Chapter 1: Understanding the Finanancial Planning Process Flashcards
Study for exam #1
improved flexibility, standard of living, spending habits, and wealth result in a “good” life which requires the use of…
financial planning.
financial plans –> financial actions =
financial results
the necessities, comforts, and luxuries one has and/or desires.
standard of living
what is directly correlated with one’s standard of living (SOL)?
their quality of life (QOL)
Type of family/household that buys more, has more money to manage, but was rare in the 1970s and prior.
two-income family
Spending habits based on needs and average propensity to consume.
current needs
the % of each dollar of income that is spend on current needs.
average propensity to consume
What most affects average propensity to consume?
1) SOL
2) QOL
1) SOL
Spending habits based on saving money to save and invest.
future needs
The 5 qualities of what?
1. specific
2. measurable
3. attainable
4. realistic
5. timely
successful financial goals
Assets determine wealth levels.
true
net total value of all possessions.
wealth
paper assets like savings accounts and securities, like stocks, bonds, etc.
financial assets
What type of assets are held for expected future returns?
earning assets
physical assets held for consumption or investment purposes.
tangible assets
steps of what process?
1. define financial goals
2. make financial plans
3. implement financial plans
4. budget to monitor and control progress
5. evaluate financial statements
6. revise goals and plans accordingly
personal financial planning process
2 key factors of what are:?
1) the results must be in monetary terms (money)
2) the results must align with what the person wants to attain (utility)
financial goals
the medium of exchange used to measure value in transactions.
money
satisfaction from buying a quantity of goods/services of quality.
utility
personal values, money “personality”/management style, & emotions factors into…
financial goals.
one’s attitude towards money consists of what 2 things?
- money “personality”
- money management style
financial compatibility is key in relationships.
true
learn about your partner’s financial management style, communicate openly about finances, & be willing to compromise in order to facilitate…
financial compatibility in relationships.
time in future where goals are expected to be fulfilled (checkpoints/deadlines).
goal dates
goals that are 6-30/40 years out in the future and must be revised over time.
long-term goals
goals that are expected to be met in 12-month periods (annually).
short-term and intermediate goals
what type of goal length involves contributions to savings/investments for net worth, is the basis for the cash budget, and includes a 6 month emergency fund?
short-term and intermediate goals
why does one need to have an emergency fund established?
because financial shocks, disasters, and accidents can occur at any time unexpectedly so preparation is key.
stages of financial planning:
1. wealth accumulation
2. wealth preservation
3. wealth transfer
which corresponds with which age group:?
1. middle-age (save)
2. young (borrow)
3. elderly (fund retirement)
- 2
- 1
- 3
financial plans will change because of maturity, progression through life, and career changes.
true
what is the nickname for the generation that is responsible for supporting parents, raising children, and paying for college (age 30-50)?
sandwich generation
what are the 4 types of assets?
- liquid assets
- investments
- personal property
- real property
one must plan asset acquisition, liabilities, insurance, savings, investments, employee benefits, taxes, retirement, and estate in order to create a sound..
financial plan.
debt incurred in borrowing doesn’t need to be repaid.
false
what two things does insurance protect?
income and assets
insurance is not essential.
false
the initial focus for savings is to establish an emergency fund and then to build wealth.
true
is higher or lower Return on investment (ROI) better?
hgher
what type of benefits are these:?
1. life/health/disability insurance
2. tuition reimbursement
3. pension, profit-sharing, 401k retirement plans
4. flexible spending accounts for child/health care expenses
5. sick leave, vacation days, personal time
employee benefits
tax planning involves evaluation of active, passive, tax-free, or tax-deferred income.
true
what uses various aspects of the tax code to reduce investor’s tax liability and is involved in tax planning process?
tax shelters
tax plans are tied to…
investment plans.
analyze earnings and assess how to minimize taxes.
true
when should one start saving for retirement?
when one starts working
what does IRA stand for?
individual retirement account
what type of planning refers to passing on one’s wealth to heirs?
estate planning
special financial planning concerns:
1. managing 2 incomes
2. managing employee benefits
3. managing finances in tough economic times
true
2-income households spend more, earn an average of $1 million over lifetime combine, and have an equal or proportional share of finances.
true
by what percent can total compensation be increase by employee benefits?
over 30%
employee benefit plan where employer allocates money and employees use it to afford benefits most useful to them.
flexible benefit plan (cafeteria plan)
3 groups of individuals in what times?
