Financial literacy sample work answers
Question 1: What is a budget and why is it important?
Answer: A budget is a financial plan that outlines the income and expenses of an individual or organization over a specific period of time. It is important because it helps in managing and controlling spending, ensuring that expenses do not exceed income. A budget also allows individuals to set financial goals and track progress towards achieving them. Additionally, it helps in identifying areas where expenses can be reduced and savings can be increased.
Question 2: What are the benefits of saving money?
Answer: Saving money has several benefits. Firstly, it provides financial security and allows individuals to have a safety net in case of emergencies or unexpected expenses. Secondly, saving money allows individuals to achieve their long-term goals such as buying a house, starting a business, or funding education. It also provides a sense of freedom and flexibility, as it allows individuals to have a financial cushion and make choices based on personal preferences rather than financial constraints. Additionally, saving money enables individuals to earn interest or investment returns, which can help in building wealth over time.
Question 3: What is the difference between a traditional IRA and a Roth IRA?
Answer: A traditional IRA (Individual Retirement Account) and a Roth IRA are both retirement savings accounts, but they have some differences. In a traditional IRA, contributions are typically tax-deductible, meaning that individuals can reduce their taxable income by the amount contributed. However, withdrawals from a traditional IRA are taxed as ordinary income during retirement. On the other hand, contributions to a Roth IRA are made with after-tax dollars, meaning that they are not tax-deductible. However, qualified withdrawals from a Roth IRA are tax-free during retirement. Another difference is that traditional IRAs require individuals to start taking minimum required distributions (MRDs) at age 72, while Roth IRAs do not have any MRD requirements during the lifetime of the original account holder.
Overall, the choice between a traditional IRA and a Roth IRA depends on individual circumstances and financial goals, including current and future tax brackets, expected retirement income, and personal preferences.
Note: These sample answers are just a starting point and would need to be expanded upon to be considered comprehensive.