4. Manage Money (15%)

Question 1

What is the primary purpose of a cash flow statement?

A. To track spending habits
B. To calculate a client’s net worth
C. To analyze the effectiveness of a spending plan
D. To show income and expenses over a specific period

Answer 1

D. To show income and expenses over a specific period

A cash flow statement provides an overview of all the income and expenses for a specific time frame.

Question 2

Which of the following accurately describes a savings account?

A. A checking account designed for frequent transactions
B. An account that earns interest on deposited funds
C. An investment account intended for long-term goals
D. An account with a high risk of loss

Answer 2

B. An account that earns interest on deposited funds

Question 3

What is the main benefit of creating a spending plan?

A. To identify debt management options
B. To prioritize wants over needs
C. To track expenses and savings to meet financial goals
D. To eliminate all variable expenses

Answer 3

C. To track expenses and savings to meet financial goals

A spending plan helps monitor spending to achieve financial objectives.

Question 4

Which of the following is a fixed expense?

A. Utility bill
B. Groceries
C. Mortgage payment
D. Entertainment

Answer 4

C. Mortgage payment

Fixed expenses remain constant each month, such as a mortgage payment.

Question 5

Which ratio is used to measure liquidity?

A. Debt-to-Income Ratio
B. Savings Ratio
C. Liquidity Ratio
D. Expense Ratio

Answer 5

C. Liquidity Ratio

The liquidity ratio measures the ability to cover current liabilities with liquid assets.

Question 6

What does BAH stand for in a military pay statement?

A. Basic Assistance Housing
B. Base Annual Housing
C. Basic Allowance for Housing
D. Base Allowance for Household

Answer 6

C. Basic Allowance for Housing

BAH is a military benefit to help cover housing costs.

Question 7

What does an emergency fund typically cover?

A. Vacation costs
B. Regular utility bills
C. Unforeseen expenses like medical emergencies
D. Entertainment expenses

Answer 7

C. Unforeseen expenses like medical emergencies

Emergency funds are set aside to handle unexpected financial needs.

Question 8

Which account type is best for immediate access to funds?

A. Certificate of Deposit
B. Retirement Account
C.Checking Account
D. Mutual Fund

Answer 8

C. Checking Account

Checking accounts allow for immediate access to cash.

Question 9

What is the goal of accumulating a three-to-six-month emergency fund?

A. To afford a new car
B. To cover regular bills if an income source is lost
C. To invest in the stock market
D. To pay for planned vacation expenses

Answer 9

B. To cover regular bills if an income source is lost

The emergency fund should support expenses during income loss or emergencies.

Question 10

What is an advantage of a money market account?

A. It has no withdrawal limits
B. It offers higher interest rates than regular savings accounts
C. It offers guaranteed returns
D. It has lower fees than a checking account

Answer 10

B. It offers higher interest rates than regular savings accounts

Money market accounts typically provide higher returns than standard savings.

Question 11

Which strategy would you recommend to a client to ensure they stay within their budget?

A. Use cash only for all expenses
B. Create a detailed spending plan and track all expenses
C. Avoid tracking small expenses
D. Use credit cards for all purchases

Answer 11

B. Create a detailed spending plan and track all expenses

A spending plan helps clients monitor their financial activities.

Question 12

How should a client prioritize debt repayment if they have multiple loans?

A. Pay the smallest loan first
B. Pay the loan with the highest interest rate first
C. Pay all loans equally
D. Ignore low-interest loans

Answer 12

B. Pay the loan with the highest interest rate first

Paying high-interest loans first reduces overall interest paid.

Question 13

Which savings product would you recommend for short-term savings goals?

A. 401(k)
B. Certificate of Deposit
C. Money Market Account
D. Individual Retirement Account (IRA)

Answer 13

C. Money Market Account

Money market accounts offer better liquidity for short-term goals.

Question 14

If a client has variable income, what budgeting method would be most suitable?

A. Zero-based budgeting
B. Envelope system
C. Priority-based budgeting
D. Incremental budgeting

Answer 14

C. Priority-based budgeting

Priority-based budgeting allows flexibility for fluctuating incomes.

Question 15

What is the first step in creating a spending plan?

A. List all fixed and variable expenses
B. Set financial goals
C. Calculate discretionary income
D. Cut unnecessary expenses

Answer 15

B. Set financial goals

Setting goals provides direction for the budgeting process.

Question 16

A client is consistently running a negative cash flow. What is the best course of action?

A. Encourage taking on additional debt
B. Review and reduce expenses
C. Ignore small discretionary purchases
D. Increase credit card usage

Answer 16

B. Review and reduce expenses

Reducing expenses can help improve cash flow.

Question 17

Which type of account is most suitable for emergency savings?

A. Retirement Account
B. High-yield Savings Account
C. Investment Account
D. Checking Account

Answer 17

B. High-yield Savings Account

High-yield savings accounts provide liquidity and higher interest.

Question 18

What is a suitable strategy to improve a client’s credit score?

A. Pay off all credit cards and close the accounts
B. Maintain a low credit utilization ratio
C. Open new credit accounts frequently
D. Skip payments occasionally

Answer 18

B. Maintain a low credit utilization ratio

A low credit utilization ratio indicates responsible credit usage.

