Week 2 - Budgeting and Inflation Flashcards
Why is a sure dollar today worth more than a sure dollar a year from now?
- It’s more certain
- Impatience to consume
- A dollar today could be invested for a year
- Inflation: a dollar today usually purchases more than a dollar in a year
What is CPI?
Consumer price index
What is the consumer price index?
- 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
Why do we use the CPI?
When comparing the cost of something today and its cost many years ago, you need to adjust for inflation using CPI.
What is an account?
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
What is a SMART goal?
Specific, measurable, achievable, relevant, and time-bound
What is a simple budget formula?
income - fixed expenses - variable expenses = leftover (small amount)
What are some strategies to increase your savings rate?
- Save more tomorrow
- Save half, spend half
- Put savings on auto-pilot
- Services / apps that monitor your accounts and deduct savings
What should you look for in a HYSA?
- Competitive rate
- National brand name with strong reputation
- Ability to link multiple accounts
- Good customer service
- FDIC insurance
Which of the following is a good use of a security fund (also called an emergency fund or a rainy day fund)?
To help you pay your bills if you lose your job
(T/F) Most people’s emergency (security or rainy day) fund should be invested in the stock market.
False
Should most people save first for retirement or for their children’s education?
Retirement
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?
More than $114
A good strategy for saving for retirement is:
Set up automatic contributions to your retirement savings account
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.
Save more each month than Jamie saves
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.
- increase your income
- automate savings
- don’t neglect the small stuff
- focus on the big stuff (insurance, mortgage)
(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
False
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.
d. The card provides access to free money.
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.
d) that you budget no more than 50% of after-tax income for expense that you must pay every month.
Which of the following should be a higher priority?
Paying off credit card debt as soon as possible
What are three categories for budgeting?
1) must-haves
2) savings
3) wants (allocate ~30%)
What is the general rule of thumb to follow for must-have expenses?
Keep it at or below 50% of your after-tax income
What is the general rule of thumb to follow for saving?
Save 20% of your after tax income
What is the general rule of thumb to follow for your wants?
Spend 30% of your after-tax income on wants
How should you allocate your savings?
10% on retirement account, 5% on a security fund, and 5% on down payment/mortgage
How many months and what kind of expenses should you keep in your security fund?
Six months of must have expenses
