Week 2 - Budgeting and Inflation

Question 1

Why is a sure dollar today worth more than a sure dollar a year from now?

Answer 1

1. It’s more certain
2. Impatience to consume
3. A dollar today could be invested for a year
4. Inflation: a dollar today usually purchases more than a dollar in a year

Question 2

What is CPI?

Answer 2

Consumer price index

Question 3

What is the consumer price index?

Answer 3

• A comparison across different years of the cost of a basket (list of) goods
• A measure of purchasing power of a dollar in different periods

Question 4

Why do we use the CPI?

Answer 4

When comparing the cost of something today and its cost many years ago, you need to adjust for inflation using CPI.

Question 5

What is an account?

Answer 5

An agreement between you and a bank such as:
- a bank
- a brokerage
- a credit card issuer
- a utility company
It is a record of transactions

Question 6

What is a SMART goal?

Answer 6

Specific, measurable, achievable, relevant, and time-bound

Question 7

What is a simple budget formula?

Answer 7

income - fixed expenses - variable expenses = leftover (small amount)

Question 8

What are some strategies to increase your savings rate?

Answer 8

• Save more tomorrow
• Save half, spend half
• Put savings on auto-pilot
• Services / apps that monitor your accounts and deduct savings

Question 9

What should you look for in a HYSA?

Answer 9

• Competitive rate
• National brand name with strong reputation
• Ability to link multiple accounts
• Good customer service
• FDIC insurance

Question 10

Which of the following is a good use of a security fund (also called an emergency fund or a rainy day fund)?

Answer 10

To help you pay your bills if you lose your job

Question 11

(T/F) Most people’s emergency (security or rainy day) fund should be invested in the stock market.

Answer 11

False

Question 12

Should most people save first for retirement or for their children’s education?

Answer 12

Retirement

Question 13

Suppose you put $100 in a bank savings account that pays 7% annual interest (and charges no annual fee). You keep that money in the account for two years (with no withdrawals or additional deposits). How much money will you have at the end of two years?

Answer 13

More than $114

Question 14

A good strategy for saving for retirement is:

Answer 14

Set up automatic contributions to your retirement savings account

Question 15

Jamie and Joe are the same age, have the same job, and earn the same salary. Both Jamie and Joe estimate that they will need $3 million to retire. At age 25, Jamie sets up automatic contributions of 15% of his salary to his 401(k). Joe doesn’t start contributing to his 401(k) until age 40. If Joe wants to retire at the same age as Jamie he will need to.

Answer 15

Save more each month than Jamie saves

Question 16

Strategies to save more include which of the following:
- Focus on the big stuff
- Buy on credit.
- Automate savings
- Don’t neglect the small stuff.
- Don’t waste time comparison shopping.
- Increase your income.

Answer 16

• increase your income
• automate savings
• don’t neglect the small stuff
• focus on the big stuff (insurance, mortgage)

Question 17

(T/F) Thaler and Benartzi’s “Save More Tomorrow” plan is to wait until you’ve been at a job for at least six months and then sign up for the 401(k) plan

Answer 17

False

Question 18

Which of the following does NOT describe a credit card?
a. The card often provides cash, frequent flyer, or other rewards.
b. The card allows you to postpone paying for your purchases.
c. The card provides protection against fraudulent charges.
d. The card provides access to free money.

Answer 18

d. The card provides access to free money.

Question 19

In the book “All Your Worth”, Elizabeth Warren and Amelia Warren Tyagi recommend:
a) that you maintain a simple budget with four categories: Must Haves, Wants, Annual Holidays, & Savings
b) that you budget no less than 50% of after-tax income for expense that you must pay every month.
c) that you save a minimum of 25% of your after-tax income
d) that you budget no more than 50% of after-tax income for expense that you must pay every month.

Answer 19

d) that you budget no more than 50% of after-tax income for expense that you must pay every month.

Question 20

Which of the following should be a higher priority?

Answer 20

Paying off credit card debt as soon as possible

Question 21

What are three categories for budgeting?

Answer 21

1) must-haves
2) savings
3) wants (allocate ~30%)

Question 22

What is the general rule of thumb to follow for must-have expenses?

Answer 22

Keep it at or below 50% of your after-tax income

Question 23

What is the general rule of thumb to follow for saving?

Answer 23

Save 20% of your after tax income

Question 24

What is the general rule of thumb to follow for your wants?

Answer 24

Spend 30% of your after-tax income on wants

Question 25

How should you allocate your savings?

Answer 25

10% on retirement account, 5% on a security fund, and 5% on down payment/mortgage

Question 26

How many months and what kind of expenses should you keep in your security fund?

Answer 26

Six months of must have expenses