Chapter 1: Overview of a Financial Plan

Liquidity cannot be enhanced using sound money and credit management.

False

________ is the process of forecasting future expenses and savings. A) Budgeting B) Planning C) Predicting D) Fortune-telling

A) Budgeting

List the six components of a financial plan.

(a) Budgeting and tax planning (b) Managing liquidity (c) Financing your large purchases (d) Protecting your assets and income (e) Investing your money (f) Planning your retirement and estate

Cash flows are affected by financial planning decisions. Which of the following is correct? A) Car payments you make are cash outflows B) Investments you make in stock are cash inflows C) Your routine monthly expenses are cash inflows D) Your income is a cash outflow

A) Car payments you make are cash outflows.

Which of the following is an example of money management? A) Putting your money in a passbook account at your bank B) Shopping around for the credit card with the best interest rate C) Deciding to delay buying a new car until you can pay cash D) Paying off a loan early to reduce the interest charges

A) Putting your money in a passbook account at your bank.

If you are interested in achieving a long-term savings goal, then A) you are not concerned with paying off your current debt. B) you believe that saving a small amount is better than saving nothing at all. C) you buy a new car because your best friend just bought one. D) you believe that 'retail therapy' is the answer to your occasional depression.

B) you believe that saving a small amount is better than saving nothing at all.

Your financial plan is usually strongly influenced by A) your parents. B) your tolerance for risk and your self-discipline. C) your peers. D) your age.

B) your tolerance for risk and your self-discipline

A personal financial plan specifies financial goals and describes A) saving, investing, and asset valuation. B) spending, saving, and credit card financing. C) spending, financing, and investment plans. D) saving and spending only.

C) spending, financing, and investment plans

Match the goals with the following: Short term goal (a) To retire in 25 years (b) To purchase a home in three years (c) To save enough money for books and tuition for next term

C) to save enough money for books

During the past year, Fritz spent $3,000 to take a cruise, bought stock costing $5,000 that by year-end had increased to $6,000, and paid off a credit card of $3,500. What was the net effect on Fritz's net worth of these transactions? A) $11,500 B) $12,500 C) $8,500 D) $1,000

D) $1,000

The first step in budgeting is to evaluate your current financial position by looking at just your income and expenses.

False

A part of your financial plan should involve a plan for protecting your assets and income through insurance coverage.

True

An example of an opportunity cost is the wages that you could have earned but did not because you were in class.

True

Credit should be used only when necessary, since it usually involves borrowed funds that you will need to pay back with interest.

True

If you set realistic goals rather than unrealistic ones, your plan becomes a more useful one.

True

In addition to the text, Web sites and financial magazines are good sources for additional help in financial planning.

True

One of the considerations in determining your investment choices is evaluating the level of risk you are willing to take.

True

The simple objective of financial planning is to make the best use of your resources to achieve your financial goals.

True

Your budget is influenced by your income, which in turn is influenced by your education and career decisions.

True

Long term goal a) to retire in 25 years b) to purchase a home in three years c) save enough money for books and tuition for next term

a) to retire in 25 years

Intermediate goal a) to retire in 25 years b) to purchase a home in three years c) save enough money for books and tuition for next term

b) to purchase a home in three years

Your ability to access funds to cover any short-term cash deficiencies is your ________.

liquidity

The wages that you forego when you leave work early to attend class is an example of a(n) ________.

opportunity cost

Most investments are subject to ________, which is the uncertainty surrounding their potential return.

risk

Jessie has $4,000 in a bank account, $2,800 in a 401(k) plan at work, a car with a current value of $28,000, and a house that she purchased for $92,000 that has a current value of $118,000. The current balance of her home mortgage is $81,000, she has one credit card with a $3,000 balance, and a school loan with a balance of $6,000. What is Jessie's current net worth? A) $62,800 B) $46,800 C) ($242,800) D) ($62,800)

A) $62,800

Which of the following would not be considered a very good investment? A) A new television set B) An art collection C) A savings account D) A mutual fund of stocks and bonds

A) A new television set

Which of the following does not protect your assets and/or income? A) Self insurance B) Disability insurance C) Automobile insurance D) Life and health insurance

A) Self insurance

From a financial standpoint when should a person start retirement planning and saving? A) When he or she first starts receiving a salary B) At 45-50 years of age C) At 50-55 years of age D) At 55-60 years of age

A) When he or she first starts receiving a salary

Which of the following is not an asset? A) Your house which you rent B) Your car which you financed C) Your coin collection given to you by your grandfather D) Your textbooks

A) Your house which you rent

The act of determining how wealth will be distributed before or upon death is A) estate planning. B) retirement planning. C) not needed for most people. D) liquidity planning.

A) estate planning

Amanda has cash of $100, a car worth $5,000, and books worth $200. Her liabilities include a car loan of $2,000 and a credit card balance of $100. What is the total of her assets, liabilities, and net worth?

