Chapter 1

Question 1

What are the 3 steps of personal financial planning?

Answer 1

1. Setting financial goals
2. Creating and activating plans
3. Monitoring and evaluating and revising plans

Question 2

What should financial goals be based on?

Answer 2

Values: principles that guide behavior
Attitudes: likes and dislikes
Goals

Question 3

What is a basic goal of financial planning?

Answer 3

Maximize income and wealth

Separate needs from wants

Question 4

Characteristic of successful goals

Answer 4

Flexible
Realistic (based on income and life situation)
Specific and measurable
Prioritization
Action oriented (achievement of goals requires action)

Question 5

Opportunity costs

Answer 5

What a person Gives (time and money) up in order to do or have something else
(Trading off 3 years worth of income for 3 years worth of law school)

Question 6

Risk
Income risk
Inflation Risk

Answer 6

Risk: possibility of experiencing harm, loss, damage, harm
Income risk: losing job or other source of income
Inflation risk: risk of rising prices. Risk of investment not earning more than the cost of living increases

Question 7

Interest rate risk
Liquidity risk
Personal risk
Status risk
Time risk

Answer 7

Interest rate risk: real value of an investment eroding due to rising cost of living
Liquidity: how readily something can be converted into cash
Personal risk: health, safety, and other risk
Status risk: clothing, neighborhood, brands, cell phones
Time risk: how long can you afford to put off savings?

Question 8

Risk aversion

Answer 8

It is assumed that individuals will try to avoid or reduce risks in order to minimize problems and maximize positive outcome

Question 9

What is the risk/return tradeoff?

Answer 9

Historically, investments that produce higher returns generally are riskier so that not taking some risk may result in the risk of earning less money by being too conservative

Question 10

Key factors that determine type of investor:

Answer 10

Risk tolerance (ability to accept risk)
Goal time horizon

Question 11

Aggressive approach

Conservative approach

Answer 11

Aggressive approach to risk: substantial volatility and short term financial setbacks are accepted as part of growth
Conservative: inability to tolerate more than minimum volatility with the goal of preserving principal

Question 12

what are possible courses of action in achieving financial goals?

Answer 12

Staying on course
Expanding (increase investment, adding to savings)
Cutting back (spending less, selling assets)
Embark on new course (getting savings plan, purchasing new stocks, bonds etc)

Question 13

How often should you reevaluate your financial plan?

Answer 13

At least once a year
Common to due when preparing tax forms
May require more frequent if more significant changes occur (going to grad school, getting married, buying a house etc)

Question 14

Four key players of the general economy

Answer 14

Consumers: use up goods and services
Government: mediates or regulates consumer-business-media exchange as well as providing some services
Business: provides goods,services and employment
Media: inform public about occurrences and upcoming events

Question 15

Economics
Wealth
assets

Answer 15

Economics: study of how wealth is created and distributed
Wealth: total value of all that is owned
Tangible assets: physical assets (home, car)
Financial assets: intangible (paper assets, savings, stocks and bonds)

Question 16

Average propensity to consume
Level of living
Standard of living

Answer 16

Average propensity: percentage of each dollar of income one spends
Level of life: current state of financial living
Standard of living: state of living one saves and invests in seeking to reach

Question 17

Who is the single largest employer in the US?

Answer 17

Federal government

Question 18

Federal reserve system

Answer 18

Nation’s central bank
Regulates US monetary and banking system including maintaining adequate money supply
Influences interest rate and buying and selling securities

Question 19

Economic cycle

Answer 19

Periodic expansions and contractions in economic activity
Expansion: unemployment low, retail sales and economic activity is growing
Recession: temporary slowing of economy, unemployment higher than desired, economic activity is slow usually lasting 6 months to year
Depression/decline: 10% or more unemployment, economic growth at standstill
Recovery: emergence from recession or depression, economy moves upward

Question 20

Indicators of direction of the economy

Answer 20

Inflation
Index of leading economic indicators (LEI): Averages 11 components of growth
Consumer price index (CPI)
Interest rate
Gross domestic product : market value of goods and services produced by a country in one year (govt. Purchases, domestic investment, net exports )

Question 21

Time value of money

Answer 21

The theory that the value derived from the use of money
Over time increases its total by investment and reinvestment.
A dollar today may be worth more than a dollar received in the future, due to inflation.

Question 22

First chairperson of federal reserve system

What are his/her responsibilities?

Answer 22

Janet yollen
Prevent recession
Bring down unemployment
Increase recovery and growth

Question 23

What is the most important indices of future wealth?

Answer 23

Current employment or salary

Question 24

What age group has the highest median income?

Answer 24

45-54

Question 25

What is the current salary gender gap?

Answer 25

Women make 83cents to men making $1

Question 26

What is the most expensive benefit that employers provide?

Answer 26

Health care

Question 27

A good benefits package can increase your compensation up to_________?

Answer 27

30% or more

Question 28

Cafeteria Style benefits:

Answer 28

plans that allow employees to base their benefits on a credit system and personal needs

Question 29

Different kinds of benefits:

Answer 29

fringe benefits: health, dental, life, disability insurance, retirement, reimbursement for moving, travel, educational expenses.
Vesting: pension plan that requires time put in before you receive the benefit
Perquisites (Perks): other benefits. use of company car, travel expenses, stock options, computer at home, etc.

Question 30

What is something important to consider when choosing retirement benefits from employers?

Answer 30

tax implications:

• tax exempt benefit: do not pay taxes
• tax deferred benefit: pay taxes in the future (at retirement or when leaving company)

Question 31

Define personal finance planning

Answer 31

The process of managing your finances to reach goals and to increase personal satisfaction

Question 32

Years and the development of money

Answer 32

1661: first time having paper money
1700: checks
1973: credit cards
1988: ATM’s
1991: debit cards
1996: chip cards