Chapter 17

Personal Finance: Turning Money into Wealth, 7e (Keown) Chapter 17 Financial Life Events - Fitting the Pieces Together 17.1 The Ingredients of Success 1) The earlier you start saving for your retirement, the easier it will be to reach your financial goals. Answer: TRUE Diff: 1 Topic: Financial Planning AACSB: Analytical Thinking 2) Financial goals must be reexamined periodically and adjusted to accommodate changes in your life. Answer: TRUE Diff: 1 Topic: Financial Life Events AACSB: Reflective Thinking 3) College graduates should be prepared to make many financial decisions during their first decade after graduation. Answer: TRUE Diff: 1 Topic: Financial Planning AACSB: Reflective Thinking 4) If you have good financial goals then you really don't need a financial plan. Answer: FALSE Diff: 2 Topic: Financial Planning AACSB: Reflective Thinking 5) Women are more likely to have a pension than men. Answer: FALSE Diff: 1 Topic: Women and Personal Finance AACSB: Diverse and Multicultural Work Environments 6) As a percentage, there are more elderly men living below the poverty line today than there are elderly women living below the poverty line. Answer: FALSE Diff: 1 Topic: Women and Personal Finance AACSB: Diverse and Multicultural Work Environments 1 Copyright © 2016 Pearson Education, Inc. 7) Women live, on average, 7 years longer than men. Answer: TRUE Diff: 3 Topic: Women and Personal Finance AACSB: Diverse and Multicultural Work Environments 8) It is never a good idea for both spouses to be actively involved in and aware of the family's finances. This can lead to arguments. Answer: FALSE Diff: 1 Topic: Women and Personal Finance AACSB: Reflective Thinking 9) Roxanne began saving for retirement at age 23 when she graduated college. She wants to have $2.3 million dollars in her retirement account when she reaches age 55. If she deposits $9,000 each year in an account earning an 11% Annual Rate of Return, will she achieve her goal in time? A) Yes, she will have over $2.3 million dollars in the account. B) No, she will have less than $2.3 million dollars in the account. Answer: B Diff: 2 Topic: Time Dimension of Investing AACSB: Analytical Thinking 10) Suppose that immediately after graduation you invested $3,000 each year for 15 years and nothing thereafter. You earn 10% on this money. Which of the following is closest to the amount of money you would you have on deposit when you retired in 40 years (25 years after the deposits stopped)? A) $47,812 B) $523,482 C) $834,295 D) $1,032,736 Answer: D Diff: 3 Topic: Time Value of Money AACSB: Analytical Thinking 11) What is the importance of understanding the financial life cycle? A) It allows you to be proactive in financial planning to prepare for your changing needs. B) It allows you to take advantage of the time-value-of-money. C) It helps you in achieving your long-term financial goals. D) All of the above are correct. E) Only A and C are correct. Answer: D Diff: 1 Topic: Financial Life Events AACSB: Reflective Thinking 2 Copyright © 2016 Pearson Education, Inc. 12) At the end of each year for 25 years you deposit $365 in an account that earns 12% interest. If instead you had begun saving earlier, and had deposited $365 in the account each year for 50 years, how much more money would you have on deposit? A) $13,607.10 B) $157,557.18 C) $718,449.48 D) $827,339.80 Answer: D Diff: 3 Topic: Time Value of Money AACSB: Analytical Thinking 13) What is a smart thing for married women to do regarding their personal financial situation? A) Make sure their plan recognizes that women live longer than men and that half of all marriages end in divorce. B) Be involved in decisions regarding their husband's employee benefits and retirement plans. C) See a financial planner about any specific concerns. D) All of the above are correct. E) Only A and C are correct. Answer: D Diff: 2 Topic: Women and Personal Finance AACSB: Reflective Thinking 14) Which of the following statistics concerning women are not true? A) About 75% of the elderly people living in poverty are women. B) Eighty percent of all widows who are now living in poverty were not living in poverty while their husbands were still alive. C) Almost half of all single elderly women get most of their income from Social Security. D) Only 22% of women 65 and older received pension benefits, versus 29% of men, and the median amount of the women's pension income was over twice that of men. Answer: D Diff: 3 Topic: Women and Personal Finance AACSB: Diverse and Multicultural Work Environments 15) Why is it more difficult for women to plan for their retirement than it is for men? A) On average, men die younger than women. B) Women generally earn less income and pay less into Social Security than men do. C) Women rely on defined-benefit plans more than men do. D) All of the above are correct. E) Only A and B are correct. Answer: E Diff: 3 Topic: