NAB Personal Finance Planning 3 — Questions and Answers
Question 1: What does 'compound interest' mean in the context of savings?
- Interest earned only on the original principal
- Interest charged on overdue payments
- Interest earned on both the principal and previously accumulated interest (Correct answer)
- A fixed interest rate that never changes
Correct 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.
Question 2: Using the Rule of 72, approximately how long will it take to double an investment earning 6% annually?
- 6 years
- 12 years (Correct answer)
- 18 years
- 24 years
Correct answer: 12 years
The Rule of 72 divides 72 by the interest rate: 72 ÷ 6 = 12 years to double the investment.
Question 3: Which credit score range is generally considered 'excellent' in the US?
- 300–579
- 580–669
- 670–739
- 800–850 (Correct answer)
Correct answer: 800–850
A FICO score of 800–850 is classified as exceptional/excellent and qualifies borrowers for the best loan rates.
Question 4: What factor has the LARGEST impact on a FICO credit score?
- Credit mix
- Length of credit history
- Payment history (Correct answer)
- New credit inquiries
Correct answer: Payment history
Payment history accounts for 35% of a FICO score, making it the single most influential factor.
Question 5: What is 'pay yourself first' as a savings strategy?
- Paying off all debts before spending on anything else
- Automatically transferring savings before spending disposable income (Correct answer)
- Saving whatever remains after all monthly expenses are paid
- Investing exclusively in employer-matched retirement accounts
Correct 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.
Question 6: Which of the following DECREASES your credit utilization ratio?
- Closing old credit card accounts
- Increasing your credit card balances
- Paying down existing credit card debt (Correct answer)
- Applying for multiple new loans simultaneously
Correct answer: Paying down existing credit card debt
Credit utilization = balance ÷ credit limit; paying down balances reduces the numerator and lowers the ratio.
Question 7: Inflation erodes purchasing power. If inflation is 3% and your savings account earns 1%, what is your real return?
- +4%
- +2%
- -2% (Correct answer)
- -3%
Correct answer: -2%
Real return = nominal return minus inflation rate: 1% − 3% = −2%, meaning purchasing power is declining.
NAB Personal Finance Planning 3
What does 'compound interest' mean in the context of savings?