Chapter 1

Question 1

five basic steps to personal financial planning

Answer 1

Evaluate your financial health.
Define your financial goals.
Develop a plan of action.
Implement your plan.
Review your progress, reevaluate, and revise your plan.

Question 2

liquidity

Answer 2

The relative ease and speed with which you can convert noncash assets into cash. In effect, liquidity involves having access to your money when you need it.

Question 3

inflation

Answer 3

An economic condition in which rising prices reduce the purchasing power of money.

Question 4

Explain why personal financial planning is so important.

Answer 4

Personal financial planning will enable you to (1) manage the unplanned, (2) accumulate wealth for special expenses, (3) save for retirement, (4) “cover your assets,” (5) invest intelligently, and (6) minimize your payments to Uncle Sam.

Question 5

three stages in the financial life cycle

Answer 5

(1) the early years—a time of wealth accumulation, (2) approaching retirement—the golden years, and (3) the retirement years.

Question 6

compound interest

Answer 6

Interest paid on interest. This occurs when interest paid on an investment is reinvested and added to the principal, thus allowing you to earn interest on the interest as well as on the principal.