Deck 1: The Financial Planning Process

Question 1

Which one of the following is not one of the five basic steps in personal financial planning?

A) Evaluate your financial health.
B) Define your financial goals.
C) Develop a plan of action.
D) Let an accountant review your plan.
E) Implement your plan.

Answer 1

Let an accountant review your plan.

Question 2

When comparing two different investment opportunities the investor should always choose the investment that minimizes the total amount of taxes paid.

Answer 2

False

Question 3

What are common factors found in an effective financial plan?

A) Effective financial plans should be flexible to allow for changes in your situation
B) Effective financial plans should provide sufficient liquidity to meet unexpected needs
C) Effective financial plans should provide insurance protection from catastrophic events
D) Effective financial plans should help you minimize paying taxes
E) All of the above are necessary in an effective financial plan

Answer 3

All of the above are necessary in an effective financial plan

Question 4

Which of the following steps are considered to be part of the personal financial planning process as outlined in the text?

A) Evaluate your financial health.
B) Define your financial goals.
C) Develop a plan of action.
D) Implement your plan.
E) All of the above.

Question 5

Today, most Americans over the age of 65 have adequate savings and income available to them during retirement.

Question 6

Personal financial planning can help you to

A) deal with unplanned health issues.
B) minimize your tax payments to Uncle Sam.
C) minimize your chances of personal bankruptcy.
D) have enough money for a comfortable retirement.
E) all of the above.

Question 7

A financial plan is only concerned with your future earnings and expenses. An examination of your current financial situation is not so important.

Question 8

Suppose that you just completed your first year of college with $11,000 in loans and plan to borrow the maximum each year from now until graduation. You have never accounted for the way you spend your money, do not have a budget, and want to insure that you will be able to repay your loans after college. What is the most important thing you can do right now?

A) Talk to your parents about an allowance.
B) Visit your career counselor at school.
C) Ask a friend who took the Personal Finance course for advice.
D) Immediately begin to develop a personal financial plan.

Question 9

The amount of current income that you earn today isn't relevant to setting your long term goals for the future.

Question 10

Step 3 of the personal financial planning process is to "Develop a Plan of Action." According to your text, which of the following is not one of the "common concerns" that should guide all financial plans?

A) flexibility
B) long-term profitability
C) liquidity
D) protection
E) minimization of taxes

Question 11

In order for your financial plan to be realistic and attainable it needs to be based upon your

A) budget.
B) income level.
C) number of tax deductions, exemption, exclusions, and credits.
D) balance sheet.
E) none of the above

Question 12

You need to review your progress, reevaluate, and revise your plan (step 5) because

A) your financial needs change over your lifecycle.
B) your employment situation changes from time to time.
C) your net worth will change over time.
D) your family situation may change from time to time.
E) all of the above are good reasons to periodically review your financial plan.

Question 13

Evaluating your financial health consists of

A) preparing a personal balance sheet.
B) determining what you are worth.
C) preparing a personal income statement.
D) determining where your money comes from and where it goes.
E) all of the above

Question 14

Once a sound financial plan is in place, there should be no need to ever change it.

Question 15

The term that considers having money readily available when you need it is the concept of

A) flexibility.
B) liquidity.
C) equity.
D) solvency.
E) none of the above

Question 16

Suppose you have just retired, have accumulated many luxury goods over the years, still owe a mortgage on your home, still have unpaid travel expenses on your credit cards, and have helped your adult children financially. Your spouse has recently passed away, and you miss his/her contribution to the household income. Which step in the personal financial planning process have you neglected?

A) Develop your financial health.
B) Define your financial goals.
C) Develop a plan of action.
D) Implement your plan.
E) Review your progress, reevaluate, and revise your plan.

Question 17

While reviewing your current financial plan, you discover that you most likely won't achieve your long term financial goals. What should you do now?

A) Look at increasing your income.
B) Look at cutting back on your expenses.
C) Look at revising your goals.
D) All of these would be realistic things to do.

