Chapter 1: Understanding the Finanancial Planning Process

Question 1

improved flexibility, standard of living, spending habits, and wealth result in a “good” life which requires the use of…

Answer 1

financial planning.

Question 2

financial plans –> financial actions =

Answer 2

financial results

Question 3

the necessities, comforts, and luxuries one has and/or desires.

Answer 3

standard of living

Question 4

what is directly correlated with one’s standard of living (SOL)?

Answer 4

their quality of life (QOL)

Question 5

Type of family/household that buys more, has more money to manage, but was rare in the 1970s and prior.

Answer 5

two-income family

Question 6

Spending habits based on needs and average propensity to consume.

Answer 6

current needs

Question 7

the % of each dollar of income that is spend on current needs.

Answer 7

average propensity to consume

Question 8

What most affects average propensity to consume?
1) SOL
2) QOL

Answer 8

1) SOL

Question 9

Spending habits based on saving money to save and invest.

Answer 9

future needs

Question 10

The 5 qualities of what?
1. specific
2. measurable
3. attainable
4. realistic
5. timely

Answer 10

successful financial goals

Question 11

Assets determine wealth levels.

Answer 11

true

Question 12

net total value of all possessions.

Answer 12

wealth

Question 13

paper assets like savings accounts and securities, like stocks, bonds, etc.

Answer 13

financial assets

Question 14

What type of assets are held for expected future returns?

Answer 14

earning assets

Question 15

physical assets held for consumption or investment purposes.

Answer 15

tangible assets

Question 16

steps of what process?
1. define financial goals
2. make financial plans
3. implement financial plans
4. budget to monitor and control progress
5. evaluate financial statements
6. revise goals and plans accordingly

Answer 16

personal financial planning process

Question 17

2 key factors of what are:?
1) the results must be in monetary terms (money)
2) the results must align with what the person wants to attain (utility)

Answer 17

financial goals

Question 18

the medium of exchange used to measure value in transactions.

Answer 18

money

Question 19

satisfaction from buying a quantity of goods/services of quality.

Answer 19

utility

Question 20

personal values, money “personality”/management style, & emotions factors into…

Answer 20

financial goals.

Question 21

one’s attitude towards money consists of what 2 things?

Answer 21

1. money “personality”
2. money management style

Question 22

financial compatibility is key in relationships.

Answer 22

true

Question 23

learn about your partner’s financial management style, communicate openly about finances, & be willing to compromise in order to facilitate…

Answer 23

financial compatibility in relationships.

Question 24

time in future where goals are expected to be fulfilled (checkpoints/deadlines).

Answer 24

goal dates

Question 25

goals that are 6-30/40 years out in the future and must be revised over time.

Answer 25

long-term goals

Question 26

goals that are expected to be met in 12-month periods (annually).

Answer 26

short-term and intermediate goals

Question 27

what type of goal length involves contributions to savings/investments for net worth, is the basis for the cash budget, and includes a 6 month emergency fund?

Answer 27

short-term and intermediate goals

Question 28

why does one need to have an emergency fund established?

Answer 28

because financial shocks, disasters, and accidents can occur at any time unexpectedly so preparation is key.

Question 29

stages of financial planning: 1. wealth accumulation 2. wealth preservation 3. wealth transfer which corresponds with which age group:? 1. middle-age (save) 2. young (borrow) 3. elderly (fund retirement)

Answer 29

1. 2 2. 1 3. 3

Question 30

financial plans will change because of maturity, progression through life, and career changes.

Answer 30

true

Question 31

what is the nickname for the generation that is responsible for supporting parents, raising children, and paying for college (age 30-50)?

Answer 31

sandwich generation

Question 32

what are the 4 types of assets?

Answer 32

1. liquid assets 2. investments 3. personal property 4. real property

Question 33

one must plan asset acquisition, liabilities, insurance, savings, investments, employee benefits, taxes, retirement, and estate in order to create a sound..

Answer 33

financial plan.

Question 34

debt incurred in borrowing doesn't need to be repaid.

Answer 34

false

Question 35

what two things does insurance protect?

Answer 35

income and assets

Question 36

insurance is not essential.

Answer 36

false

Question 37

the initial focus for savings is to establish an emergency fund and then to build wealth.

Answer 37

true

Question 38

is higher or lower Return on investment (ROI) better?

Answer 38

hgher

Question 39

what type of benefits are these:? 1. life/health/disability insurance 2. tuition reimbursement 3. pension, profit-sharing, 401k retirement plans 4. flexible spending accounts for child/health care expenses 5. sick leave, vacation days, personal time

Answer 39

employee benefits

Question 40

tax planning involves evaluation of active, passive, tax-free, or tax-deferred income.

Answer 40

true

Question 41

what uses various aspects of the tax code to reduce investor's tax liability and is involved in tax planning process?

Answer 41

tax shelters

Question 42

tax plans are tied to...

Answer 42

investment plans.

Question 43

analyze earnings and assess how to minimize taxes.

Answer 43

true

Question 44

when should one start saving for retirement?

Answer 44

when one starts working

Question 45

what does IRA stand for?

Answer 45

individual retirement account

Question 46

what type of planning refers to passing on one's wealth to heirs?