Question 19

Which type of debt consolidation is most effective for a client with multiple high-interest debts?

A. Personal loan
B. Home equity line of credit
C. Balance transfer credit card
D. Payday loan

Answer 19

C. Balance transfer credit card

Balance transfers often offer lower interest rates.

Question 20

If a client has a large upcoming expense, how should they prepare?

A. Increase credit card usage
B. Build up a savings buffer
C. Apply for a personal loan immediately
D. Avoid saving and focus on paying bills

Answer 20

B. Build up a savings buffer

Savings ensure coverage without relying on credit.

Question 21

A client has a debt-to-income ratio of 50%. They want to qualify for a mortgage. What action should the client prioritize?

A. Increase monthly expenses to reduce discretionary income
B. Consolidate debt to reduce monthly payments
C. Focus on reducing debt or increasing income to lower the ratio
D. Apply for a mortgage with a higher interest rate

Answer 21

C. Focus on reducing debt or increasing income to lower the ratio

A debt-to-income ratio of 50% is generally too high to qualify for most mortgages. The client should focus on reducing this ratio by paying down debt or increasing their income

Question 22

If a client’s spending plan shows a deficit each month, which of the following is the best strategy to help them achieve a positive cash flow?

A. Reduce discretionary expenses, such as dining out or entertainment
B. Transfer the balance to a credit card each month
C. Stop contributing to their retirement plan
D. Ignore fixed expenses since they can’t be changed

Answer 22

A. Reduce discretionary expenses, such as dining out or entertainment

Reducing discretionary spending is a more immediate and manageable way to reduce a deficit than cutting fixed expenses or retirement contributions.

Question 23

A client has been using their credit card for everyday purchases and paying off the balance every month. Suddenly, they start carrying a balance with no change in income or expenses. What could this indicate?

A. They have mismanaged their budget
B. There has been a temporary increase in living expenses
C. They are not tracking expenses properly
D. There may be a cash flow issue or financial challenge

Answer 23

D. There may be a cash flow issue or financial challenge

Carrying a balance unexpectedly can indicate cash flow challenges that should be investigated further.

Question 24

Which financial ratio would you use to evaluate a client’s ability to manage debt repayments?

A. Savings Ratio
B. Debt Service Ratio
C. Liquidity Ratio
D. Net Worth Ratio

Answer 24

B. Debt Service Ratio

The debt service ratio measures the ability to pay off debt with income, providing insight into debt management.

Question 25

A client wants to save for a child’s education and pay off debt simultaneously. How would you help them prioritize these goals? A. Focus entirely on debt repayment first B. Split resources equally between both goals C. Evaluate the interest rates on the debt and expected returns on education savings D. Only focus on savings since education is more important

Answer 25

C. Evaluate the interest rates on the debt and expected returns on education savings ## Footnote Prioritization should consider the cost of debt versus potential returns on savings.

Question 26

If a client’s monthly discretionary spending frequently exceeds the budgeted amount, what would you recommend? A. Reassess and potentially increase the discretionary budget B. Eliminate discretionary spending altogether C. Create a separate savings account for discretionary expenses D. Cut essential expenses to accommodate increased discretionary spending

Answer 26

A. Reassess and potentially increase the discretionary budget ## Footnote If a client consistently exceeds discretionary spending limits, the budget may need adjustment to be realistic and sustainable.

Question 27

A client’s net worth statement reveals a high level of unsecured debt and limited liquid assets. What is the **most appropriate** advice? A. Increase investment contributions to improve net worth B. Focus on paying down unsecured debt while building an emergency fund C. Ignore unsecured debt and focus on retirement savings D. Take out a secured loan to cover expenses

Answer 27

B. Focus on paying down unsecured debt while building an emergency fund ## Footnote The client needs to reduce high-interest unsecured debt while maintaining enough liquidity for emergencies.

Question 28

A client wants to know if they should refinance their home. They currently have a 6% interest rate, and rates have dropped to 4%. Which **factors** should you consider before recommending refinancing? A. The client’s credit score and costs associated with refinancing B. The client’s employment history and credit card balance C. Whether the client can afford a new car loan D. The cost of home maintenance

Answer 28

A. The client’s credit score and costs associated with refinancing ## Footnote Refinancing should be considered based on credit score and whether the savings will offset the costs.

Question 29

A client has inconsistent income and wants to establish a spending plan that accounts for this fluctuation. What **budgeting strategy** would you recommend? A. Zero-based budgeting B. Traditional monthly budgeting C. Priority-based budgeting D. Fixed vs. variable budgeting

Answer 29

C. Priority-based budgeting ## Footnote Priority-based budgeting allows clients to allocate funds based on importance, making it more flexible for variable income.

Question 30

A client has a good understanding of their income and expenses but struggles to reach their financial goals. What is likely the **problem**? A. Lack of financial knowledge B. Inability to track cash flow C. Goals are too ambitious or not aligned with their spending D. Overspending on fixed expenses

Answer 30

C. Goals are too ambitious or not aligned with their spending ## Footnote A mismatch between goals and spending habits can hinder financial progress.