Chapter 1 - Goals

Question 1

what is personal finance?

Answer 1

the process of planning your spending, financing and investing activities while also taking into account uncontrollable events (such as death or disability) in order to optimize your financial situation over time

Question 2

what is a personal finance plan?

Answer 2

the same as personal finance, but this is the plan that specifies those goals, and how you are intended to achieve them

Question 3

what is opportunity cost

Answer 3

what you give up as a result of a decision

Question 4

T/F: An understanding of personal finance allows you to judge the guidance of financial advisers and to determine whether their advice is in your best interest rather than in their best interest

Answer 4

T

Question 5

What is the FPSC (financial planning standards council)

Answer 5

a non-profit organization that was created to benefit the public through the development, enforcement and promotion of the highest competency and promotion of the highest competency and ethical standards in financial planning

Question 6

what are the 5 components of a financial plan

Answer 6

1. budgeting and tax planning
2. financing your purchases
3. protecting your assets and income (insurance)
4. investing your money
5. planning your retirement and estate

Question 7

what is budgeting? why is it important?

Answer 7

the process of forecasting future income, expenses, and savings goals

it is important because it can help you estimate how much of your income will be required to cover monthly expenses so that you can set a reasonable and practical goal for saving each month

Question 8

what is liquidity? what two factors are considered in managing liquidity and how are they used?

Answer 8

access to ready cash, including savings and credit, to cover short-term or unexpected expenses

In managing your liquidity you consider money management and credit management.

Money management deals with deciding how much money to retain in a liquid form and how to allocate the funds among short-term investment instruments.

Credit management deals with decisions about how much credit you need to support your spending and which sources of credit to use.

Question 9

what is money management (in terms of liquidity)

Answer 9

decisions regarding how much money to retain in liquid form and how to allocate the funds among short-term investment instruments

Question 10

what is an emergency fund?

Answer 10

a portion of savings that you have allocated to short term needs such as unexpected expenses in order to maintain adequate liquidity

Question 11

does credit enhance liquidity?

Answer 11

yes

Question 12

what is credit management (in terms of liquidity)

Answer 12

this is a part of liquidity for some people

it is the decisions regarding how much credit to obtain to support your spending and which sources of credit to use

Question 13

T/F: Credit should be used only when necessary

Answer 13

true

Question 14

in the context of insurance, what does risk mean?

Answer 14

exposure to events that can cause financial loss

Question 15

what is risk management?

Answer 15

decisions about whether and how to protect against risk

Question 16

what is insurance planning?

Answer 16

determining the types and amount of insurance you need to protect your assets.

home/auto insurance = protecting tangible assets

life insurance = protecting income

Question 17

what should you do with any savings that you have beyond what you need to maintain liquidity

Answer 17

invest!

Question 18

what is investment risk

Answer 18

the uncertainty surrounding not only the potential return on an investment but also its future value

Question 19

what is retirement planning? when should you begin retirement planning?

Answer 19

determining how much money you should set aside each year for retirement and how you should invest the funds

as early as possible!

Question 20

what is estate planning

Answer 20

determining how your wealth will be distributed before / after your death

Question 21

what is the foundation of a financial plan?

Answer 21

budgeting is the base for making personal financial decisions

Question 22

what does an effective financial plan do?

Answer 22

builds your wealth and therefore enhances your net worth

Question 23

developing the financial plan. There are six steps involved in developing each component of your financial plan. What are they?

(this is different than the financial plan components themselves)

Answer 23

Step 1: Establish financial goals
- make sure they are SMART goals (Specific, Measurable, Action-oriented, Realistic and Time bound)

Step 2: Consider your current financial situation

• A person with little debt will act differently than a person with larger debt
• Also varies with age and level of wealth

Step 3: Identify and Evaluate Alternative plans

Step 4: Select and implement the best plan for achieving your goals

Step 5: Evaluate your plan (monitor your progress)

Step 6: Revise your financial plan
- revise to make more realistic, more saving, etc.

Question 24

how is your net worth calculated? why is it important?

Answer 24

Net worth is the value of what you own (assets) minus the value of what you owe (liabilities).
Net worth is a measure of your total wealth and budgeting strategies can help increase your net worth, and thereby your wealth. For example, you can build your net worth by setting aside part of your income to invest in additional assets or reduce your liabilities

Question 25

how do tax laws affect the budgeting process?

Answer 25

Many financial decisions are affected by tax laws, such as certain types of income being taxed at a higher rate than others. By understanding how your alternative financial choices would be affected by taxes, you can make financial decisions that have the most favourable effect on your after-tax cash flows.

Question 26

What factors are considered in managing your financial resources?

Answer 26

Factors considered in managing financial resources include how much money to maintain in ready cash, where and in what form, versus the use of credit as a source of funds.

Question 27

how can an understanding of personal finance benefit you?

Answer 27

An understanding of personal finance enables you to make more informed decisions about your financial situation. You would also be able to better judge the advice of financial advisers. You might even pursue a career as a financial adviser.

Question 28

what elements must be assessed in budget planning?

Answer 28

A first step in budgeting involves evaluating your current financial position by assessing your income, your expenses, your assets, and your liabilities.

Question 29

what factors influence income?

Answer 29

your life stage

Question 30

Why is an accurate estimate of expenses important in budget planning?

Answer 30

If expenses are not accurately estimated, it may be difficult to reach savings goals.

Question 31

what is the primary objective of investing? what else must be considered? what potential investment vehicles are available?

Answer 31

• The primary objective of investing is to use funds not needed for liquidity purposes to earn a return.
• Most investments are subject to risk, and you need to understand your personal tolerance to risk in order to manage it.
• Potential investments include stocks, bonds, mutual funds, and real estate

Question 32

What are the three elements of planning to protect your assets? Define each element

Answer 32

risk, risk management and insurance planning

Question 33

after paying off all of your debt (other than your mortgage) and building your emergency fund, what should you do?

Answer 33

1. start saving for retirement - minimum of 10% of your income in your 20s
2. save for other large purchases (car, house)
3. save for any other “want/need” items you have in your goals