Answer 46

estate planning

Question 47

special financial planning concerns: 1. managing 2 incomes 2. managing employee benefits 3. managing finances in tough economic times

Answer 47

true

Question 48

2-income households spend more, earn an average of $1 million over lifetime combine, and have an equal or proportional share of finances.

Answer 48

true

Question 49

by what percent can total compensation be increase by employee benefits?

Answer 49

over 30%

Question 50

employee benefit plan where employer allocates money and employees use it to afford benefits most useful to them.

Answer 50

flexible benefit plan (cafeteria plan)

Question 51

3 groups of individuals in what times? 1. those directly affected 2. those marginally affected 3. those indirectly affected

Answer 51

economically tough times

Question 52

these are the 3 keys to what? 1. spend less than earned 2. keep investing 3. know where you are and plan for the unexpected

Answer 52

successful financial planning

Question 53

professional financial planners are paid what 2 ways?

Answer 53

by (1) commissions or (2) fees

Question 54

what type of payment for financial planners is based on the products sold?

Answer 54

commission

Question 55

what type of payment for financial planners is based on the complexity of the plan being made?

Answer 55

fee

Question 56

the financial planning environment consists of what 3 entities?

Answer 56

1. government 2. businesses 3. consumers

Question 57

what are the 2 key aspects of the financial planning environment?

Answer 57

1. players 2. economy

Question 58

which entity provides the essential public goods/services, regulates economic activity, is the source of revenue for businesses and wages for consumers, and makes constraints on taxation and regulation? (gov, consumers, busi.)

Answer 58

government

Question 59

which entity provides consumers with goods/services to receive payment, need "factors of production," and are a part of the income flow that sustains free-enterprise system?

Answer 59

businesses

Question 60

which entity is the central player as in its choices dictate the output of businesses and control the economy based on spending?

Answer 60

consumers

Question 61

what 2 policies does the government utilize to control the economy?

Answer 61

1. monetary policy 2. fiscal policy

Question 62

which government policy controls the money supply?

Answer 62

monetary policy

Question 63

do increases or decreases in the money supply: lower interest rates = more borrowing/spending = increase economic activity?

Answer 63

increases

Question 64

do increases or decreases in the money supply: higher interest rates = less borrowing/spending = slows economic activity?

Answer 64

decreases

Question 65

which government policy utilizes taxation and spending to regulate the economy?

Answer 65

fiscal policy

Question 66

do increases or decreases in spending on government-funded organizations speed up the economy?

Answer 66

increases

Question 67

do increases or decreases on spending for social services, defense, education, etc. slow down the economy?

Answer 67

decreases

Question 68

does taxation increase speed up or slow down the economy?

Answer 68

slow

Question 69

does taxation decrease speed up or slow down the economy?

Answer 69

speed up

Question 70

what cycle:? 1. expansion - (GDP increases) 2. peak 3. contraction (AKA recession) - (GDP falls) 4. trough

Answer 70

economic cycle

Question 71

system that facilitates the exchange of goods/services for money.

Answer 71

prices

Question 72

prices increase above average over time.

Answer 72

inflation

Question 73

what is inflation measured by?

Answer 73

consumer price index (CPI), alternatively, based on change in cost.

Question 74

what affects earning amount, purchasing power, and interest rates?

Answer 74

inflation

Question 75

amount of stuff that each dollar can buy.

Answer 75

purchasing power

Question 76

your what is determined by your:? 1. age 2. relationship status 3. education 4. location 5. career

Answer 76

income

Question 77

inheritances are not included in personal income.

Answer 77

true

Question 78

where are salaries higher?

Answer 78

northeast and west, metropolitan areas

Question 79

the economic condition, labor supply, industrial base, and living costs are affected by what?

Answer 79

location

Question 80

to pick a career, identify interests, skills, needs, and values.

Answer 80

true

Question 81

make a career plan by establishing goals, a plan, and revising/reviewing your plans to progress through your career.

Answer 81

true

Question 82

your income is determined by what 2 factors?

Answer 82

location and career

Question 83

the purchase of a car is an example of...

Answer 83

consuming.

Question 84

why is a goal, like make a $12,000 downpayment on a vehicle in 4 years, so useful in financial planning?

Answer 84

it is specific, has a time period assigned to it, and is within reason.

Question 85

how many months of money should be in an emergency fund?

Answer 85

6 months worth of income

Question 86

why is tax planning important?

Answer 86

to minimize taxes

Question 87

career planning helps in improving professional satisfaction.

Answer 87

true

Question 88

what is the best way to ensure that you achieve financial objectives?

Answer 88

by constructing a financial plan

Question 89

land would be included in which of the 4 asset types?

Answer 89

real property

Question 90

what will happen to Andy's salary if inflation increases every year by 1% and there isn't any growth in his salary?

Answer 90

his purchasing power would decrease

Question 91

if Ben invests $10,000 at a rate of 5% for 40 years, then, he will receive a significant amount of money by the end of the investment period because of a feature called...

Answer 91

compounding.

Question 92

open communication about financial matters is the ideal way to handle financial decisions.

Answer 92

true

Question 93

would salaries be lower in rural areas?

Answer 93

yes

Question 94

after working for 2 years in a small financial planning firm, Becky earns $85,000 annually and saves $5,000 a year after spending on her current needs. what will her average propensity to consume be [hint: (income - savings) / total income]?

Answer 94

94%