Unit 11: Personal Finance
The money math that decides whether debt buries you or compounding sets you free: budgets, credit, loans, saving, and taxes.
13 topics · 47 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
Building a Budget
- How it worksHow does tracking every dollar of income against every dollar of expenses build a working monthly budget?
- Worked exampleFind how much is left to save when monthly income is 3000 dollars and total expenses add up to 2450 dollars.
- Common mistakeWhy doesn't having money left in your checking account at the end of the month mean you're actually saving?
Your turn1 of 2
Monthly income is 5089 dollars and total monthly expenses are 2344 dollars. How much is left to save?Needs, Wants, and the Opportunity Cost of Spending
- How it worksHow does every dollar spent on a want represent the opportunity cost of a dollar that could have been saved or invested?
- Worked exampleFind how much a 200 dollar purchase today would have grown to in 30 years if invested instead at a 7 percent annual return.
- Common mistakeWhy isn't telling a need apart from a want just about how much the item costs?
Your turn1 of 2
A purchase of 363 dollars today could instead be invested at a 8 percent annual return. How much would it have grown to after 38 years?Simple Interest Versus Compound Interest
- How it worksHow does compound interest pay interest on top of interest already earned, while simple interest only ever pays on the original amount?
- Worked exampleFind the balance after 3 years on a 1000 dollar deposit earning 5 percent simple interest versus 5 percent compound interest.
- Common mistakeWhy isn't a slightly higher simple interest rate always the better deal over a slightly lower compound rate?
Your turn1 of 2
A deposit of 3634 dollars earns 6 percent simple interest per year for 9 years. What is the balance after 9 years?The Power of Starting Early
- How it worksHow does compound growth over decades let time do more work than the size of any single contribution?
- Worked exampleFind the balance after 40 years on a single 5000 dollar investment earning 7 percent annual compound interest.
- Common mistakeWhy doesn't waiting five extra years to start investing cost you only five years' worth of growth?
- Going furtherWhat happens to a 40 year compound-interest projection once the annual return rises from 7 percent to 9 percent?
Your turn1 of 2
A single investment of 7268 dollars earns 8 percent annual compound interest for 39 years. What is the balance after 39 years?How a Bank Account Actually Works
- How it worksHow does a bank lend out most of a checking or savings deposit while still letting you withdraw your money on demand?
- Common mistakeWhy isn't the money in your savings account just sitting untouched in a vault with your name on it?
- Going furtherWhat happens to your deposit if the bank holding it fails and the account is insured by the FDIC?
Your turn1 of 2
A depositor holds 427140 dollars in a single account at one bank. The FDIC insures deposits up to 250000 dollars per depositor per bank. How much of the deposit is NOT insured?What a Credit Score Measures
- How it worksHow do payment history, amounts owed, length of credit history, and new credit combine into a credit score?
- Worked exampleFind the credit utilization ratio when a cardholder owes 900 dollars on a card with a 3000 dollar limit.
- Common mistakeWhy doesn't a credit score measure how much money you have?
- Common mistakeWhy doesn't carrying a small unpaid balance from month to month boost your credit score?
- Going furtherWhat happens to a credit score after a single missed payment stays on the record for years?
Your turn1 of 2
A cardholder owes 1802 dollars on a credit card with a 4947 dollar limit. What is the credit utilization ratio, as a percent?How Credit Card Debt Compounds Against You
- How it worksHow does compound interest on an unpaid credit card balance work against you the same way it works for you in savings?
- Worked exampleFind how much interest accrues in one month on a 3000 dollar credit card balance at a 22 percent annual rate.
- Common mistakeWhy doesn't paying only the minimum payment each month actually get a credit card balance paid off quickly?
- Common mistakeWhy doesn't the minimum payment listed on a credit card statement equal the amount you actually owe?
Your turn1 of 2
A credit card balance of 4330 dollars carries an annual interest rate of 23 percent. How much interest accrues in one month?Loans and How an Amortization Schedule Works
- How it worksHow does an amortization schedule show the split between interest and principal shifting over the life of a loan?
- Worked exampleFind how much of the first monthly payment on a 200000 dollar mortgage at a 6 percent annual rate goes toward interest.
- Common mistakeWhy isn't every payment on an amortizing loan split evenly between interest and principal?
- Common mistakeWhy isn't renting an apartment for years necessarily throwing away money compared with paying down a mortgage?
- Going furtherWhat happens to the interest-versus-principal split on a mortgage payment by the time the loan is nearly paid off?
Your turn1 of 2
A mortgage of 308925 dollars carries an annual interest rate of 6 percent. How much of the FIRST monthly payment goes toward interest?Comparing a Mortgage, a Student Loan, and an Auto Loan
- How it worksHow do loan term, collateral, and risk each shape the interest rate charged on a mortgage, a student loan, and an auto loan?
- Worked exampleFind the total interest paid over the life of a 20000 dollar auto loan at 6 percent over 5 years versus the same loan stretched over 3 years.
- Common mistakeWhy doesn't a longer loan term always mean paying less money in total?
Your turn1 of 2
An auto loan of 27410 dollars carries a monthly interest rate of 0.00919 and is paid off over 69 monthly payments. Using the standard loan payment formula, what is the TOTAL interest paid over the life of the loan?Saving Versus Investing
- How it worksHow does the tradeoff between safety and expected return decide when to save in cash versus invest in assets?
- Worked exampleFind the real value lost over 10 years on 10000 dollars sitting in cash earning 1 percent while inflation runs at 3 percent.
- Common mistakeWhy isn't keeping money entirely in cash the safest possible choice over the long run?
Your turn1 of 2
An amount of 14536 dollars sits in cash earning 1.9 percent annual interest, while inflation runs at 5 percent annually, for 9 years. How much value, in today's purchasing power terms, is lost compared with what the cash would need to earn just to keep pace with inflation?Diversification and Risk
- How it worksHow does spreading money across many different investments reduce the damage any single one can do to a whole portfolio?
- Common mistakeWhy doesn't diversification guarantee you'll never lose money on your investments?
- Going furtherWhat happens to a diversified portfolio's risk when every asset inside it moves up and down together?
Your turn1 of 2
A portfolio is split equally across 15 different stocks. What percentage of the total portfolio does any single stock represent?How Insurance Spreads Risk Across a Pool
- How it worksHow does pooling premiums from many policyholders let an insurer cover the rare large loss any one of them might suffer?
- Worked exampleFind the annual premium each of 2000 policyholders must pay if the insurer expects to cover 600000 dollars in total claims a year.
- Common mistakeWhy isn't buying insurance a bad deal just because you personally never end up filing a claim?
- Going furtherWhat happens to insurance premiums for a group of policyholders whose average risk of a claim rises?
Your turn1 of 2
An insurer expects to cover 757134 dollars in total claims this year across a pool of 3596 policyholders. What annual premium must each policyholder pay to cover the expected claims?How a Progressive Income Tax Actually Works
- How it worksHow does a progressive tax system apply a higher rate only to the income earned within each successive bracket?
- Worked exampleFind the total tax owed on 60000 dollars of income taxed at 10 percent up to 20000 dollars and 20 percent on the rest.
- Common mistakeWhy doesn't moving into a higher tax bracket reduce your total take-home pay below what it was before?
- Ties togetherHow does paying a higher rate only on income above a bracket connect to the opportunity cost of earning one more dollar?
Your turn1 of 2
A person earns 80267 dollars. The tax system charges 12 percent on the first 19735 dollars of income and 19 percent on income above that. What is the total tax owed?