Financial Understanding Quiz: Measure Your Financial Literacy

A budget is a financial plan that helps individuals or organizations allocate their income towards expenses, savings, and investments over a specific period. By planning future expenses, a budget ensures that resources are used efficiently and financial goals are met. It helps in managing money, avoiding debt, and ensuring that there are funds available for essential expenses and savings.

Diversification is a risk management strategy that involves spreading investments across various financial instruments, industries, and other categories. This approach reduces the impact of poor performance of any single investment on the overall portfolio. By investing in multiple types of assets, such as stocks, bonds, real estate, and commodities, an investor can achieve a more stable and potentially higher return.

An emergency fund is a savings account set aside to cover unforeseen expenses, such as medical emergencies, car repairs, or sudden job loss. Having an emergency fund helps avoid debt and provides financial security by ensuring that there are funds available to handle unexpected financial setbacks without disrupting long-term financial plans.

A credit score is a numerical representation of a person's creditworthiness, based on their credit history. Lenders use credit scores to evaluate the risk of lending money to individuals. A higher credit score indicates a lower risk of default and can result in better loan terms, including lower interest rates and higher credit limits.

Compound interest is calculated on the initial principal and also on the accumulated interest of previous periods. This means that interest in the next period is earned on the total amount, including past interest. Compound interest leads to exponential growth of the investment or debt, as opposed to simple interest, which is calculated only on the principal amount.

A checking account is designed for frequent access to funds, making it ideal for daily transactions such as deposits, withdrawals, writing checks, and electronic payments. These accounts typically do not earn significant interest but offer high liquidity and convenience for managing everyday finances.

Return on Investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment. It is calculated by dividing the net profit from the investment by the initial cost of the investment, then multiplying the result by 100 to get a percentage. A higher ROI indicates that the investment gains compare favorably to its cost.

A high credit score indicates a good credit history and a lower risk of default, making lenders more willing to offer loans at lower interest rates. This can save borrowers a significant amount of money over the life of a loan. A high credit score can also improve the chances of loan approval and may provide access to higher credit limits.

Gross Domestic Product (GDP) is a monetary measure of the market value of all final goods and services produced in a country during a specific period, usually annually or quarterly. It is a comprehensive indicator of a country's economic performance and is used to compare the economic productivity of different countries.

The income statement, also known as the profit and loss statement, provides a summary of a company’s revenues and expenses over a specific period, usually a quarter or a year. It shows the company’s ability to generate profit by increasing revenue, reducing costs, or both. The bottom line of the income statement is the net profit or loss for the period.