elements of financial planning and behavioral considerations

Question 1

what is the definition of opportunity cost?

Answer 1

the highest valued alternative not chosen

Question 2

what is the first step in the financial planning process?

Answer 2

understanding the clients personal and financial circumstances

Question 3

what is the second step in the financial planning process?

Answer 3

identifying and selecting goals

Question 4

what is the third step in the financial planning process?

Answer 4

analyzing the client’s current course of action and potential alternative courses of action

Question 5

what is the fourth step in the financial planning process?

Answer 5

developing the financial planning recommendations

Question 6

what is the fifth step in the financial planning process?

Answer 6

presenting the financial planning recommendations

Question 7

what is the sixth step in the financial planning process?

Answer 7

implementing the financial planning recommendations

Question 8

what is the seventh step in the financial planning process?

Answer 8

monitoring progress and updating

Question 9

benchmark for life insurance

Answer 9

10-16 x gross pay

Question 10

benchmark for health insurance

Answer 10

a client needs at least $1 million lifetime cap pre-Affordable Care Act

ACA eliminated per illness or per lifetime caps

Question 11

benchmark for disability

Answer 11

60-70% of gross pay

Question 12

benchmark for property (both home and auto)

Answer 12

a policy that covers both home and auto for FMV

Question 13

benchmark for long term care

Answer 13

36-60 months with inflation protection

Question 14

benchmark for personal liability umbrella policy

Answer 14

$1-3 million in liability protection

Question 15

benchmark for emergency fund

Answer 15

3-6 months
current assets / monthly non-discretionary cash flows

Question 16

benchmark for housing ratio

Answer 16

a client’s primary mortgage, which includes principal, interest, taxes and insurance should not exceed 28% of gross income

Question 17

benchmark for housing and debt ratio

Answer 17

a client’s primary mortgage plus all other recurring debt payments should not exceed 36% of gross income

Question 18

benchmark for education funding

Answer 18

3k / year for 18 years for public university
6k / year for 18 years for semi private university
9k / year for 18 years for private univeristy

Question 19

benchmark for retirement

Answer 19

at age 62-65 yo, an individual should have 16x the amount of income needed annually saved for retirement

Question 20

benchmark for savings rate

Answer 20

10-12% saved toward a retirement goal assuming they start saving early

Question 21

benchmark for return on investments with a long term goal

Answer 21

8-10%

Question 22

benchmark for risk of a diversified portfolio

Answer 22

8-14%
measured by standard deviation

Question 23

what are the “Big Three” documents when it comes to legacy?

Answer 23

Will
Durable POA
Advanced Medical Directive

Question 24

what are the stages in the Five Stages of Change Model?

Answer 24

Pre-contemplation
Contemplation
Preparation
Action
Maintenance

Question 25

Money Beliefs: Money Avoidance

Answer 25

ex. rich ppl get rich by taking advantage of others, good ppl should not care about money, I do not deserve a lot of money

traits: try not to think about money, believe they do not deserve money

effect: do not look at finances, suffer from financial denial or financial enabling, unlikely to stick to a budget

Question 26

Money Beliefs: Money Worship

Answer 26

ex. things would get better if I had more money, money is power, its hard to be poor and happy

traits: buy things in an effort to create happiness

effect: often have lower net worth, carry credit card debt, likely to suffer from workaholism

Question 27

Money Beliefs: Money Status

Answer 27

ex. I will not buy something unless it is new, your self worth equals your net worth, ppl are only as successful as the amount of money they earn

trait: need to keep up the appearance of being successful

effect: likely to overspend, prone to suffer from a gambling disorder, financial dependence, financial infidelity

Question 28

Money Beliefs: Money Vigilance

Answer 28

ex. money should be saved and not spent, I would be a nervous wreck if I did not have money for an emergency, it is extravagant to spend money on oneself

trait: are alert and watchful in matters concerning their finances, may have anxiety about their financial future

effect: often results in good financial outcomes, could result in loss aversion and or underspending