Women and Personal Finance AACSB: Information Technology 3 Copyright © 2016 Pearson Education, Inc. 16) List the 10 'ingredients' in order to succeed financially. Answer: - Evaluate your financial health. - Plan and budget. - Manage your cash and credit. - Control your debt. - Make knowledgeable consumer decisions. - Have adequate health, life, property, and liability insurance. - Understand investing principles. - Make investment decisions that reflect your goals. - Plan for retirement. - Plan for what happens to your accumulated wealth and your dependents after you die. Diff: 2 Topic: Financial Planning AACSB: Reflective Thinking 17) According to "Step 1: Manage Your Life," what are the two things that, if not eliminated, might jeopardize your future? Answer: Delete Any Eyebrow-Raising Photos from Facebook and Other Social Media. Because potential employers will look at Twitter, Instagram, Facebook, and other social media, photos of you drinking or having fun on spring break must go. Eliminate FEAR! Don't Be Afraid to Invest in Yourself. In a way, your largest financial asset is your "human capital." You'll most likely hold several jobs over your lifetime, so make sure your skill set grows over time. Diff: 2 Topic: Financial Challenges AACSB: Reflective Thinking 18) Why is it important for someone twenty five years old to start planning for retirement? Answer: When you are young your best friend is time. With the time-value-of-money working for you, you can start saving a relatively small amount of money when you are young and accumulate a fairly large amount of money by the time you retire. If you wait until later in life to start saving for retirement, you would need to save a dramatically larger amount to even come close to the younger saver. This represents an opportunity cost of a lower standard of living for the older saver. Starting early, consistently investing in the stock market, and taking advantage of the tax deferred retirement accounts is the smartest thing a young person can do. Diff: 2 Topic: Time Value of Money AACSB: Reflective Thinking 4 Copyright © 2016 Pearson Education, Inc. 19) Why is it more challenging for women to become financially security? Answer: Because the woman stereotypically has responsibility to raise the children, this may interfere with their careers meaning they may earn less money and contribute less money to their own retirement accounts, especially when they are younger. Statistically, women live longer than men so they are most likely to end up alone. Because they live longer they run out of retirement monies and rely on Social Security only. Many times they relied on their husbands to handle the family finances and they are naive as to what to do financially. Diff: 3 Topic: Women and Personal Finance AACSB: Reflective Thinking 17.2 Financial Life Events 1) When you get married it is a good time to evaluate your and your spouse's financial goals and come up with a set of joint financial goals. Answer: TRUE Diff: 1 Topic: Financial Life Events AACSB: Reflective Thinking 2) Given the current divorce rate in the country if one spouse has good credit established, then it is equally important for the other spouse to establish credit in his or her own name. Answer: TRUE Diff: 2 Topic: Financial Life Events AACSB: Analytical Thinking 3) For a married couple with opposite spending habits, one checking account for the family is the ideal strategy. Answer: FALSE Diff: 2 Topic: Financial Life Events AACSB: Reflective Thinking 4) In spite of the fact that many younger couples have high living expenses at first, it's is still vitally important to start a savings plan. Answer: TRUE Diff: 2 Topic: Financial Life Events AACSB: Analytical Thinking 5) Tracking your spending for a month or so will help you plan savings. Answer: TRUE Diff: 2 Topic: Pay Yourself First AACSB: Analytical Thinking 5 Copyright © 2016 Pearson Education, Inc. 6) Couples should have many conversations about their views on family finances prior to becoming engaged or married. Answer: TRUE Diff: 2 Topic: Financial Life Events AACSB: Reflective Thinking 7) When you get married, by law you must have joint credit card accounts instead of individual accounts. Answer: FALSE Diff: 2 Topic: Financial Life Events AACSB: Analytical Thinking 8) One of the first things a newly married couple should do is update their financial records and consider making each other the beneficiary on their financial accounts. Answer: TRUE Diff: 2 Topic: Financial Life Events AACSB: Analytical Thinking 9) Your spouse's credit score may have a positive or negative impact on your ability to acquire a mortgage together. Answer: TRUE Diff: 2 Topic: Financial Life Events AACSB: Analytical Thinking 10) Insurance planning becomes much more important when a person gets married. Answer: TRUE Diff: 2 Topic: Financial Life Events AACSB: Diverse and Multicultural Work Environments 