Chapter 1: Personal Finance Overview

Question 1

Personal Finance (Personal financial planning

Answer 1

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

Question 2

A personal Financial plan

Answer 2

A plan that specifies your financial goals and describes the spending, financing, and investing activities that are intended to achieve those goals and the risk management strategies that are required to protect against uncontrollable events such as death or disability.

Question 3

per capita debt

Answer 3

The amount of debt each individual in Canada would have if total debt (consumer debt plus mortgages) was spread equally across the population

Question 4

opportunity cost

Answer 4

What you give up as a result of a decision

Question 5

Financial Planning Standards Council (FPSC)

Answer 5

A not-for-profit organization that was created to benefit the public through the development, enforcement, and promotion of the highest competency and ethical standards in financial planning.

It provides a series of questions that you can ask a financial adviser, also known as a financial planner. The answers that you receive to these questions will help you evaluate whether or not you are comfortable with the perspective and business approach of a potential financial adviser.

Question 6

Fiancial Advisors are in demand because

Answer 6

• people lack understanding of personal fiance
• are not interested in making their own financial decisions
• simply do not have the time necessary to research and educate themselves on financial issues in order to make informed decisions.

Question 7

components of a financial plan

Answer 7

1. Budgeting and tax planning
2. Managing your liquidity
3. Financing your large purchases
4. Protecting your assets and income (insurance)
5. Investing your money
6. Planning your retirement and estate

Question 8

components of a financial plan:1. Budgeting and tax planning

Answer 8

The process of forecasting future income, expenses, and savings goals.
step 1: evaluate current financial position by assessing you income, your expenses, your assets, and you liabilities.
– Budgeting enables you to improve net worth by setting aside a part of you income to invest in assets or reduce liabilities.

Question 9

components of a financial plan: 2. Managing your liquidity

Answer 9

Access to ready cash, including savings and credit, to cover short-term or unexpected expenses.
- you can enhance liquidity through money management and credit management

Question 10

components of a financial plan: 3. Financing your large purchases

Answer 10

use of loans
managing loans includes :
- how much you can afford to borrow
- deciding on the maturity (length of time)
- selecting a loan that charges an appropriate interest rate

Question 11

components of a financial plan: 4. Protecting your assets and income (insurance)

Answer 11

• use of risk management to determine and combat possible risk (reduce, accept, share, insure) and insurance planning on assets

Question 12

components of a financial plan: 5. Investing your Investing

Answer 12

• any savings beyond your liquidity should be invested
  , this will earn you return (stocks, bonds, mutual funds, real estate.
  There is risk in investment (potential loss of return and or loss of capital ), therefore you must determine your risk tolerance.

Question 13

components of a financial plan:6. Planning your retirement and estate

Answer 13

various kinds of retirement planning
Retirement planning -Determining how much money you should set aside each year for retirement and how you should invest those funds.

Estate Planning - Determining how much money you should set aside each year for retirement and how you should invest those funds. Ensures that your wealth is protected from taxes and is distributed throughout the entirety of your life

Question 14

Assets

Answer 14

What you own

Question 15

liabilities

Answer 15

What you owe; your debt

Question 16

net worth

Answer 16

the value of what you own minus what you owe

Question 17

What is budget influenced by ?

Answer 17

• income

- life stage

Question 18

Money Management

Answer 18

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

Question 19

emergency fund

Answer 19

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

Question 20

Credit management

Answer 20

-credit is often used as a form of liquidity, however we must be careful with credit because we will have to pay it back

Decisions regarding how much credit to obtain to support your spending and which sources of credit to use.

Question 21

Risk management

Answer 21

Decisions about whether and how to protect against risk

Question 22

Risk

Answer 22

Exposure to events (or perils) that can cause a financial loss.

Question 23

Insurance Planning

Answer 23

Determining the types and amount of insurance needed to protect your assets

Question 24

investment risk

Answer 24

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

Question 25

risk tolerance

Answer 25

A person’s ability to accept risk, usually defined as a potential loss of return and/or loss of capital.

Question 26

Developing the Financial plan

Answer 26

Step 1: Establish you financial goals
step 2: Consider you current financial position
Step 3: Identify and Evaluate Alternative Plans that could help you achieve you goals.
Step 4: Select and Implement the Best Plan for Achieving your Goals
Step 5: Evaluate your Financial Plan
Step 6: Revise your Financial Plan

Question 27

Step 1: Establish you financial goals

Answer 27

• specify you goals (amount of money)
• measure you goals (what will you need to accomplish them )
• set realistic goals
• timing of goals (short , medium, long term )

Question 28

step 2: Consider you current financial position

Answer 28

decisions about how much to spend, how much to place in savings account, how often to use your credit card, and how much you invest will depend on your financial position

Question 29

Step 3: Identify and Evaluate Alternative Plans that could help you achieve you goals.

Answer 29

identify other financial options that could achieve your financial goals , given your financial position.

Question 30

Step 4: Select and Implement the Best Plan for Achieving your Goals

Answer 30

• • choose the alternative that will most effectively achieve your goals. The type of plan you select to achieve you financial goals is influenced by your willingness to take risk and by your self-discipline.
• use the internet

Question 31

Step 5: Evaluate your Financial Plan

Answer 31

keep plan easily accessible so you can evaluate it over a period of time. (in general, do it annually)

Question 32

Step 6: Revise your Financial Plan

Answer 32

• if you are unable to follow it you may need to revise it in order to make it more realistic.