Financial Literacy and Personal Finance Flashcards

You deposit $1,000 in an account paying 5% interest compounded annually. How much is in the account after 2 years?

Answer: $1,102.50

$1,000 × 1.05 × 1.05 = $1,102.50, because the second year's interest is earned on the first year's interest too.

Jordan's monthly debt payments total $900 and their gross monthly income is $3,600. What is their debt-to-income ratio?

Answer: 25%

Debt-to-income ratio = $900 ÷ $3,600 = 0.25, or 25%.

If a savings account earns 1% per year while inflation is 3% per year, what happens to the purchasing power of the savings?

Answer: It decreases by about 2% per year

The real return is roughly 1% − 3% = −2%, so the money buys less each year.

What is the main purpose of diversifying an investment portfolio?

Answer: To reduce risk by spreading money across different investments

Diversification lowers risk because losses in one investment may be offset by gains in others.

Financial advisors commonly recommend that an emergency fund cover about how much?

Answer: Three to six months of essential living expenses

Three to six months of essential expenses is the standard guideline for handling job loss or unexpected costs.

Compared with buying a car with a loan, leasing a car typically means:

Answer: Lower monthly payments but no ownership unless you buy it at the end

Lease payments cover only the car's depreciation during the term, so they are lower, but you do not own the vehicle.

A jacket regularly priced at $80 is on sale for 25% off, and 13% sales tax is added to the sale price. What is the final cost?

Answer: $67.80

The sale price is $80 × 0.75 = $60, and $60 × 1.13 = $67.80.