Personal Finance Planning Flashcards

What does 'compound interest' mean in the context of savings?

Answer: Interest earned on both the principal and previously accumulated interest

Compound interest is calculated on the initial principal plus all previously earned interest, accelerating wealth growth over time.

Using the Rule of 72, approximately how long will it take to double an investment earning 6% annually?

Answer: 12 years

The Rule of 72 divides 72 by the interest rate: 72 ÷ 6 = 12 years to double the investment.

Which credit score range is generally considered 'excellent' in the US?

Answer: 800–850

A FICO score of 800–850 is classified as exceptional/excellent and qualifies borrowers for the best loan rates.

What factor has the LARGEST impact on a FICO credit score?

Answer: Payment history

Payment history accounts for 35% of a FICO score, making it the single most influential factor.

What is 'pay yourself first' as a savings strategy?

Answer: Automatically transferring savings before spending disposable income

Paying yourself first means automatically directing a portion of income to savings immediately upon receiving a paycheck, before discretionary spending.

Which of the following DECREASES your credit utilization ratio?

Answer: Paying down existing credit card debt

Credit utilization = balance ÷ credit limit; paying down balances reduces the numerator and lowers the ratio.

Inflation erodes purchasing power. If inflation is 3% and your savings account earns 1%, what is your real return?

Answer: -2%

Real return = nominal return minus inflation rate: 1% − 3% = −2%, meaning purchasing power is declining.