3.1 Saving for Future Purchases

Worked Examples

Key Terms

• APY
• Automated Savings Plan
• Certificate of Deposit (CD)
• Checking Account
• Commercial Bank
• Compound Interest
• Cost of Living
• Credit Union
• Cryptocurrency
• Economy
• Emergency Fund
• Financial Goal
• Impulse Buying
• Income
• Inflation
• Instant Gratification
• Interest
• Interest Rate
• Lifestyle Inflation
• Liquidity
• Long-Term Goal
• Mobile Payment Account
• Money Market Account (MMA)
• Opportunity Cost
• Principal
• Purchasing Power
• Saving
• Savings Account
• Short-Term Goal
• Simple Interest

Practice Questions

6 questions. Nothing here is recorded or scored.

1. Question 13.1.A.2

   Devon Brooks

   Devon Brooks, seventeen, runs a small lawn-mowing operation each summer and busses tables at a diner through the winter. Summer weeks bring in about 220 dollars; winter weeks bring in about 90, and some bring nothing when the diner cuts shifts. He is saving toward a 900-dollar laptop he will need for college in eight months, and the money sits in a payment-app balance on his phone. Last summer, when the mowing money was strong, he upgraded his phone plan and started buying lunch out most days, and by September the laptop fund had barely grown. His aunt suggests two changes: move the fund into an account at her credit union, and set an automatic transfer that moves a fixed amount on every payday.

   Devon's laptop fund is best described as an example of which of the following reasons consumers save?

   • A.Preparing for emergencies such as a lost job or illness.
   • B.Building a source of income for the years after work ends.
   • C.Saving for a significant planned future purchase.
   • D.Earning interest as a source of current income.
   Check answerHide answer

   Answer: C

   A.

   The paired-concept swap. An emergency fund covers the events nobody schedules, a lost job or an illness, and a purchase with a known price and a known date is a goal, not an emergency.

   B.

   Retirement saving builds income for the years after work ends, decades away for a seventeen-year-old. Devon's target is a specific purchase eight months out, not a future income stream.

   C.

   Correct. The framework names three reasons consumers save: significant future purchases, future emergencies, and retirement income. A laptop for college is the significant-purchase reason wearing student clothes: it has a price, 900 dollars, and a date, eight months out.

   D.

   This confuses a side effect with a reason. Savings can earn interest, and interest on a fund this size comes to less than the price of the laptop's charger; nobody mows lawns all summer for it.

2. Question 23.1.A.5

   Devon's phone-plan upgrade and daily lunches after the strong mowing weeks best identify which barrier to saving?

   • A.Lifestyle inflation, because his spending rose to match his summer income.
   • B.Impulse buying, because each lunch was an unplanned purchase of the moment.
   • C.Inconsistent income, because his mowing money arrives only in the summer.
   • D.Inflation, because prices across the economy rose faster than his income.
   Check answerHide answer

   Answer: A

   A.

   Correct. Lifestyle inflation is spending that climbs to match a rise in income, and Devon's timeline matches it exactly: income jumped in June, a pricier phone plan and a lunch habit followed, and by September the fund had barely grown. Both new costs recur, resetting his baseline spending rather than emptying his pocket once.

   B.

   Impulse buying is the unplanned grab in the moment, one purchase at a time. A monthly phone contract plus a most-days lunch routine is a pattern that tracks his income, not a momentary lapse.

   C.

   Devon's income really is uneven across the year, but the fund stalled during the strong summer weeks, when money was arriving steadily. The barrier on display is what his spending did with that income, not the income's timing.

   D.

   The vocabulary borrow. Inflation is an economy-wide rise in prices, an outside economic factor, and nothing in the scenario says prices rose. Devon's spending rose.

3. Question 33.1.C.7

   Which of the following best explains the aunt's advice to move the laptop fund out of the payment app?

   • A.Payment apps charge higher monthly fees than credit union savings accounts.
   • B.App balances lose purchasing power to inflation while insured deposits do not.
   • C.A credit union account would make the money easier to spend on short notice.
   • D.The app balance typically earns no interest and carries no federal insurance.
   Check answerHide answer

   Answer: D

   A.

   The scenario gives no fee schedule for either the app or the credit union, so no fee comparison can support the advice. The real gap is interest and insurance, not monthly charges.

   B.

   This hands inflation a power it does not have: inflation shrinks what a dollar buys wherever that dollar sits, insured or uninsured, so it cannot separate these two vehicles.

   C.

   This reverses the benefit. Easy spending is the app's flaw, and the useful friction runs the other way: a savings account puts a small barrier between Devon and his own money.

   D.

   Correct. A payment-app balance is a storage spot rather than a savings vehicle: unless it is offered through an insured financial institution, no federal insurance protects it, and it typically pays no interest. A savings account at the credit union pays interest, is insured by the federal government up to 250,000 dollars, and puts a small barrier between Devon and his own money.