1. those directly affected
2. those marginally affected
3. those indirectly affected
economically tough times
these are the 3 keys to what?
1. spend less than earned
2. keep investing
3. know where you are and plan for the unexpected
successful financial planning
professional financial planners are paid what 2 ways?
by (1) commissions or (2) fees
what type of payment for financial planners is based on the products sold?
commission
what type of payment for financial planners is based on the complexity of the plan being made?
fee
the financial planning environment consists of what 3 entities?
- government
- businesses
- consumers
what are the 2 key aspects of the financial planning environment?
- players
- economy
which entity provides the essential public goods/services, regulates economic activity, is the source of revenue for businesses and wages for consumers, and makes constraints on taxation and regulation? (gov, consumers, busi.)
government
which entity provides consumers with goods/services to receive payment, need “factors of production,” and are a part of the income flow that sustains free-enterprise system?
businesses
which entity is the central player as in its choices dictate the output of businesses and control the economy based on spending?
consumers
what 2 policies does the government utilize to control the economy?
- monetary policy
- fiscal policy
which government policy controls the money supply?
monetary policy
do increases or decreases in the money supply:
lower interest rates = more borrowing/spending = increase economic activity?
increases
do increases or decreases in the money supply:
higher interest rates = less borrowing/spending = slows economic activity?
decreases
which government policy utilizes taxation and spending to regulate the economy?
fiscal policy
do increases or decreases in spending on government-funded organizations speed up the economy?
increases
do increases or decreases on spending for social services, defense, education, etc. slow down the economy?
decreases
does taxation increase speed up or slow down the economy?
slow
does taxation decrease speed up or slow down the economy?
speed up
what cycle:?
1. expansion - (GDP increases)
2. peak
3. contraction (AKA recession) - (GDP falls)
4. trough
economic cycle
system that facilitates the exchange of goods/services for money.
prices
prices increase above average over time.
inflation
what is inflation measured by?
consumer price index (CPI), alternatively, based on change in cost.
what affects earning amount, purchasing power, and interest rates?
inflation
amount of stuff that each dollar can buy.
purchasing power
your what is determined by your:?
1. age
2. relationship status
3. education
4. location
5. career
income
inheritances are not included in personal income.
true
where are salaries higher?
northeast and west, metropolitan areas
the economic condition, labor supply, industrial base, and living costs are affected by what?
location
to pick a career, identify interests, skills, needs, and values.
true
make a career plan by establishing goals, a plan, and revising/reviewing your plans to progress through your career.
true
your income is determined by what 2 factors?
location and career
the purchase of a car is an example of…
consuming.
why is a goal, like make a $12,000 downpayment on a vehicle in 4 years, so useful in financial planning?
it is specific, has a time period assigned to it, and is within reason.
how many months of money should be in an emergency fund?
6 months worth of income
why is tax planning important?
to minimize taxes
career planning helps in improving professional satisfaction.
true
what is the best way to ensure that you achieve financial objectives?
by constructing a financial plan
land would be included in which of the 4 asset types?
real property
what will happen to Andy’s salary if inflation increases every year by 1% and there isn’t any growth in his salary?
his purchasing power would decrease
if Ben invests $10,000 at a rate of 5% for 40 years, then, he will receive a significant amount of money by the end of the investment period because of a feature called…
compounding.
open communication about financial matters is the ideal way to handle financial decisions.
true
would salaries be lower in rural areas?
yes
after working for 2 years in a small financial planning firm, Becky earns $85,000 annually and saves $5,000 a year after spending on her current needs. what will her average propensity to consume be [hint: (income - savings) / total income]?
94%
