Chapter 1: Personal Financial Planning Flashcards
What is personal financial planning?
The process of managing your money to achieve personal economic satisfaction.
List three advantages of personal financial planning.
- Increased effectiveness in obtaining financial resources
- Increased control of financial affairs
- Improved personal relationships
What are the six steps in the financial planning process?
- Develop financial goals
- Determine your current financial situation
- Identify alternative courses of action
- Evaluate alternatives
- Create and implement a financial action plan
- Re-evaluate and revise your plan
What types of risks should be evaluated in personal financial planning?
- Economic Risks
- Product Risks
- Personal Risks
What are the four basic stages in personal financial management?
- Early years (until mid-30s)
- Middle years (mid-30s to mid-50s)
- Later years (50s+)
- Retirement years
Fill in the blank: Financial goals are influenced by _______.
[personal values and attitudes towards money, time frame, type of financial need, life situation]
What does the acronym SMART stand for in goal-setting?
- Specific
- Measurable
- Action Oriented
- Realistic
- Timely
True or False: The opportunity cost is what a person gains by making a choice.
False
What is the time value of money?
The increases in an amount of money because of interest earned.
Define simple interest.
Interest calculated on the principal, excluding previously earned interest.
What is compound interest?
Interest earned on previously earned interest.
What is future value?
The amount to which current savings will increase based on a certain interest rate and time period.
What is present value?
The current value of a future amount based on a certain interest rate and time period.
What are the components of personal financial planning?
- Obtaining
- Planning
- Saving
- Borrowing
- Spending
- Managing Risk
- Investing
- Retirement and Estate Planning
What should a financial plan summarize?
Your current financial situation.
List the factors that influence the level of interest rates.
[Economic conditions, inflation, monetary policy, market demand]
Fill in the blank: The cost of credit when you borrow is represented by _______.
[interest rates]
What is the role of the Bank of Canada in personal financial planning?
Influences interest rates and economic conditions.
List types of personal risks to evaluate in financial planning.
- Risk of Death
- Risk of Income Loss
- Health Risk
- Asset and Liability Risk
What is the significance of the rule of 72?
It estimates how fast prices will double based on the annual inflation rate.
What is an annuity?
A series of equal amounts (deposits or withdrawals) made at regular time intervals.
What is the importance of developing good financial habits?
It contributes to both short-term satisfaction and long-term financial success.
What is a key strategy for achieving financial objectives?
A willingness to learn
This involves being open to acquiring knowledge about financial matters.
What does SMART stand for in the context of financial goals?
Specific, Measurable, Achievable, Relevant, Time-bound
These criteria help in setting effective and realistic financial goals.
List three components of a well-conceived financial plan.
- Using a spending plan
- Having appropriate insurance
- Becoming informed about tax and investment alternatives
These components contribute to both short-term satisfaction and long-term financial security.
What are personal opportunity costs?
- Time
- Effort
- Health
These costs represent what you give up when making a financial decision.
What factors should be considered when assessing personal financial planning?
- Consumer prices
- Interest rates
- Employment opportunities
These economic factors can significantly influence financial planning decisions.
True or False: Every financial decision involves a trade-off.
True
This highlights the importance of evaluating opportunity costs in financial decision-making.
What is the purpose of evaluating alternatives in personal financial decision-making?
To identify the best course of action for achieving financial goals
This involves comparing different options based on their potential outcomes.
Fill in the blank: Goals should be _______ to be effective.
[SMART]
SMART goals enhance clarity and focus in financial planning.
What resources can be used for financial planning?
- Current Periodicals
- Financial Institutions
- Courses & Seminars
- Personal Finance Software
- The Internet
These resources provide valuable information and tools for effective financial planning.
What does the time value of money concept involve?
Future Value and Present Value computations
This concept is essential for evaluating the worth of money over time.
What is a financial opportunity cost based on?
Time value of money
This reflects the potential gains lost when choosing one financial option over another.
What are the steps in making personal financial decisions?
- Determine current financial situation
- Develop financial goals
- Identify alternative courses of action
- Evaluate alternatives
- Create and implement a financial plan
- Re-evaluate and revise the financial plan
Following these steps can lead to more informed and effective financial choices.
What should financial goals be affected by?
- Person’s values
- Attitudes towards money
- Life situation
These factors shape the priorities and strategies for achieving financial objectives.
What is the significance of calculating future and present values?
To measure increased value (or lost interest) from saving, investing, borrowing or purchasing decisions
Understanding these calculations aids in making informed financial decisions.
Identify strategies for achieving personal financial goals.
- Specific goals
- Spending strategies
- Saving strategies
- Investing strategies
- Borrowing strategies
These strategies should align with personal life situations and economic factors.