4. Question 43.1.A.4

   A hospital lets employees route part of each paycheck, before income tax is calculated, into an account reserved for medical expenses. Which of the following best identifies this saving incentive?

   • A.An automated savings plan, because a set amount moves out each pay period.
   • B.A health savings account, because the tax break follows money set aside for health costs.
   • C.A certificate of deposit, because the money is reserved for a single purpose.
   • D.Federal deposit insurance, because the account shields the employees' deposits.
   Check answerHide answer

   Answer: B

   A.

   A strong trap, because the money really does move on each payday. Automation is how the plan runs, but the incentive the stem describes is the tax break, which an ordinary automated transfer into a plain savings account never earns.

   B.

   Correct. The framework names three programs that incentivize saving: automated savings plans, which move a set amount of income each pay period; retirement savings plans, which cut taxes on money saved for retirement; and health savings accounts, which cut taxes on money set aside for health expenses. The defining feature here is income escaping tax because it goes to medical costs, so this is the health savings account exactly.

   C.

   A certificate of deposit locks money away for a set term in exchange for a higher rate; it carries no tax advantage and has no connection to medical expenses. Being reserved for one purpose is the employee's designation, not what a CD does.

   D.

   This names a protection rather than an incentive. Insurance keeps deposits safe whether or not a consumer ever saves another dollar; it does not reward the act of saving.

5. Question 53.1.C.2, 3.1.C.3

   Devon's Savings Options

   Devon has 600 dollars saved and needs the laptop money ready in eight months. His aunt's credit union lists four options, and the table shows them.

   Option | Annual yield | Minimum | Terms Savings account | 3.8% | $25 to open | No monthly fee Money market account | 4.3% | $2,500 minimum balance | Six-month CD | 4.5% | $1,000 | No withdrawals for six months Twelve-month CD | 4.9% | $1,000 | No withdrawals for twelve months Which conclusion is supported by the table?

   • A.The savings account is open to Devon, because its minimum is 25 dollars.
   • B.The twelve-month CD fits Devon's plan best because it pays the highest rate.
   • C.The money market account is the riskiest option because it carries no federal insurance.
   • D.The six-month CD frees Devon's money before his deadline, so the table supports opening one.
   Check answerHide answer

   Answer: A

   A.

   Correct. Read the minimum column first: the money market wants 2,500 dollars, both CDs want 1,000, and Devon holds 600, so only the savings account with its 25-dollar minimum is open to him today. The honest arithmetic on yield: 600 dollars at 3.8 percent earns about 23 dollars in a year, roughly 15 by his deadline, so the automatic deposits will move this fund far more than any rate on the table.

   B.

   The highest-rate bait. 4.9 percent fails twice, on a 1,000-dollar minimum Devon cannot meet and on a twelve-month lock that runs four months past an eight-month deadline. Higher interest typically asks for something back, here both a bigger minimum and a longer lock.

   C.

   All four accounts at this insured credit union carry the same federal insurance, so insurance eliminates nothing on this card. The table gives no basis for calling any option uninsured.

   D.

   The half-supported conclusion. The six-month clock does end inside his eight months, but the same row's minimum column still reads 1,000 dollars, so the table blocks the account it seems to recommend. A supported conclusion has to survive every column.

6. Question 63.1.B.2

   Which of the following best explains how expected inflation affects a consumer's incentive to save?

   • A.Inflation forces banks to raise savings-account rates in step with rising prices.
   • B.Inflation raises the purchasing power of the money already held in savings.
   • C.Inflation is a legal factor requiring the government to insure larger deposits.
   • D.Inflation erodes purchasing power, so expecting it weakens the incentive to save.
   Check answerHide answer

   Answer: D

   A.

   Economic conditions do move interest rates, but nothing forces a rate to keep pace with prices, so plenty of accounts pay less than inflation takes.

   B.

   This runs the effect backward. Inflation erodes purchasing power; it never adds to it. A dollar saved today buys less, not more, after prices across the economy rise.

   C.

   This files inflation in the wrong drawer. Inflation is an economic factor, and deposit insurance and bank regulation are the legal factors, a swap exam writers like to offer.

   D.

   Correct. Inflation is an increase in the prices of goods and services across an economy, and it erodes the purchasing power of savings: a dollar put away today buys fewer goods when it comes back out. If a 900-dollar laptop costs 5 percent more next year, the price becomes 945 dollars, and money saved toward the old price arrives 45 dollars short. A consumer who expects that erosion has a real reason to spend now rather than save.

CED Codes

3.1.A.1 · 3.1.A.2 · 3.1.A.3 · 3.1.A.4 · 3.1.A.5 · 3.1.B.1 · 3.1.B.2 · 3.1.B.3 · 3.1.B.4 · 3.1.C.1 · 3.1.C.2 · 3.1.C.3 · 3.1.C.4 · 3.1.C.5 · 3.1.C.6 · 3.1.C.7