11) Estate planning is much less important for married people than for single people. Answer: FALSE Diff: 2 Topic: Financial Life Events AACSB: Diverse and Multicultural Work Environments 12) Your tax status and the tax-advantaged benefits and opportunities afforded you by your employer may change as a result of your marriage. Answer: TRUE Diff: 3 Topic: Financial Life Events AACSB: Diverse and Multicultural Work Environments 6 Copyright © 2016 Pearson Education, Inc. 13) If you and your spouse have different money management styles, it may be wise to maintain separate checking accounts. Answer: TRUE Diff: 3 Topic: Financial Life Events AACSB: Reflective Thinking 14) According to U.S. News and World Reports, the required investment for a medium income family to raise and support a child for 22 years is approximately A) $52,000 B) $197,704 C) $1,000,000 D) $1,450,000 E) $3,000,000 Answer: D Diff: 1 Topic: Financial Life Events AACSB: Analytical Thinking 15) What is a reason that your textbook suggests as to why a newly married couple would want to establish separate checking accounts? A) It makes record keeping much easier. B) It is preferable if the couple has incompatible money management styles. C) One always gets a better deal from the bank on two accounts versus one account. D) All of the above E) None of the above Answer: B Diff: 1 Topic: Financial Life Events AACSB: Reflective Thinking 16) According to your textbook, which is a typical financial event that recent graduates may face during their first decade out of college? A) Buying a car B) Establishing credit C) Paying taxes D) Repaying student loans E) All of the above Answer: E Diff: 1 Topic: Financial Life Events AACSB: Diverse and Multicultural Work Environments 7 Copyright © 2016 Pearson Education, Inc. 17) Part of life event number 1, getting started, is laying the groundwork for your financial goals. Which of the following is part of laying the groundwork? A) Establishing a budget B) Checking your credit score C) Establishing an emergency fund D) All of the above are correct. E) Only A and B are correct. Answer: D Diff: 1 Topic: Financial Life Events AACSB: Reflective Thinking 18) Part of the getting started stage is to begin saving for your goals. What are the critical steps to doing so? A) Make savings automatic. B) Live within your means. C) Catch your matches. D) All of the above are correct. E) Only A and C are correct. Answer: D Diff: 2 Topic: Financial Life Events AACSB: Reflective Thinking 19) What challenges to personal financial planning does marriage present? A) Setting common goals B) Establishing a common household budget C) Asset ownership and estate planning D) All of the above are correct. E) Only B and C are correct. Answer: D Diff: 2 Topic: Financial Life Events AACSB: Reflective Thinking 8 Copyright © 2016 Pearson Education, Inc. 20) List the main "life events" as discussed in your textbook. Answer: 1. Getting started 2. Marriage 3. Buying a home 4. Having children 5. Inheritance, bonuses, or unexpected money 6. A major illness 7. Caring for an elderly parent 8. Retiring 9. Death of a spouse 10. Divorce Diff: 1 Topic: Financial Life Events AACSB: Reflective Thinking 21) Discuss what is involved in Life Event 1: Getting started. Answer: Before you can begin your life's journey, you need to figure out where you are now. Creating an income statement and balance sheet is essential in determining your financial health and establishing a realistic budget. You must establish an emergency fund and have adequate insurance in place to protect your long term savings and investments incase of an unplanned event. Establishing and maintaining strong credit is essential to having access to affordable credit. Establishing realistic goals and creating a plan to achieve them are next. Without a plan in place, the odds of achieving your goals are low. Diff: 3 Topic: Financial Life Events AACSB: Reflective Thinking 22) Why is discussing personal finances with your significant other so important prior to getting married? Answer: Personal finances become more challenging when their are two people involved. Financial stress can lead to an unhappy marriage and divorce. Understanding each other's perspectives and habits before you get into the marriage may help to prevent any future problems before they arise. Their income, debt, saving and spending habits need to be known so that you can work together to establish common financial goals, budgets and priorities in life. If you cant effectively communicate with each other over these issues before you get married then heaven help you afterwards! Diff: 3 Topic: Financial Life Events AACSB: Reflective Thinking 9 Copyright © 2016 Pearson Education, Inc. 23) Buying a home is one of the smartest investments you can make. What are the proper steps necessary to make sure you do it right? Answer: Part of financial planning is looking