Module 2 (4) Savings Goals

Question 1

What is a good rule of thumb that the client should have in terms of fixed and variable expenses in liquid accounts for emergencies?

Answer 1

3-6 months worth

Question 2

What should your “emergency fund” for fixed and variable expenses exclude?

Answer 2

the income-related taxes and contributions to savings and investments

Question 3

What are “appropriate” emergency fund assets?

Answer 3

cash/cash equivalents

money market

short-term CDs (<90 days)

checking: but must reserve an amount equal to one month’s expenses

Question 4

What are “inappropriate” emergency fund assets?

Answer 4

equities

debt/debt instruments

life insurance cash value

anything that creates a debt or liability

Question 5

What is saving?

Answer 5

the process of putting cash aside in extremely safe accounts

Question 6

What is investing money?

Answer 6

the process of using your money or capital, to buy an asset that you think has a good probability of generating an acceptable rate of return over time

Question 7

Using a financial calculator, what is the formula to accumulate $100,000 in 10 years fi that person can earn 5% compounded monthly?

Answer 7

10, SHIFT, N

5,I/YR

100,000FV

Solve for PMT=641.32

(see pg 35–ch 4 module 2)

Question 8

Using a financial calculator—-

what if the $100,000 were going to increase because of inflation?

What would you need to first do, then what is the new formula?

Answer 8

the monthly amount would increase as well.

we would first need to inflate $100k over 120 months at the rate of inflation–assume it runs 3% the result is $134, 935

Formula:

10, SHIFT, N

3, I/YR

100,000, +/-, PV

FV=134,935

Then clear the calculator (SHIFT, C) and enter:
10,SHIFT,N 5,I/YR 134,35 FV

PMT=865.36 (BEGIN Mode)

Question 9

What is delta?

Answer 9

the difference between the two factors

Question 10

What is the equation for inflation-adjusted rate

Answer 10

inflation-adjusted rate=

[{1 + interest rate / 1 + interest rate} - 1] x100

Question 11

What is the key to having the money to make large purchases?

Answer 11

to commit to a systematic savings plan

most people don’t have enough disposable income to be able to save for every desire they have so they will need to prioritize their goal—encourage them by saving long before they intend to make the purchase