Key Terms : Chapter 1 - Understanding the Financial Planning Process

Question 1

Average Propensity to Consume

Answer 1

The percentage of each dollar of income, on average, that a person spends for current needs rather than savings.

Question 2

Consumer Price Index

Answer 2

A measure of inflation based on changes in the cost of consumer goods and services.

Question 3

Contraction

Answer 3

The phase of the economic cycle when real GDP falls.

Question 4

Expansion

Answer 4

The phase of the economic cycle when levels of employment and production are high and the economy is growing, generally accompanied by rising prices for goods and services.

Question 5

Financial Assets

Answer 5

Intangible assets, such as savings accounts and securities, that are acquired for some promised future return.

Question 6

Financial Goals

Answer 6

Results that an individual wants to attain, such as buying a home, building a college fund, or achieving financial independence.

Question 7

Flexible - Benefit Plan (Cafeteria)

Answer 7

A type of employee benefit plan wherein the employer allocates a certain amount of money and then the employee “spends” that money for benefits selected from a menu covering everything from child care to health and life insurance to retirement benefits.

Question 8

Goal Dates

Answer 8

Target dates in the future when certain financial objectives are expected to be completed.

Question 9

Gross Domestic Product (GDP)

Answer 9

The total of all goods and services produced in a country; used to monitor economic growth.

Question 10

Inflation

Answer 10

A state of the economy in which the general price level is increasing.

Question 11

Money

Answer 11

The medium of exchange used as a measure of value in financial transactions.

Question 12

Peak

Answer 12

The medium of exchange used as a measure of value in financial transactions.

Question 13

Personal Financial Planning

Answer 13

A systematic process that considers important elements of an individual’s financial affairs in order to fulfill financial goals.

Question 14

Professional Financial Planner

Answer 14

An individual or firm that helps clients establish financial goals and develop and implement financial plans to achieve those goals.

Question 15

Standard of Living

Answer 15

The necessities, comforts, and luxuries enjoyed or desired by an individual or family.

Question 16

Tangible Assets

Answer 16

Physical assets, such as real estate and automobiles that can be held for either consumption or investment purposes.

Question 17

Trough

Answer 17

The phase of the economic cycle when a contraction ends and an expansion begins.

Question 18

Utility

Answer 18

The amount of satisfaction received from purchasing certain types or quantities of goods and services.

Question 19

Wealth

Answer 19

The total value of all items owned by an individual, such as savings accounts, stocks, bonds, home, and automobiles.

Question 20

What is the heart of financial planning?

Answer 20

making sure your values and goals line up with how you spend and save.

Question 21

True or False: With good planning even hard to reach goals are possible

Answer 21

True

Question 22

What does SMART goals stand for?

Answer 22

Specific, Measurable, Attainable, Realistic, Timely.

Question 23

What are the rewards of financial planning

Answer 23

1. Greater financial flexibility
2. Improved standard of living
3. Wiser spending habits
4. Increased wealth / assets

Question 24

What is the organizational planning model

Answer 24

Financial Plans -> Financial Actions -> Financial Results

Question 25

What is APC?

Answer 25

refers to the portion of income we use for consumption

Question 26

If you have $80,000 in income and you spend $60,000, what is your APC?

Answer 26

60,000 / 80,000 = .75 or 75%

Question 27

What are financial assets?

Answer 27

intangible and include cash account and securities such as stock, bonds, mutual funds.

Question 28

What are tangible assets?

Answer 28

physical assets such as automobiles, homes, and furniture

Question 29

What are the 6 steps of the financial planning process?

Answer 29

1. Define financial goals
2. Develop financial plans / strategies to achieve goals
3. Implement financial plans / strategies
4. Periodically develop and implement budgets to monitor and control progress towards the goal
5. Use financial statements to evaluate results of plans / budgets, and take corrective action as needed
6. Redefine goals / revise plans as personal circumstances change.

Question 30

What are financial goals

Answer 30

Financial goals are developed when an individual wants to attain something, such as buying a home, building a college fund, retirement planning, or achieving financial independence.

Question 31

Example of Unrealistic, Realistic and Financial Goals

Answer 31

Unrealistic goal: Save 25% of take-home income.
Realistic Goal: Save 10% of take-home pay
Financial goals : Having a $20,000 down payment to buy a home in 3 years.

Question 32

True or False: Money is an important motivator of personal behavior because it has a strong effect on self-image

Answer 32

True

Question 33

Target dates on Financial Goals

Answer 33

Long Term : 6 years or more
Intermediate Term : next 2 – 5 years
Short Term : Within the next year

Question 34

Why should you put a specific time frame while setting financial goals

Answer 34

As shorter goals are often steps along the way to bigger goals, you should set your long-term goals first then intermediate and short-term goals

Question 35

Example of setting financial goals

Answer 35

Goal: I want to buy a house
Financial Goal: I need to accumulate $20,000 across the next five years for a down payment.

Question 36

What are special planning concerns

Answer 36

-Managing two incomes
-Managing employee benefits
-Managing finances in tough economic conditions
-Adapting to other major life changes

Question 37

What are the different types of financial planners?

Answer 37

Commission based planners earn commission on selling products such as insurance / annuities
Fee-only planners charge fees based on complexity of prepared plans and time
Hybrid approach involves both charging fees and collecting commissions
None of the three techniques is the “right” one. Just know what you are paying for if you hire a planner.

Question 38

4 Stages of the business cycle

Answer 38

Economic expansions reach peaks, then a contraction (recession) will set in.
After the recession reaches its trough (low point), a new expansion starts.
Expansions are marked by rising company profits, with increased sales demanding more workers be employed and higher salaries paid to attract and retain workers.
In a contraction the reverse is true.