Key Terms : Chapter 1 - Understanding the Financial Planning Process Flashcards
Average Propensity to Consume
The percentage of each dollar of income, on average, that a person spends for current needs rather than savings.
Consumer Price Index
A measure of inflation based on changes in the cost of consumer goods and services.
Contraction
The phase of the economic cycle when real GDP falls.
Expansion
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.
Financial Assets
Intangible assets, such as savings accounts and securities, that are acquired for some promised future return.
Financial Goals
Results that an individual wants to attain, such as buying a home, building a college fund, or achieving financial independence.
Flexible - Benefit Plan (Cafeteria)
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.
Goal Dates
Target dates in the future when certain financial objectives are expected to be completed.
Gross Domestic Product (GDP)
The total of all goods and services produced in a country; used to monitor economic growth.
Inflation
A state of the economy in which the general price level is increasing.
Money
The medium of exchange used as a measure of value in financial transactions.
Peak
The medium of exchange used as a measure of value in financial transactions.
Personal Financial Planning
A systematic process that considers important elements of an individual’s financial affairs in order to fulfill financial goals.
Professional Financial Planner
An individual or firm that helps clients establish financial goals and develop and implement financial plans to achieve those goals.
Standard of Living
The necessities, comforts, and luxuries enjoyed or desired by an individual or family.
Tangible Assets
Physical assets, such as real estate and automobiles that can be held for either consumption or investment purposes.
Trough
The phase of the economic cycle when a contraction ends and an expansion begins.
Utility
The amount of satisfaction received from purchasing certain types or quantities of goods and services.
Wealth
The total value of all items owned by an individual, such as savings accounts, stocks, bonds, home, and automobiles.
What is the heart of financial planning?
making sure your values and goals line up with how you spend and save.
True or False: With good planning even hard to reach goals are possible
True
What does SMART goals stand for?
Specific, Measurable, Attainable, Realistic, Timely.
What are the rewards of financial planning
- Greater financial flexibility
- Improved standard of living
- Wiser spending habits
- Increased wealth / assets
What is the organizational planning model
Financial Plans -> Financial Actions -> Financial Results
What is APC?
refers to the portion of income we use for consumption
If you have $80,000 in income and you spend $60,000, what is your APC?
60,000 / 80,000 = .75 or 75%
What are financial assets?
intangible and include cash account and securities such as stock, bonds, mutual funds.
What are tangible assets?
physical assets such as automobiles, homes, and furniture
What are the 6 steps of the financial planning process?
- Define financial goals
- Develop financial plans / strategies to achieve goals
- Implement financial plans / strategies
- Periodically develop and implement budgets to monitor and control progress towards the goal
- Use financial statements to evaluate results of plans / budgets, and take corrective action as needed
- Redefine goals / revise plans as personal circumstances change.
What are financial goals
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.
Example of Unrealistic, Realistic and Financial Goals
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.
True or False: Money is an important motivator of personal behavior because it has a strong effect on self-image
True
Target dates on Financial Goals
Long Term : 6 years or more
Intermediate Term : next 2 – 5 years
Short Term : Within the next year
Why should you put a specific time frame while setting financial goals
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
Example of setting financial goals
Goal: I want to buy a house
Financial Goal: I need to accumulate $20,000 across the next five years for a down payment.
What are special planning concerns
-Managing two incomes
-Managing employee benefits
-Managing finances in tough economic conditions
-Adapting to other major life changes
What are the different types of financial planners?
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.
4 Stages of the business cycle
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.
