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Question 130 • POP Financial Math 26/27

Which of these is an example of using financial reserves for a occasional expense?

Answer

You know that your car will need a tune-up and other routine maintenance every winter, so you save a little money every month in preparation and use the saved money to pay when winter comes around.

You are hit with a summer heat wave and your utility bill spikes, so you use your credit card to pay the bill and pay off the balance over the next few months.

You graduate college and need to start paying back your student loans, so you devote some of your income every month to paying down the debt.

You are never quite sure how much money you spend on food every month, and every so often you need to pull a tiny bit from your retirement fund to pay for groceries.

Explanation

A financial reserve is money set aside ahead of time for expenses that don’t happen every month. In choice A, the car’s winter tune-up and maintenance are occasional but predictable, so saving a little each month prepares for the cost. The credit card in B covers an unexpected bill with borrowed money, while C describes regular debt payments and D uses retirement savings for ordinary groceries.

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