into the future for threats or opportunities that may arise. Saving up the largest downpayment you can afford may take several years of planning and budgeting. Establishing or repairing good, strong credit may also take several years to allow you to get approved for affordable financing. Using the 28/36 rule to help you understand the impact of other debt payments like car and student loans will help you to properly manage and or eliminate some non-mortgage debt before you purchase the home. Becoming aware of the tax implications associated with owning a home in your State is also beneficial. Diff: 3 Topic: Financial Life Events AACSB: Analytical Thinking 24) How should a family plan for having children from a personal financial perspective? Answer: By being proactive, a family can plan for children financially making less of a financial impact and stress upon the birth of the children. For a typical newlywed younger couple, they may have car loans, student loans and credit card debt from being single. A good goal would be to pay off as much of this debt prior to having a family. If they also plan on buying a home, possibly the increased expenses from owning a home and having children might be more than they can handle. Delaying one of these major decisions until they have paid off debt, increased their savings or both might be a good idea. Being properly insured is a must before the pregnancy and making sure their health coverage includes pregnancy expenses is key. Diff: 3 Topic: Financial Life Events AACSB: Reflective Thinking 25) How can someone plan for a major illness? Answer: Part of financial planning is being prepared for the unplanned events that occur to most of us sooner or later. Sound budgeting to make sure we have enough in an emergency fund to meet the liquidity ratios from chapter two is essential. Keeping our debt ratios under 15% gives us options and flexibility in case something bad happens and we lose some income. Being properly insured before we develop a pre-existing condition is vitally important. You can't avoid a catastrophe but you can be proactive in managing and lessening it's financial impact. Diff: 3 Topic: Financial Life Events AACSB: Reflective Thinking 10 Copyright © 2016 Pearson Education, Inc. 26) How can someone plan for a divorce? Answer: Hopefully you will only marry once and forever but the odds are not in your favor, unfortunately. It is critically important for both spouses to be actively involved in and aware of the financial decisions for the family. Maintaining your own personal credit during your marriage is essential. Making sure that the joint assets are titled properly also protects you from possible harm in case of divorce. Maintain your own checking and savings accounts and use a joint account for joint expenses makes sense and protects you from the other spouse having access without your knowledge. Use joint credit sparingly and limit your debt limits accordingly. Try to maintain communications and civility during the divorce to limit attorney fees. Make sure insurance needs are met and change beneficiary designations accordingly. If you are awarded alimony or child support payments, make sure the judge requires the payor to have adequate life insurance coverage where you are the policy owner and beneficiary. Diff: 3 Topic: Financial Life Events AACSB: Reflective Thinking 17.3 The Keys to Success: A Dozen Decisions 1) Medical insurance can keep medical expenses from becoming a catastrophic financial event. Answer: TRUE Diff: 1 Topic: 12 Keys to Success AACSB: Diverse and Multicultural Work Environments 2) Opening a 529 plan for yourself near the end of your career is a good means to save for your retirement. Answer: FALSE Diff: 1 Topic: 12 Keys to Success AACSB: Diverse and Multicultural Work Environments 3) It is a good idea to pay all your bills first and then determine how much to save with what is left over. Answer: FALSE Diff: 1 Topic: 12 Keys to Success AACSB: Analytical Thinking 4) Understanding key personal finance topics can prevent you from being a victim to fraud and self-interested behaviors of sales people and financial advisors. Answer: TRUE Diff: 1 Topic: 12 Keys to Success AACSB: Diverse and Multicultural Work Environments 11 Copyright © 2016 Pearson Education, Inc. 5) Procrastination is the enemy of the power of compounding. Answer: TRUE Diff: 1 Topic: 12 Keys to Success AACSB: Reflective Thinking 6) Living below your means leads to a harsh, barren lifestyle with little or no pleasure in life. Answer: FALSE Diff: 1 Topic: 12 Keys to Success AACSB: Reflective Thinking 7) Living below your means deals with buying what you need versus buying what you want. Answer: TRUE Diff: 2 Topic: 12 Keys to Success AACSB: Analytical Thinking 8) A budget is essential for a recent college graduate with no dependents. Answer: TRUE Diff: 2 Topic: 12 Keys to Success AACSB: Analytical