Wise Financial Literacy Test Practice Quiz

A budget is a financial plan that estimates income and expenses over a set period. It helps in managing personal finances by providing a clear overview of spending and saving.

Saving money is essential for covering unexpected expenses and for achieving long-term financial goals. It builds a financial safety net and fosters disciplined money management.

Interest is the cost you pay for borrowing money, or the earning you receive on deposited funds. It compensates lenders for the risk and the opportunity cost of lending money.

A credit score evaluates an individual's creditworthiness based on their borrowing history. It is used by lenders to determine the risk of lending money to that person.

Using a credit card responsibly helps in establishing and improving credit history. It can lead to better lending terms and financial opportunities in the future.

Compound interest grows faster because it earns interest on both the principal and the interest that has already been added. This reinvestment causes the investment to grow at an accelerating rate.

The interest rate is the key factor that determines how much your savings will grow over time. Higher interest rates result in more money earned from the balance.

Diversification involves allocating investments across various asset types to mitigate risk. By not putting all eggs in one basket, investors protect themselves against significant losses from any single asset.

Fixed expenses remain constant each month, making them predictable for budgeting. Rent or mortgage payments are standard examples because they typically do not change over time.

High inflation decreases the purchasing power of your money, meaning you can buy less with the same amount. This can make it challenging to maintain living standards if incomes don't keep up with rising prices.

The interest rate on a credit card determines the extra cost incurred when carrying a balance from month to month. Knowing this rate can help you make informed decisions to avoid unnecessary debt.

A checking account is built for everyday use, enabling frequent deposits and withdrawals. It is ideal for managing routine transactions unlike savings or fixed deposit accounts which focus on long-term storage of funds.

APR stands for Annual Percentage Rate, which represents the yearly cost of borrowing including fees and interest. It is an important metric for comparing loan offers because it reflects the true cost of borrowing.

An emergency fund is designed to cover unforeseen expenses such as urgent repairs or medical emergencies. This fund prevents the need to rely on high-interest debt during unexpected financial challenges.

A fixed-rate mortgage offers a consistent interest rate throughout the life of the loan, which makes monthly payments predictable. In contrast, adjustable-rate mortgages can fluctuate, potentially increasing the cost over time.

Using the compound interest formula, the future value is calculated as 1000 x (1.05)^10, which is roughly $1,629. This demonstrates the impact of compound interest over a significant period.

Inflation reduces the real value of investment returns by increasing the cost of goods and services over time. Long-term investors must factor in inflation to ensure that their gains translate into increased purchasing power.

Failing to diversify means your investments are concentrated in one area, increasing vulnerability if that asset performs poorly. Diversification helps spread risk and minimizes potential losses from any single investment.

Paying more than the minimum payment helps reduce the principal balance faster, resulting in lower overall interest charges. This approach accelerates debt reduction and improves long-term financial health.

Opportunity cost is the value of the benefits you forgo by choosing one option over another. Recognizing this cost is crucial in making well-informed decisions that maximize overall benefits.