Personal Finance Exam

Instructions: Please read each question carefully and provide the best answer based on the concepts discussed in class.

Section 1: Investments

This section covers concepts related to investing, including factors that influence stock prices and different investment vehicles. It also asks about your experience in the Investopedia simulation.

Please select the best answer or check all that apply for the multiple-choice questions. Provide your response for the open question on the separate answer sheet.

1. A small firewood processing business experiences a significant increase in customer orders due to a successful local advertising campaign. How would this internal success likely affect the valuation (stock price) of the company, assuming it were publicly traded?

a) Decrease the stock price due to increased operational costs.
b) Increase the stock price as investors anticipate higher profits.
c) Have no significant impact, as only external factors affect stock prices.
d) Lead to a stock split, decreasing the price per share but not the overall valuation.

2. New environmental regulations are passed that severely limit the installation of new wood-burning fireplaces nationwide. How would this external change likely affect the valuation (stock price) of a publicly traded firewood processing business?

a) Increase the stock price due to reduced competition.
b) Decrease the stock price as demand for firewood is expected to fall.
c) Have no significant impact, as only internal company performance affects stock prices.
d) Cause the company to issue more shares, increasing the stock price.

3. Investing in a variety of different stocks across different industries, rather than putting all your money into just one company's stock, is a strategy primarily used to:

a) Guarantee a higher investment return.
b) Increase the risk of losing your investment.
c) Reduce overall investment risk through diversification.
d) Avoid paying taxes on investment gains.

4. Which of the following investment options allows you to easily own a small piece of many different companies with a single purchase?

a) Buying a single share of stock in one large corporation.
b) Purchasing a government savings bond.
c) Investing in a mutual fund or index fund.
d) Opening a standard checking account.

Open Response:

Reflect on your experience participating in the Investopedia stock market simulation from December 2024 to April 2025. What were the most important lessons you learned about investing during this simulation, regardless of your final account value? Discuss at least two specific takeaways from your experience.

(Provide your answer for Section 1, Open Response on the separate answer sheet.)

Section 2: Mortgage Amortization

You are considering purchasing a home and have been offered three different mortgage options. You will need to use an amortization calculator to analyze each option and determine which is the most favorable over the life of the loan. Assume a loan amount of $200,000 for all options, unless otherwise specified.

Task:

For each mortgage option, calculate the estimated monthly principal and interest payment.
Create or complete an amortization table for the first 5 years of each mortgage.
Based on your analysis of the amortization tables and the total cost of the loan over its full term, explain which mortgage option you would choose and why. Consider factors such as the monthly payment, the total interest paid, and how quickly equity is built.

(Provide your answers for Section 2 on the separate answer sheet.)

Section 3: Income Calculation

You are offered a job that pays $23.75 per hour. You are expected to work 40 hours per week. In addition, your manager estimates that you will have the opportunity to work 4 hours of overtime at time-and-a-half pay twice a month, and every weekend in November and December.

Task:

Calculate your estimated annual gross salary, including the estimated overtime pay. Show your work.

(Provide your answers for Section 3 on the separate answer sheet.)

Section 4: Taxes and Tax Forms (Including W-4)

1. For a single individual with no dependents and earning less than $100,000 annually, the primary purpose of filling out a W-4 form is to:

a) Determine their eligibility for tax credits.
b) Inform their employer how much federal income tax to withhold from their paycheck.
c) File their annual income tax return with the IRS.
d) Claim deductions for job-related expenses.

2. If too much federal income tax is withheld from your paycheck throughout the year, what is the likely outcome when you file your tax return?

a) You will owe additional taxes.
b) You will receive a tax refund.
c) Your tax liability will be zero.
d) Your employer will adjust your future paychecks.

3. When should a single individual with no dependents consider submitting a new W-4 form to their employer?

a) Only when they start a new job.
b) Whenever they want to receive a tax refund.
c) If their financial situation changes significantly (e.g., they get married, have a child, or get a second job).
d) Every tax season when they file their annual return.

