Chapter 4

Question 1

The purpose of net worth planning is fourfold:

Answer 1

1. It helps to establish financial discipline.
   2.sets out a strategy to achieve a future financial target.
   3.provides a means to measure financial progress at regular intervals.
   4.It provides reassurance about future financial security.

Question 2

This type of statement shows how much money flows in and out of a household or business over a set period (generally not exceeding one year)

Answer 2

Cash Flow Statement

Question 3

This type of statement determines the value of assets and liabilities at a specific point

Answer 3

The net worth statement

Question 4

If total savings during a given year are not enough to achieve the targeted growth in net worth, the client must act to correct the situation. The two options are

Answer 4

to reduce spending or increase income.

Question 5

Flexible expenses that can be reduced without seriously affecting the desired lifestyle are called

Answer 5

discretionary expenses.

Question 6

These types of expenses may include clothing, personal care, and entertainment

Answer 6

discretionary expenses.

Question 7

Fixed expenses that may affect the desired lifestyle if reduced are called

Answer 7

non-discretionary expenses.

Question 8

This method of expense control requires some restraint in spending on largely discretionary expenses.

Answer 8

Current Expense Control

Question 9

It refers to the techniques that can be used to reduce an individual’s debt burden, such as consolidation, refinancing, and deferring the purchase of big-ticket items

Answer 9

Debt Restructuring

Question 10

The key to long-range financial success is the development of a

Answer 10

systematic savings plan

Question 11

A systematic savings plan can be used for two purposes;

Answer 11

1. To generate necessary savings to achieve set goals
2. To systematically direct these savings toward targeted areas to achieve specific financial goals.

Question 12

The ______________________________, which is based on a client’s current cash flow statement, provides a comprehensive forecast of future income and expenses

Answer 12

Projected cash flow statement

Question 13

A projected cash flow statement can be used as a planning tool to help clients in the following areas:

Answer 13

1. Control Spending
2. Ensure Liquidity
3. Implement the financial plan

Question 14

A client’s current ___ ________is the base on which a savings plan is built

Answer 14

current net worth

Question 15

As for the size of the emergency fund, many advisors recommend the equivalent of _____to _____months of living expenses.

Answer 15

3 to 6 months of living expenses

Question 16

Part of the premium paid on this type of policy is set aside in a policy reserve (or cash value), which can be withdrawn upon surrendering the policy

Answer 16

permanent life insurance policy

Question 17

This means that a dollar held or received today is worth more than a dollar received at a later date, given that today’s dollars can be invested to generate some type of return.

Answer 17

time value of money (TVM).

Question 18

Making contributions (PMT) at the Beginning of each year on an annuity is called

Answer 18

annuity due

Question 19

During calculations, if the contributions are “starting today” or they contribute “at the beginning” you need to set your calculator in this mode

Answer 19

BGN

Question 20

Right away, you should recognize this as an annuity problem. However, there is one difference that distinguishes this problem from the others we have seen so far: the payments do not begin for another five years. As you should recall, this type of cash flow pattern is known as a

Answer 20

deferred annuity.

Question 21

The four main reasons for undertaking net worth planning are to:

Answer 21

• Establish financial discipline (discipline)
• Have a strategy to achieve a future financial target (strategize)
• Measure financial progress on a regular basis (Measure Progress)
• Feel financially secure about the future. (Security )

Question 22

The value of a defined benefit pension plan should be recorded at its _______ value.

Answer 22

Commuted (reduced)