualified education expenses such as tuition, fees, and room and board.
Question 2: A Health Savings Account (HSA) requires the account holder to be enrolled in which type of plan?
- Medicare Part B
- A High-Deductible Health Plan (HDHP) (Correct answer)
- Medicaid
- Any employer-sponsored health plan
Correct answer: A High-Deductible Health Plan (HDHP)
To contribute to an HSA, an individual must be enrolled in a qualified High-Deductible Health Plan (HDHP) and cannot have other disqualifying health coverage.
Question 3: A Certificate of Deposit (CD) differs from a regular savings account primarily because:
- CDs are not FDIC-insured at banks
- CDs require a fixed term and typically penalize early withdrawal (Correct answer)
- CDs can only be purchased at credit unions
- CDs earn lower interest rates than standard savings accounts
Correct answer: CDs require a fixed term and typically penalize early withdrawal
CDs require funds to remain deposited for a fixed term (e.g., 6 months, 1 year), and withdrawing funds early typically results in an interest penalty, which is the tradeoff for their higher guaranteed rate.
Question 4: Which of the following savings vehicles typically provides the HIGHEST liquidity combined with federal deposit insurance?
- Series I Savings Bonds
- Treasury Bills
- High-yield online savings account (Correct answer)
- Stock index mutual fund
Correct answer: High-yield online savings account
A high-yield online savings account is FDIC-insured and allows immediate access to funds, combining federal deposit protection with high liquidity—making it the best choice among these options.
Question 5: A money market account (MMA) at a bank typically differs from a standard savings account in that it:
- Is not FDIC-insured
- Often requires a higher minimum balance and may offer limited check-writing privileges (Correct answer)
- Can only be used for business purposes
- Earns the same fixed rate regardless of balance
Correct answer: Often requires a higher minimum balance and may offer limited check-writing privileges
Money market accounts typically require higher minimum balances and often offer check-writing or debit card privileges while usually paying higher interest rates than standard savings accounts.
Question 6: Series I Savings Bonds are particularly attractive as a savings vehicle during periods of high inflation because their interest rate:
- Is fixed at purchase and never changes
- Is partially tied to the Consumer Price Index (CPI), adjusting every six months (Correct answer)
- Is determined solely by the federal funds rate
- Is guaranteed to exceed the stock market return
Correct answer: Is partially tied to the Consumer Price Index (CPI), adjusting every six months
Series I Bonds earn a composite rate that includes a fixed rate plus an inflation adjustment based on the CPI, which resets every six months, protecting purchasing power during inflationary periods.
Question 7: Which automated savings strategy involves rounding up debit card purchases to the nearest dollar and transferring the difference to a savings account?
- Dollar-cost averaging
- The envelope method
- Round-up savings (Correct answer)
- The 50/30/20 rule
Correct answer: Round-up savings
Round-up savings programs automatically round each debit purchase up to the nearest dollar and transfer the small difference to savings, accumulating savings passively through everyday spending.
AFC Savings Strategies and Emergency Fund Planning 2
Which savings vehicle is specifically designed for education expenses and offers tax-free growth when funds are used for qualified education costs?