LO 3.2.1: Recommend financial planning solutions that maximize the client’s potential to achieve financial goals.

Question 1

Budgeting

Answer 1

Process of projecting, monitoring, adjusting, and controlling future inflows and outflows (105)

• Evaluate where they are spending money, and plan where it should go
• Helps actively manage money so clients can achieve (short and long-term) financial goals by measuring financial performance and self-evaluation of progress
• Helps avoids use of high-interest debt (credit cards)
• Like a road map, increases chances of reaching a destination (102)

Question 2

Budget

Answer 2

Serves as a control document for future cash flows with consideration to financial goals

• Helps monitor and evaluate income, expenses, and spending patterns.
• To be effective, accurate spending records must be kept, and the budget must be reviewed regularly

Question 3

How is a budget prepared

Answer 3

With a realistic estimate of income and expenditures, a budget is prepared from actual historical information unless these values have changed in the recent past
* If so, current information should be used

Question 4

What is the consequence of not following a budget

Answer 4

If future spending exceeds budget projections, the cash actually saved will be less than anticipated

Question 5

Reasons for Using a Budget

Answer 5

• 1. to accomplish specific financial goals by dedicating the right amount to budget categories for time frame;
• 2. to avoid the need to use credit cards or other forms of debt for expenses that can be anticipated (e.g. auto maintenance);
• 3. as a written plan that includes goals (e.g. travel or paying down debt) that are communicated to the family so they will know why spending is limited in one area or another and get everyone engaged in staying on track;
• 4. when family economics are complex (e..g when income and/or expenses are widely fluctuating);
• 5. when clients need to understand where money is being spent;
• 6. when the family believes it is important to establish financial incentives for its members; and
• 7. when a family wants to shift or improve control of household expenses.

Question 6

Budgeting Advantages

Answer 6

• 1. Allows clients to choose where they want to allocate their resources rather than allowing habit to drive spending decisions
• 2. May be used to establish financial goals and determine the feasibility of meeting them
• 3. Family stress and conflicts over money can be addressed before they become budgeting issues
• 4. The probability of achieving financial goals increases if attention is given to resources that can help meet these goals.

Question 7

Budgeting Challenges

Answer 7

• 1. Developing a budget is time consuming, and clients must make a commitment to the process
• 2. Initially, there may be family conflicts when deciding what is important and what expenses to reduce or eliminate
• 3. If inaccurate information is used to develop the budget, it will be of little or no value
• 4. Using a budget as an absolute control of spending pay preclude (prevent) a client from taking advantage of financial advantages that might aid in reaching goals
• • e.g. new job, new 401K, budget should allow for contributions.

Question 8

Creating a Budget

Answer 8

Limit budget period to no more than 1 year, manageable time frame for goal setting
* 7 Step Process

Question 9

7 Steps to Creating a Budget

Answer 9

• Step 1: Identify the client’s financial goals and determine what is required to meet them.
• Step 2: Estimate income. (see income sources on p. 104)
• Step 3: Estimate expenses. (see expense categories on p. 105)
• Step 4: Compare income and expenses to determine if expected expenses are equal to or less than expected income.
• Step 5: If expenses are too high, attempt to identify potential sources of additional income or areas in which expenses may be reduced.
• Step 6: Present each category of income and expense as a percentage of the total.
• Step 7: Once the budget is finalized for the year, establish a process at the end of each month to review the budget and make adjustments.

Question 10

Categories of expenses

Answer 10

• Inflexible/Flexible
• • Fixed. Definite monthly amount, cannot be easily changed short term.
• • Variable. Amount varies from month to month. Clients have more control over the amount of these expenses.
• Required/Optional
• • Nondiscretionary. Reoccurring or nonreoccurring expense needed to maintain lifestyle
• • Discretionary. Reoccurring or nonrecurring expense for a nonessential item or one more expensive than necessary

Question 11

Successful Budgeting

Answer 11

How should budgeting success be measured?

• • Whether that client
• ** Has reduced their stress
• ** Has more control over finances
• ** Is able to invest money to meet their future goals and objectives.