PFM - Chapter 3

Question 1

How much (ideally) should you have saved up for an emergency?

Answer 1

$500-$1,000

Question 2

Why has saving recently decreased in popularity?

Answer 2

After World War II, Americans became too comfortable and used/went into debt to buy everything.
- At the same time, they stopped saving.

Question 3

45% of Americans don’t have $1,000 saved up for an _________________.

Answer 3

Emergency

Question 4

What is Murphy’s Law?

Answer 4

Anything that can go wrong will go wrong.

Question 5

What are some things that cause financial stress?

Answer 5

1) Unexpected expenses (emergencies)
2) Living paycheck to paycheck
3) Going into debt

Question 6

What is the first reason to save your money?

Answer 6

Emergencies

Question 7

What is an emergency fund?

Answer 7

A saving account created to cover unexpected expenses without going into debt.

Question 7

What is the First Foundation?

Answer 7

Creating an emergency fund of at least $500.

Question 8

What is the second reason to save your money?

Answer 8

Large purchases—anything you don’t have the money to pay for right now.

Question 9

If you really want to be wealthy, what is the secret?

Answer 9

Living on less than you make.

Question 10

What is the third reason to save your money?

Answer 10

Wealth building

Question 11

What are some tips for saving?

Answer 11

1) Factor saving into your budget BEFORE you cover the rest of your spending categories.
2) Set realistic savings goals.

Question 12

What should you do once you have $500 saved up for an emergency?

Answer 12

Keep that money in a separate savings account and keep it there until you actually experience an emergency.

Question 13

Where should you NOT put your emergency fund?

Answer 13

In a checking account, where you could spend it and not know it.

Question 14

Is $500 enough for an emergency fund throughout your life?

Answer 14

NO!

Question 15

When should you start to build up your emergency fund? How much should be in it then?

Answer 15

When…
1) You are out of school
2) You are out of debt
3) You have a career
How much…
1) 3-6 months of living expenses

Question 16

What should you NOT do with your emergency fund money?

Answer 16

Invest it
- Your emergency fund is not an investment, but rather insurance.

Question 17

What are the three questions you should ask yourself when considering to use your emergency fund?

Answer 17

1) Is it unexpected?
2) Is it necessary?
3) Is it urgent?

Question 18

If you do have to spend your emergency fund money, what should you then do?

Answer 18

Build it back up to at least $500 for the next emergency.

Question 19

What is an interest rate?

Answer 19

The amount charged on the principle by the lender for the use of its money.
- Determines how quickly your money will grow.

Question 20

What is accrued interest?

Answer 20

Interest that is charged on a debt that has not yet been collected.
- Examples: Student loans, mortgages, credit card, etc.

Question 21

What is the first thing you should do if you have to make a large purchase?

Answer 21

1) Determine how much money you will have to spend.
2) Determine how long you have to save for that particular thing.

Question 22

What is the Second Foundation?

Answer 22

Get out of debt and STAY out of debt.

Question 23

What is the Third Foundation?

Answer 23

Pay for your car in cash.

Question 24

How to never feel buyer’s remorse:

Answer 24

1) Never rush into a large purchase.
2) Don’t fall for zero-interest
- Businesses will make you think that you can get a loan with no extra interest.
- If you make one late payment or fail to pay off the debt before the zero-interest period is up, you have to start all over again!
3) Pay up front
- Most stores only show you the monthly cost of items to make things seem more affordable. Do some digging and find the total price. Save up, budget, and accumulate the money to pay for the whole thing in one sitting to avoid monthly payments. Without monthly payments on anything, you can save your money more easily.

Question 25

What is compound growth?

Answer 25

The average rate of growth for an investment over time.
- Shown as an annual figure.

Question 26

What is the Fourth Foundation?

Answer 26

Pay for college with cash.

Question 27

What is the Fifth Foundation?

Answer 27

Build wealth and give.

Question 28

What two things does it take to become a millionaire?

Answer 28

1) Money consistently invested/coming in.
2) Time for that money to grow and patience.

Question 29

What are the top three millionaire jobs?

Answer 29

1) Accounting
2) Engineering
3) Teaching

Question 30

What is the difference between saving and investing?

Answer 30

Saving: You save money you plan to use in five years or less.

Investing: You invest for much longer than five years; possibly 20-30, or even more.

Question 31

What is the similarities with interest between an investment account and a savings account?

Answer 31

In both, you earn interest on your money.
- Basically, your money makes money.