Question 18

Describe the five steps in the personal financial planning process.

Question 19

Being financially secure involves balancing what you earn with

A) your investments.
B) what you spend.
C) your retirement plans.
D) your current level of debt.

Question 20

This course/text will assist you in accomplishing six financial objectives. What are they?

Question 21

Suppose that you are a 20-year-old college student. What stage of the financial life cycle are you currently in?

A) stage 1: wealth accumulation
B) stage 2: the golden years
C) stage 3: the retirement years
D) stage 4: the formative years
E) stage 5: the educational years

Question 22

Based on the Life Cycle of Financial Planning, when would be a good time to review and possibly adjust an effective financial plan?

A) a really effective financial plan doesn't need to be adjusted.
B) when you get married
C) when you have children
D) when the stock market goes up
E) both B and C are correct answers

Question 23

When you are involved in ________ planning, you are planning for your eventual death and the distribution of your wealth to your heirs.

A) prenatal
B) beneficiary
C) estate
D) actuarial
E) none of the above

Question 24

Which stage in the Financial Life Cycle is the longest in terms of years?

A) stage 1
B) stage 2
C) stage 3
D) stage 4

Question 25

The major reason to make a financial plan is to

A) account for your spending.
B) see where you are overspending or underspending.
C) achieve your financial goals.
D) allow for a surplus.
E) serve as a tax planning guide.

Question 26

A well-educated and trained employee is virtually guaranteed job security in today's corporations. Therefore he or she doesn't need to worry about keeping his or her skills updated and current.

Question 27

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

A) deflation.
B) inflation.
C) stagflation.
D) cash erosion.
E) none of the above

Question 28

The most important aspect of choosing a career is the amount of income that career will generate over your lifetime.

Question 29

Elaborate upon the four common concerns that should guide all financial plans.

Question 30

Education and specialized skills required for a job are important determinants of the income potential associated with that job.

Question 31

For the typical consumer, one difference between the stage 2 in the Financial Life Cycle and stage 3 in the Financial Life Cycle is that:

A) during stage 2, you will earn more than you spend; whereas during stage 3 you will spend more than you earn.
B) during stage 3 you will earn more than you spend; whereas during stage 2 you will spend more than you earn.

Question 32

What should you do with your goals on a frequent basis throughout your lifetime?

A) Prioritize them
B) Modify them
C) Put them in writing
D) All of the above

Question 33

Which of the following typically occur(s) during stage one of the financial life cycle?

A) initial goal setting
B) insurance planning
C) saving for goals
D) home purchase
E) all the above

Question 34

Proper financial planning can help you use your current income to achieve your long term financial goals

Question 35

After retirement starts, which aspect of financial planning becomes paramount?

A) maintaining a regular pattern of saving
B) long-term borrowing commitments
C) estate planning
D) effects of inflation

Question 36

Differentiate between short-term, intermediate, and long-term goals. Give examples.

Question 37

What is the significance of the financial life cycle?

A) to help you to compare your situation with other people's situation
B) to better understand how your financial needs will most likely change over time
C) to allow you to be more proactive in dealing with expected changes in the future and take steps today to prepare for them
D) to help you realize that your original plan is sufficient and doesn't need to change
E) both B and C are significant aspects of the financial life cycle

Question 38

Jacob has written down his short-term goals for the next year on his goals worksheet. So far he has priortized his goals, and he has determined a feasable due date by which he wants to have achieved his goals; according to the textbook, the final step Jacob needs to complete in his goals process is to ________

A) determine an appropriate cost for each of his listed goals.
B) post his goals worksheet on his refrigerator so he can see it every day.
C) contact his financial advisor for approval of his goals.
D) email himself a copy of the goals worksheet in case he loses the paper copy of the worksheet.

Question 39

Explain the essence and importance of each of the stages in the financial life cycle.

Question 40

Why do individuals need to plan for their finances?