Thinking 9) The key to keeping the cost of home and auto insurance down is to keep your deductibles as high as you can afford. Answer: TRUE Diff: 2 Topic: 12 Keys to Success AACSB: Diverse and Multicultural Work Environments 10) Carrying debt today is limiting your financial options in the future. Answer: TRUE Diff: 2 Topic: 12 Keys to Success AACSB: Analytical Thinking 11) The best investment advice for younger people is to be conservative and avoid risk. Answer: FALSE Diff: 2 Topic: 12 Keys to Success AACSB: Diverse and Multicultural Work Environments 12 Copyright © 2016 Pearson Education, Inc. 12) Only people 40 years or older should max out their retirement contributions at work. Answer: FALSE Diff: 2 Topic: 12 Keys to Success AACSB: Diverse and Multicultural Work Environments 13) Your potential income sources should be evaluated prior to having children. Answer: TRUE Diff: 2 Topic: 12 Keys to Success AACSB: Analytical Thinking 14) On average, married men earn 26% more money than unmarried men. Answer: TRUE Diff: 2 Topic: 12 Keys to Success AACSB: Diverse and Multicultural Work Environments 15) Which of the following statements is correct? A) You should spend less than you earn and budget your money. B) You should know the costs of borrowing. C) You should understand the difference between good and bad debt. D) You should make sure that you can repay what you borrow. E) All of the above statements are correct. Answer: E Diff: 1 Topic: 12 Keys to Success AACSB: Reflective Thinking 16) According to your text, which of the following is true regarding employment in today's world? A) Your history with the company is all that matters. B) Working at a company for many years ensures that you will keep your job. C) Reinventing and upgrading your skills is a necessity in today's business world. D) None of the above. Answer: C Diff: 1 Topic: Financial Life Events AACSB: Diverse and Multicultural Work Environments 17) According to your text, is it recommended that couples have a joint credit card or not? A) No, it is best for couples to have their own credit cards. B) Yes, it is important for couples to have joint credit cards. Answer: A Diff: 1 Topic: 12 Keys to Success AACSB: Reflective Thinking 13 Copyright © 2016 Pearson Education, Inc. 18) Which of the following is not true regarding investing in stocks? A) They are risky, but not as risky as not investing in them. B) Mutual funds are an easy way to invest in stocks and diversify. C) You should let asset allocation decisions be guided by your time horizon. D) You should review the time dimension of investing. E) All of the above are true statements. Answer: E Diff: 1 Topic: 12 Keys to Success AACSB: Analytical Thinking 19) Which of the following does a budget help you accomplish? A) It allows you to not think about what you spend money on. B) It allows you to live above your means. C) It forces you to use restraint. D) All of the above E) None of the above Answer: C Diff: 1 Topic: 12 Keys to Success AACSB: Analytical Thinking 20) Which of the following is one of the "keys to financial success" as outlined in Chapter 17 of your textbook? A) Live Below Your Means B) Hide Your Plastic C) Realize You Aren't Indestructible D) All of the above Answer: D Diff: 1 Topic: 12 Keys to Success AACSB: Information Technology 21) Why are stocks risky, but not as risky as not investing in them? Answer: Stocks are risky due to the ups and downs experienced both in the individual stock as well as in the stock market in general. They are indeed risky. They are not as risky as not investing in them for the following reasons: 1. Diversification will reduce the risk of owning individual stocks. 2. The time dimension of planning will reduce the general market risks (fluctuations). 3. You will be better able to keep ahead of inflation and taxes. Diff: 2 Topic: Saving AACSB: Diverse and Multicultural Work Environments 14 Copyright © 2016 Pearson Education, Inc. 22) Discuss why budgeting is so critical to financial success and what it forces you to do. Answer: Budgeting is critical in allowing you to save more than you spend. It forces you to do the following: 1. Use restraint when purchasing items or obtaining/using credit. 2. More carefully consider what you spend your money on. 3. Live below your means. 