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Exam 25: Extension: Managing Personal Finances

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Question 41

True/False

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For individuals, budgets are usually more trouble than they are worth.

A) True
B) False

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Question 42

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According to Newsweek magazine, a young couple with a new baby should have life insurance coverage equal to:

A) $500,000.
B) three times their annual income.
C) five times their annual income.
D) seven times their annual income plus $100,000 to cover the cost of college.

E) All of the above
F) A) and B)

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Question 43

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Shuichi graduated from college two years ago. He has already accumulated enough money in his savings account and money market to meet basic contingencies, and now wants to begin investing a portion of each paycheck to earn a high rate of return over the long run. His best choice as a young recent graduate would be to put money into a bank savings account regularly.

The greatest return over a period of several years is likely to be earned by investing in a:

Personal financial planners recommend renting a home, rather than incurring the cost of buying a home.

One disadvantage of term life insurance is that:

A retirement plan where employers often match part of an employee's contribution is known as a:

During the first few years of a home mortgage, almost all the payments go for interest on the loan. This high interest is a reason it is better for young people to rent rather than buy.

Due to the high cost of the insurance premiums, many people have found that it makes financial sense to carry medical insurance only if their employer provides it.

________ insurance provides protection from the cost of medical care for illnesses and injuries.

If you use a credit card to make purchases, you should make a strong effort to pay off the balance in full each month.

The biggest advantage of the Roth IRA is that:

Mini-Case Ira Roth and Penny Weiss met and married in the early 1990s, during their days at State University. Both came from families with limited financial resources. They had to work at part-time jobs during school, and still needed student loans to help pay for their college education. Ira and Penny shared a strong work ethic and had a great desire to succeed financially and enjoy the good life. Penny and Ira quickly experienced financial success in the latter half of the booming 1990s. Ira used his marketing major and extensive knowledge of computers to obtain a high-paying job in a successful dot-com business. Penny, who cleaned homes to earn money during college, used her experience to start her own business. Her entrepreneurial spirit surprised Ira and their friends, and she built a successful cleaning business with a growing base of residential clients and even a few commercial customers. She soon had to hire several part-time employees to keep up with demand. With money rolling in, Ira and Penny began to live the good life, buying an expensive new car, a state-of-the-art home entertainment center, and expensive wardrobes. As busy as they were, and as hard as they both worked, they often found it easier to dine at a nice restaurant rather than fix meals at home. When the dot-com bubble burst in the early 2000s, Ira was lucky enough to keep his job, but was forced to take a significant pay cut. The economic downturn forced some of the households and businesses that used Penny's company to cut back on professional cleanings, so her business suffered too. Soon the couple was struggling to pay the rent on their upscale apartment. They began relying on credit cards to cover expenses, but after a few months the credit limits on their cards had been reached. They fell behind in paying off their student loans and started getting some unpleasant calls from bill collectors. The stress and frustration led to arguments that began to threaten their personal relationship. With their personal finances out of control, Ira and Penny knew that they had to make changes to save not only their financial dreams, but also their marriage. However, they were at a loss as to where to start. Family members encouraged them to seek the advice of a financial planner. The couple reluctantly agreed that this was something they needed to do. -As their situation began to improve, the financial adviser began discussing investment strategies with Penny and Ira. He suggested that they might want to invest in the stock market. He surprised them by saying that they should try to buy stocks during a major downturn in the market-just when most people were trying to sell. This statement suggests that the financial adviser agreed with the:

Annette and Ron just got married. They received some very expensive wedding gifts including some beautiful silverware and jewelry. Their homeowner's policy:

The best way to save money is to:

If your personal liabilities exceed your assets, your are on the road to financial security.

Your personal balance sheet will reflect the same fundamental accounting equation as the balance sheet for a business: assets = liabilities + owners' equity.

A(n) _______ is a personal financial plan that allows you to take control of future spending.

Your computer and car should both be listed on the asset side of your personal balance sheet.

Which of the following is true of credit cards?