Personal and Family Finance Flashcards

A family is consistently spending more than they earn and wants to gain control over their variable expenses. A financial counselor advises them to use the 'envelope system.' What is the primary principle of this budgeting method?

Answer: Allocating cash to labeled envelopes for specific spending categories and stopping when an envelope is empty.

The envelope system is a cash-based budgeting method where you allocate a specific amount of cash into physical envelopes for different spending categories (e.g., groceries, entertainment). Once the money in an envelope is gone, you cannot spend any more in that category for the rest of the month. This enforces discipline and prevents overspending in variable categories.

According to FICO, the credit scoring model used by most lenders, which of the following factors has the MOST significant impact on an individual's credit score?

Answer: An individual's history of making payments on time.

Payment history is the single most important factor in calculating a FICO credit score, accounting for approximately 35% of the score. It indicates whether a person has paid past credit accounts on time, which is a primary concern for lenders assessing risk. The other factors listed also impact the score but to a lesser degree.

A 25-year-old professional is starting their first full-time job and wants to begin saving for retirement. They have a high tolerance for risk and a time horizon of over 40 years. Which investment strategy would be most appropriate for their retirement portfolio?

Answer: A portfolio heavily weighted towards stocks and equity funds.

Given the long time horizon and high-risk tolerance, a portfolio heavily weighted towards stocks is generally recommended. Stocks have historically provided higher returns over the long term compared to less risky assets like bonds or cash. The long time frame allows the investor to recover from short-term market volatility in pursuit of greater long-term growth.

Which of the following best describes the primary purpose of purchasing life insurance?

Answer: To provide financial protection for dependents upon the policyholder's death.

The fundamental purpose of life insurance is to provide a death benefit to beneficiaries, offering financial security after the insured person's death. This money helps replace lost income and allows dependents to cover expenses such as mortgage payments, daily living costs, and funeral expenses. While some policies have a cash value component, their primary function is protection.

The Consumer Financial Protection Bureau (CFPB) is a U.S. government agency created after the 2008 financial crisis. What is its central mission?

Answer: To ensure consumers are treated fairly by banks, lenders, and other financial institutions.

The central mission of the CFPB is to protect consumers in the financial marketplace by enforcing federal consumer financial laws and ensuring that financial institutions like banks and lenders treat consumers fairly. It was created to be a single point of accountability for this purpose. The other options describe the roles of the SEC/DOJ, FDIC, and the Federal Reserve.

A client earns an annual salary of $70,000 and their employer offers a 401(k) plan with a company match described as '100% of the first 4% of your salary you contribute.' What is the minimum amount the client must contribute annually to receive the full employer match?

Answer: $2,800

To receive the full employer match, the client must contribute 4% of their gross annual salary. The calculation is $70,000 (salary) × 0.04 (4%) = $2,800. By contributing this amount, the employee will receive an additional $2,800 from their employer into their 401(k), which is a 100% return on their investment. Not contributing enough to get the full match is like turning down free money.