Question 41

Chapter 1 discusses ten principles that form the foundation of personal finance. The principle that considers the fact that one expects to earn additional return for increasing investment risk is the ________ principle.

A) risk and return go hand in hand
B) mind games and your money
C) nothing happens without a plan
D) the best protection is knowledge

Question 42

The sub-prime mortgage mess is dominating the news. Many people signed up for adjustable rate mortgages and now they can't afford their payments. Many of these people were misled by the lender. Which financial principle from chapter one most applies?

A) The best protection is knowledge
B) Mind games and your money
C) Stuff happens, or the importance of liquidity
D) The time value of money

Question 43

During this recent economic downturn twenty-three percent of households reported a drop of at least twenty-five percent of their annual household income.

Question 44

Factors that impact the returns of all assets in the market such as the national unemployment rate or inflation rate are a type of risk that can be eliminated through diversification.

Question 45

The economic downturn that began in 2008 had which negative consequences?

A) There was a dramatic increase in unemployment rates.
B) Financial markets were disrupted.
C) Consumers found it difficult to borrow money from lending institutions.
D) All consumers increased their wealth.
E) Only A, B and C are correct.

Question 46

According to the Rockerfeller Foundation report, which of the following issues do Americans rank as number one in terms of causing the most concern?

A) unemployment
B) retirement
C) debt
D) medical expenses

Question 47

What is the main factor in determining your potential income level?

A) education and skills that you have attained
B) who you know in your company administration
C) your age and years of employment
D) the size of the company you work for

Question 48

What piece of advice might you give to someone for whom the act of saving is an afterthought?

A) Pay yourself first.
B) Money isn't everything.
C) Don't put all your eggs in one basket.
D) None of the above.

Question 49

All else being equal, an increase in inflation will cause investors to require a higher rate of return on an asset.

Question 50

Diversification allows you to reduce risk, but still provides consistently high returns.

Question 51

Chapter 1 discusses ten principles that form the foundation of personal finance. The principle that considers the importance of insurance is the ________ principle.

A) agency problem - beware the sales pitch
B) all risk is not equal
C) time value of money
D) protect yourself against major catastrophes
E) none of the above

Question 52

According to your text what percentage of Americans could only go 2 weeks without experiencing financial hardships?

A) 20 percent
B) 30 percent
C) 40 percent
D) 50 percent

Question 53

What is the relationship between earnings, education, and standard of living?

Question 54

Which of the following statements applies to obtaining an undergraduate college degree?

A) They are expensive and rarely pay off in increased earnings.
B) There is no relationship between personal wealth and earning a college degree.
C) It may be the single best investment you will ever make.
D) All of the above.

Question 55

Most individuals will reach their financial goals without planning or budgeting.

Question 56

It is important to take a close look at the recent economic downturn as a means to understand how vulnerable American's finances are.

Question 57

Which of the following is outlined in the text as reason(s) why many people do not have an adequate financial plan?

A) For most people it is easier to spend than save.
B) Procrastination can affect everyone.
C) Many of us lack the proper knowledge.
D) There is never enough time for organizing and planning.
E) all of the above are common excuses for not planning.

Question 58

The concept that emphasizes that people should not put all their eggs in one basket is

A) the time dimension of investing.
B) the curse of competitive investment markets.
C) diversification reduces risk .
D) the farmers analogy.
E) liquidity is first.

Question 59

Probably the most important determinant of your future earnings will be

A) your highest level of education obtained.
B) the size of the company where you will work.
C) your seniority with your company.
D) joining a labor union.

Question 60

Chapter 1 discusses ten principles that form the foundation of personal finance. The principle that considers the value of compound interest is the ________ principle.

A) all risk is not equal
B) pay yourself first
C) competitive inflation adjustment
D) time value of money
E) none of the above

Question 61

Which of the following adheres to the financial principle "just do it?"

A) The amount you can spend is what's left after you put aside your savings.
B) Pay yourself last.
C) It's much easier to save than to spend.
D) all of the above

Question 62

Bert bought a used car last month for $1,200. He just found out he needs a new transmission that will cost $1,800 to install. He is asking you for advice as to what he should do. What financial principle from Chapter One would you use to base your advice on?