4. When do employers typically send out W-2 forms reporting your previous year's wages and taxes withheld?

a) By January 15th
b) By January 31st
c) By April 15th
d) By December 31st

5. Match the following common tax forms with their primary purpose:

(Write the letter of the purpose next to each form)

W-2: _______

1099 (various types, e.g., 1099-NEC, 1099-INT): _______

1040: _______

W-4: _______

a) Used to report income from sources other than traditional employment (e.g., freelance income, interest income).

b) The standard form used by individuals to file their annual federal income tax return.

c) Provided by an employer to report wages earned and taxes withheld during the year.

d) Filled out by an employee to tell their employer how much federal income tax to withhold.

6. Which of the following are good practices to avoid tax fraud? (Check all that apply)

a) Reporting all sources of income, even small amounts.
b) Claiming deductions and credits without having proper documentation.
c) Keeping accurate records of income and expenses.
d) Not reporting cash income received for services.
e) Being cautious of unsolicited calls or emails claiming to be from the IRS demanding immediate payment.

7. Under which of the following circumstances might it be advisable to seek assistance from a qualified tax accountant or enrolled agent? (Check all that apply)

a) You have a simple tax situation with only one W-2.
b) You started a small business or freelance work.
c) You bought or sold real estate.
d) You experienced a major life event like marriage, divorce, or the birth of a child.
e) You have investment income or losses.

Section 5: The Savings Equation and Mindset

We discussed the savings equation: Income - Expenses = Savings. While increasing income and investment returns can boost savings, individuals often have the most direct and immediate control over reducing their expenses. Investment returns, on the other hand, are generally the least controllable factor.

1. Based on the savings equation (Income - Expenses = Savings), which action is typically the MOST controllable way for an individual to increase their savings in the short term?

a) Getting a significant raise in income.
b) Reducing discretionary spending on non-essential items.
c) Achieving a much higher return on investments.
d) Receiving a larger tax refund next year.

2. Which component of the savings equation do individuals typically have the most direct and immediate control over?

a) Income
b) Expenses
c) Investment Returns
d) Taxes

Please select the option that represents the most disciplined savings mindset.

3. You have been saving for a large purchase. A disciplined savings mindset is best demonstrated by:

a) Using a credit card to buy the item now and paying it off over time.
b) Waiting until you have saved the full amount before making the purchase.
c) Buying a slightly cheaper version of the item on impulse.
d) Borrowing money from a friend to cover part of the cost.

4. You receive a $500 unexpected gift. A disciplined savings mindset would most likely lead you to:

a) Spend it on a fun, non-essential activity you've been wanting to do.
b) Put the entire amount into a savings account or use it to pay down high-interest debt.
c) Use half of it for spending and save the other half.
d) Keep it in cash for easy access for everyday expenses.

5. When faced with the option of buying energy drinks, a disciplined saver will:

a) Get an energy drink from the gas station whenever they want one.
b) Buy energy drinks in bulk from a store like Costco to save money per unit.
c) Make coffee or tea at home instead of buying energy drinks.
d) Charge energy drinks to a credit card when they don't have cash.

Section 6: Time Management (The 168 Hours)

We used the concept of a 168-hour spreadsheet to understand how we spend our time. Please answer the following short response questions.

1. Estimate how much time you spend brushing your teeth per month. Explain the steps you took to arrive at your estimate.

(Provide your answer for Section 6, Question 1 on the separate answer sheet.)

2. Beyond just tracking time, how can analyzing how you spend your 168 hours help you improve your personal finances? Provide at least two specific examples.

(Provide your answer for Section 6, Question 2 on the separate answer sheet.)

3. Identify one activity you currently spend time on that you could potentially reduce or eliminate to free up time for activities that could improve your financial situation (e.g., working more hours, learning a new skill, creating a budget). Explain your choice.

(Provide your answer for Section 6, Question 3 on the separate answer sheet.)