The Answers

1. What is the general rule of thumb for the maximum amount you should spend on a house? 

The answer is 2.5 times your household income, but if your debt ratio would rise above 35% including your mortgage, you should pay down debt before buying a house. 28% for the mortgage and no more than 35% for all debt is a good rule. I just read a website that says 20 and 40% but I think a 40% Debt to Income is just too high.

2. What is the “Time Value” of money?

Fundamentally, TVM is just the concept that a dollar today is worth more than a dollar in the future which is why if you’re borrowing that dollar today, you will pay interest to offset the loss off the value of future dollars or if you’re investing, you want to earn interest on that dollar to offset it’s decline in value over time due to inflation, etc.

3. What is the difference between a Roth IRA and a Traditional IRA? 

A Roth IRA’s contributions come from after-tax dollars while Traditional IRA contributions are from pre-tax dollars. The advantage of a Roth for the typical investor is (what Ivhon said) that typically you’ll be at a higher tax bracket when you retire and distributions from a Roth are not taxed as income unlike distributions from your traditional IRA. The other advantage of Roth IRAs is that you can take distributions without penalty for buying a home or paying educational expenses. In my not so useful opinion, everyone between 18 and 45 needs a ROTH IRA that they put money in regularly.

4. If you started saving $100 per month on your 18th birthday and earned 10% return annually, how much would you have saved for retirement on your 60th birthday? 

Here: PV = 0, N = (60-18)*12 = 504, i/y = 10/12= .833, pmt = -100, FV = ?? Or you can use this. The answer is $774,429.65. No, I didn’t use the link.

5. What do they mean by “Total Cost of Ownership” for a home and what is that estimated amount?

Total Cost of Ownership is a self-explanatory term. It includes all of the costs associated with holding an asset including the purchase price, maintenance, etc. TCO for a house is estimated at Principal + Interest + Maintenance = Roughly three times the purchase price.

6. If you want to buy a car that costs $25,000, put 10% down and take out a 5 year loan for the rest, how much will your monthly payment be if the interest rate on the loan is 6%?

Here: PV = 22,500, N = 60, i/y = .05, pmt = ??, FV = 0 Or use this. Your payment, according to my BAII Plus is $434.99.

7. What is the basic difference between stocks and bonds?

In a nutshell, Stocks are equity (ownership) and Bonds are debt. Bonds are lower-risk typically because in a bankruptcy the creditors get paid first. Stockholders get what’s left after all claims are paid. Usually, that’s nothing.

8. What’s the difference between an income statement and a balance sheet?

An income statement shows profits and losses over time (Income and expenses). A balance sheet is a snapshot of the value of Assets, Liabilities and Equity as of the moment it is created. Technically, a balance sheet is only accurate for that moment which is why it will always show the date it was created in the header. Information from the income statement is reflected in the balance sheet.

9.What is the difference between growth stocks and income stocks?

Growth stocks are for companies that reinvest profit to increase the value of the business while income stocks pay dividends to shareholders. Is that clear enough? I guess I have to give this one to Ivhon.

10. What does the Federal Reserve bank do to manage inflation? Stimulate growth? How exactly does that work?

The Fed controls interest rates and money supply. They control money supply in a couple different ways but the inflationary control is that if the dollar is weakening, they will buy US dollars back out of the economy making fewer available and making them worth more. If it is too strong, they increase money supply by selling dollars or printing money. I have been pleased to see that they are increasing the reserve requirement for banks rather than increasing Money supply.Interest rates are intended to stimulate lending and subsequently investment, yes. The fed is involved in two rates: The federal funds rate (the rates banks charge each other to borrow federal funds) and the discount rate (the rate charged by the fed to borrow directly from it).

 

I didn’t have a lot of takers on this quiz either place I posted it.  That’s too bad.  These are pretty basic things that I think every single person should know.   It would save a lot of headaches on both a personal and a national level. 

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~ by sharplisa on October 2, 2008.

4 Responses to “The Answers”

  1. Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

  2. For (1) you meant mortgage (inc prop tax) should not exceed 28% and all debt inc mortgage, 36% or so. I’d add, if one is disciplined, and has no other debt, there’s little harm in having the mortgage be the entire 36%. As one’s income goes up, the percent they need for food, transportation, entertainment, drops, it doesn’t rise. The subprime mess was due to ARMs that took more than this portion of income right at the teaser rate. Had there been this simple rule, based on maximum rate, not teaser, this mess would not have occurred.
    Joe

  3. Ack! Thanks Joe! That’s what I get when I type pissed off. I get stuff backwards.

  4. Humm, didn’t see it or I would have answered. Actually probably wouldn’t have had any answers. I know nursing not $ that well except I try to get the credit card paid off as quickly as possible (not doing good at that right now–but tomorrow is another day!)

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