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