Finance Finale Test Answer Key

1. Which of the following is an example of a fixed expense?

• Correct Answer: Rent
• Reasoning: Fixed expenses are costs that generally stay the same each month, such as rent or a car payment. Groceries, entertainment, and fluctuating utilities are typically variable expenses.

2. Which of the following is an example of a variable expense?

• Correct Answer: Groceries
• Reasoning: Variable expenses are costs that can change from month to month, like groceries, entertainment, or utilities that fluctuate with usage. Rent, car payments, and insurance premiums are typically fixed expenses.

3. What is the primary difference between a checking account and a savings account?

• Correct Answer: A checking account is for daily transactions, while a savings account is for long-term growth and saving.
• Reasoning: Checking accounts offer easy access for spending and payments, while savings accounts are designed for accumulating funds, often with interest, and less frequent withdrawals.

4. Which of these actions would positively impact your credit score?

• Correct Answer: Paying your bills on time and in full
• Reasoning: Timely payments are a major factor in building a good credit history. Late payments, opening too many accounts, and high credit utilization negatively impact your score.

5. What is interest in the context of a loan or a savings account?

• Correct Answer: Interest is extra money paid by a borrower to a lender, or money earned by a saver from a bank.
• Reasoning: For a loan, interest is the cost of borrowing. For a savings account, interest is the reward for depositing money with the bank.

6. A debit card typically pulls money directly from which type of account?

• Correct Answer: Checking account
• Reasoning: Debit cards are directly linked to your checking account, deducting funds immediately from your available balance.

7. Describe one benefit of having a good credit score.

• Expected Response: (Any one of the following or similar)
  • Easier to get approved for loans (e.g., car loan, mortgage).
  • Can get better interest rates on loans, saving money in the long run.
  • Easier to rent an apartment.
  • May get lower insurance premiums.
  • Some employers check credit as part of the hiring process.
• Key points to look for: Access to credit, better terms, other financial benefits.

8. What is the primary purpose of creating a budget?

• Correct Answer: To track your spending and manage your money effectively
• Reasoning: Budgeting is a tool for financial planning, helping individuals understand where their money goes and make informed decisions about saving and spending.

9. Which of the following is considered a need when budgeting?

• Correct Answer: Groceries
• Reasoning: Needs are essential for survival (food, shelter, basic clothing, utilities). The other options are wants, which are things that improve quality of life but are not strictly necessary.

10. Briefly explain what a credit score represents.

• Expected Response: A credit score is a three-digit number that represents a person's creditworthiness or financial reliability. It's a numerical summary of your credit history and helps lenders assess the risk of lending money to you.
• Key points to look for: Three-digit number, creditworthiness/reliability, assessment for lenders.