NEDP Financial Literacy 2 — Questions and Answers

Question 1: What is the purpose of an emergency fund?

To cover unexpected expenses without going into debt (Correct answer)
To invest in the stock market for higher returns
To pay off credit card balances each month
To save for a planned vacation

Correct answer: To cover unexpected expenses without going into debt

An emergency fund provides a financial cushion for unplanned expenses like medical bills or job loss without borrowing.

Financial experts recommend keeping 3–6 months of living expenses in an accessible emergency fund. Its purpose is to handle genuine unexpected crises (job loss, car repair, medical bills) without resorting to high-interest credit. It should be kept in a liquid, low-risk account like a savings account — not invested in volatile assets.

Question 2: A credit card has an APR of 24%. If you carry a $500 balance for one month, approximately how much interest will you owe?

$10.00 (Correct answer)
$24.00
$120.00
$2.00

Correct answer: $10.00

Monthly interest rate = 24% ÷ 12 = 2%. Interest = $500 × 0.02 = $10.00.

APR (Annual Percentage Rate) of 24% means approximately 2% per month (24 ÷ 12). Applying that to a $500 balance: $500 × 0.02 = $10 in interest for one month. This shows how carrying a balance, even a small one, adds up over time.

Question 3: Which of the following best describes 'net income'?

Take-home pay after taxes and deductions are subtracted (Correct answer)
The total amount earned before any deductions
The amount deposited directly into savings
The total household income from all sources

Correct answer: Take-home pay after taxes and deductions are subtracted

Net income is gross pay minus taxes, Social Security, and other deductions — the amount you actually receive.

Gross income is your total earnings before deductions. Net income (take-home pay) is what remains after federal and state taxes, Social Security (FICA), Medicare, and any voluntary deductions (health insurance, retirement contributions) are subtracted. Budgeting should always be based on net income.

Question 4: What does FDIC insurance protect?

Bank deposits up to $250,000 per depositor per bank (Correct answer)
Investments in the stock market
Retirement accounts like 401(k)s
Life insurance policies

Correct answer: Bank deposits up to $250,000 per depositor per bank

The Federal Deposit Insurance Corporation (FDIC) insures eligible bank deposits up to $250,000 per depositor per institution.

The FDIC insures deposits (checking accounts, savings accounts, CDs, money market accounts) at member banks up to $250,000 per depositor per institution. If the bank fails, your insured deposits are protected. Stocks, bonds, mutual funds, and annuities are NOT FDIC-insured.

Question 5: Which of the following is a fixed expense in a monthly budget?

Monthly rent payment (Correct answer)
Grocery shopping
Entertainment spending
Clothing purchases

Correct answer: Monthly rent payment

Fixed expenses stay the same every month, like rent or a car loan payment. Variable expenses change month to month.

Fixed expenses are consistent and predictable: rent/mortgage, car loan payments, insurance premiums, and subscription services. Variable expenses fluctuate: groceries, utilities, entertainment, and clothing. Understanding the difference helps you plan a realistic budget and identify where you can cut spending if needed.

Question 6: Which action will most directly improve a low credit score?

Making all payments on time consistently (Correct answer)
Opening several new credit cards at once
Closing all existing credit accounts
Applying for a large loan immediately

Correct answer: Making all payments on time consistently

Payment history is the largest factor in credit scores (about 35%). Consistent on-time payments rebuild credit over time.

Payment history accounts for approximately 35% of a FICO credit score — the largest single factor. Consistently paying all bills on time is the most effective way to improve a low score. Opening many new accounts hurts your score (hard inquiries + lower average account age). Closing accounts can reduce available credit, worsening utilization ratio.

NEDP Financial Literacy 2

What is the purpose of an emergency fund?