A) Waste not, want not, smart spending matters
B) Mind games and your money
C) Protect yourself from major catastrophes
D) None of the above would be correct.

Question 63

Maria is very proud of herself for having $3,000 in her savings account that pays 3 percent interest. She currently has a balance of $1,800 on her credit card account that charges 18 percent interest. Maria thinks she is making a wise financial decision by keeping her money in her savings account instead of paying off her credit card balance. What financial principle from Chapter One would you use to give her good advice?

A) Just do it
B) The time value of money
C) Taxes affect personal financial decisions
D) Mind games and your money

Question 64

Maiko lost her job and she was forced to sell a rental property because she did not have other funds (liquid, emergency, etc) available to meet her financial obligations. What financial principle best applies to this situation?

A) the time value of money
B) waste not, want not - smart spending matters
C) mind games and your money
D) stuff happens, the importance of liquidity

Question 65

In Chapter One, Principle Three deals with the time value of money. Why is this principle so important to financial planning?

A) It allows us to determine how much money we will need to achieve our future goals.
B) It shows us the impact of inflation on our money over time.
C) It helps us determine our savings needs today in order to meet our retirement goals.
D) It shows us how important time and interest rates are in accumulating wealth.
E) all of the above are important in financial planning.

Question 66

A solid understanding of personal finance will

A) enable you to protect yourself from an incompetent investment advisor.
B) allow you to take advantage of changes in the economy.
C) give you the ability to make intelligent investments.
D) help you understand the importance of planning for your financial future.
E) all of the above

Question 67

Charlie is sixty-four years old and is looking forward to his retirement next year. He currently has all of his 401K retirement money invested in the stock market. What financial principle from Chapter One does he need to understand better?

A) Nothing happens without a plan
B) Knowledge is the best protection
C) Stuff happens, the importance of liquidity
D) Risk and return go hand in hand.

Question 68

In 2008, the Bear Stearns Company collapsed could not be saved and was sold to JP Morgan Chase for $10 per share, a price far below its pre-crisis 52-week high of $133.20 per share. Prior to the collapse, many of the company's employees had all of their retirement money invested only in Bear Stearns common stock. This was a very risky financial strategy for just such a reason: What if the company dissolves? What financial principle from Chapter One did they need to understand better?

A) Risk and return go hand in hand
B) Nothing happens without a plan
C) The time value of money
D) Just do it

Question 69

Which of the following falls under the category of mind games and your money?

A) the sunk cost effect
B) mental accounting
C) viewing your tax refund as "mad money"
D) all of the above

Question 70

Without recognizing ________ it is impossible to understand compound interest, which allows investments to grow over time.

A) that taxes affect personal finance decisions
B) the time value of money
C) the importance of liquidity
D) that risk and return go hand in hand

Question 71

What aspect of financial planning might you discuss with a friend who buys fancy coffee drinks twice a day, visits the mall at least once a week for recreational shopping, and prefers impulse buying to carefully researched purchasing?

A) Just do it.
B) Nothing happens without a plan.
C) Mind games and your money
D) Waste not, want not - smart spending matters

Question 72

If liquid funds are not available, an unexpected need, such as a job loss or injury may force you to

A) cash in a longer-term investment.
B) borrow money fast.
C) take on unexpected debt repayments.
D) all of the above.

Question 73

Laticia is twenty-two years old and she has all of her savings in a Certificate of Deposit at the bank that currently pays an annual 3 percent yield. The account is protected by the FDIC so it is virtually risk free. She hopes to use her savings for a down payment on a new house in ten years. Inflation in house prices in her area has averaged 5 percent per year. What financial principle from Chapter One does she need to pay better attention to?

A) Nothing happens without a plan
B) Waste not, want not, smart spending matters
C) Risk and return go hand in hand
D) all of the above are correct