4. Be frugal. Diff: 1 Topic: Budget AACSB: Reflective Thinking 23) What does the phrase "living below your means" really mean and how is it related to wealth building? Answer: Living below your means is simply saving money by spending less than you earn. This is related to wealth building in that, by practicing this method of living, you are getting out of the trap or tendency that many people have of spending to their level of earning (or beyond). It allows you to be realistic with respect to what you can really afford. Diff: 2 Topic: Saving AACSB: Reflective Thinking 17.4 Tying Things Together: Debt and the Real World 1) There are always positive things you can do to change your credit score so it is worth the time to try and manage it. Answer: TRUE Diff: 1 Topic: Debt AACSB: Diverse and Multicultural Work Environments 2) The interest on your mortgage is generally tax deductible and this tax benefit should be considered when determining which type of debt you should use. Answer: TRUE Diff: 1 Topic: Debt AACSB: Analytical Thinking 3) According to the Keown book, in 2014, the average interest rate on a credit card was around 15.6 percent–expensive borrowing, to be sure. Answer: TRUE Diff: 2 Topic: Debt AACSB: Reflective Thinking 15 Copyright © 2016 Pearson Education, Inc. 4) At the beginning of 2014, according to CreditCards.com and Cardweb.com, the average credit card debt per household with at least one credit card was $15,279, up from $2,985 in 1990. Answer: TRUE Diff: 3 Topic: Debt AACSB: Information Technology 5) Studies show that there is an inverse relationship between education and playing the lottery, with 54 percent of lottery players earning less than $40,000. Answer: TRUE Diff: 2 Topic: Financial Challenges AACSB: Reflective Thinking 6) Which of the following is considered to be a key element to effective debt management? A) Know and understand the costs of debt. B) Complete a budget: always spend more than you earn. C) Take the largest possible loan you can obtain. D) Accept credit whenever it is offered. E) None of the above Answer: A Diff: 1 Topic: Debt AACSB: Diverse and Multicultural Work Environments 7) The debt limit ratio is A) total monthly take-home pay divided by total monthly nonmortgage payments. B) total monthly nonmortgage payments divided by total monthly take-home pay. C) total monthly gross pay divided by total monthly mortgage payments. D) total monthly mortgage payments divided by total monthly gross pay. Answer: B Diff: 1 Topic: Debt AACSB: Analytical Thinking 8) Suppose that you want to purchase a home. Your lender has told you that the standard limit for your total debt limit ratio is ________ including your mortgage debt. A) 24% B) 36% C) 38% D) 40% E) none of the above Answer: B Diff: 1 Topic: Debt AACSB: Analytical Thinking 16 Copyright © 2016 Pearson Education, Inc. 9) Debt is being marketed to adults as much as toys are to children. What are some of the results of this? A) People are encouraged to borrow more than they should. B) Almost 60% of those aged 30 and under do not pay off their credit card bills every month. C) Students are limited in their capacity to obtain debt. D) All of the above E) Only A and B Answer: E Diff: 1 Topic: Debt AACSB: Analytical Thinking 10) According to the Keown book, the average student debt is more than ________. In addition, according to a recent Fidelity survey, total student debt–including credit card debt and personal and family loans–tops ________. A) $9,000; $15,000 B) $19,000; $25,000 C) $29,000; $35,000 D) $39,000; $45,000 Answer: C Diff: 3 Topic: Student Loan AACSB: Reflective Thinking 11) Discuss the results of having debt marketed to adults the same way toys are marketed to children. Answer: 1. Students and those with little capacity to repay are being given the opportunity to increase debts at will. Many students only need a college ID to obtain a credit card. These cards typically come with all types of free goodies to entice application. 2. People are encouraged to borrow more than they should. Borrowing is becoming part of our culture. In a recent survey of those aged 30 and under, almost 60 percent do not pay off their credit card bills every month. For those over 60, it falls to less than 15 percent. 3. Bankruptcies have reached an all-time high. Debt as a percent of disposable income has nearly doubled over the last 40 years. In 1997 was the first year where over 1 million Americans filed for bankruptcy. Diff: 2 Topic: Debt AACSB: Diverse and Multicultural Work Environments 17 Copyright © 2016 Pearson Education, Inc. 12) Discuss why it is important to keep a clean credit record. Answer: 1. It provides a source of funds that might not otherwise be available in the case of an emergency or crisis. You might lose your job or become ill. 2. It can significantly hurt you in getting a car loan, an apartment, and even a job. 3. It significantly affects the rate that you pay when you borrow money. Rates can be up to six percent higher on mortgage rates for those with poor credit. Diff: 2 Topic: Debt AACSB: Reflective Thinking 13) List the six keys to successful debt management. Answer: 1. Budget and spend less than you earn. 2. Know the costs. 3. Understand the difference between good and bad debt. 4. Make sure you can repay what you borrow; set your own standards. 5. Keep a clean credit record; it is a source of emergency money. 6. Do not live with bad (and expensive) debt. Diff: 1 Topic: Debt AACSB: Information Technology 18 Copyright © 2016 Pearson Education, Inc.