Assets of $5,300, liabilities of $2,100, and a net worth of $3,200

A worker making $20 per hour decides to take unpaid leave from work to attend a graduation ceremony. Assuming the worker works and 8-hour day, has a total tax rate of 70%, an d receives a 5% contribution from his employer to his 401(k), what is the worker's total opportunity cost? A) $8.00 B) $120.00 C) $112.00 D) $160.00

B) $120.00

Nancy is paid $2,000 biweekly (26 pays per year) in her job as a market researcher. Her expenses are $400 per month rent on her apartment, $100 per month for food, and $100 per month for utilities. Nancy also has student loans on which she makes monthly payments of $200. Nancy is considering the purchase of a new car, but also is very determined to save at least 50% of any budget surplus each month. If Nancy adheres to this savings plan, how much would she have available each month for a car payment. Round to the nearest dollar. A) $3533 B) $1766 C) $1600 D) None since there is a budget deficit

B) $1766

By establishing high and unrealistic financial goals, you will probably A) improve the likelihood of achieving at least some success. B) become discouraged and lose interest in planning. C) increase the viability of your plan. D) impress your spouse or significant other.

B) become discouraged and lose interest in planning.

A plan for ________ is needed to determine how much you could afford to borrow, the length of the loan, and to select a loan that charges competitive interest rates. A) buying B) financing C) spending D) saving

B) financing

Since career choices affect your income, you should choose one A) that pays the highest salary even if you dislike the work. B) that will be enjoyable and will suit your skills. C) that will be the easiest to find employment. D) that requires the least amount of training or education so you can begin working as quickly as possible.

B) that will be enjoyable and will suit your skills

Which of these statements is true with regards to the 2008-2009 financial crisis? A) More than half of the people working in the United States have a plan for saving money. B) The value of many homes were cut in half or more. C) Even with and understanding of personal finance, you most likely will not be able to make decisions that will enhance your financial situation. D) Economic conditions are now as strong as they were in the period before the crisis.

B) the value of many homes were cut in half or more.

________ is the process of forecasting future expenses and savings.

Budget planning

Cash flows are affected by financial planning decisions. Which of the following is not correct? A) Insurance payments are a cash outflow B) Investing in stock is a cash outflow C) Buying on time results in a cash inflow D) Income is a cash inflow

C) Buying on time results in a cash inflow.

When estimating expenses for a budget, A) last month's and last year's expenses are not a good starting point. B) many of the same expenses do not occur each month. C) large unusual expenses such as car or hospital bills should be included. D) estimating your future assets is a good starting point.

C) large unusual expenses such as car or hospital bills should be included.

Insurance planning is not designed to protect your wealth in which of the following ways? A) Protecting the assets that you own B) Limiting your exposure to potential liabilities C) Protecting your income D) Downturns in the stock market

D) Downturns in the stock market

All of the following are true with regards to the demand for financial advisors except A) many people lack an understanding of personal finance. B) financial matters have become so difficult that making decisions alone is impossible. C) many people are just not interested in making their own financial decisions. D) the law requires that you use them before making investments.

D) the law requires that you use them before making investments.

A complete financial plan consists of budgeting, taxes, financing, and investing.

False

If prepared properly, financial plans are set for life and should not need to be adjusted.

False

Money management decisions include deciding how much credit to obtain to support your spending and what sources of credit to use.

False

Most Americans will never be able to understand and develop a personal financial plan.

False

The major source of cash outflow for most people is the income they receive from employers.

False

Various government agencies have conducted surveys that show most people have a good understanding of personal finance.

False

If you do not have access to money to cover cash needs, you may have insufficient liquidity.

True

The value of what you own minus the value of what you owe is called your net worth.

True

During his ________ your Uncle Harvey decides to cut you out of his will.

estate planning

To increase your savings, A) income must be increased. B) expenses must be increased. C) income must be decreased. D) net worth must be decreased.

A) income must be increased.

Estate planning results in A) protecting your wealth against unnecessary taxes. B) sheltering your wealth against all taxes. C) ensuring that your wealth is distributed in the manner that the court determines. D) eliminating all controversy in your family.

A) protecting your wealth against unnecessary taxes.

Which of the following would be classified as a short-term goal? A) Purchasing a house in three years B) Buying new clothes this month C) Retiring in ten years D) Paying for your two-year-old child's college education

B) Buying new clothes this month

Which of the following is not a type of decision to manage your liquidity? A) Deciding how much money to keep in savings. B) Choosing between credit cards. C) Determining how much money to save versus how much to spend. D) Building and maintaining a monthly/yearly budget with allocations to expenses and investments.

B) Choosing between credit cards.

Which of the following statements is not true regarding education and financial position? A) Your financial position is highly influenced by the amount of education you pursue B) Higher education always guarantees a higher income C) The more education you have, the higher your earnings will likely be D) Before you choose a major, you should consider your skills, interests, and the career paths that will be available to you

B) Higher education always guarantees a higher income

________ management involves decisions regarding how much money to retain in a liquid form and how to allocate funds among short-term investment instruments. A) Investment B) Money C) Credit D) Liquidity

B) Money

Opportunity cost refers to A) money needed for major consumer purchases. B) what you give up or forego as a result of making a decision. C) the amount paid for taxes when a purchase is made. D) evaluating different alternatives for financial decisions.

B) what you give up or forego as a result of making a decision.

Jakob received a $1,000 a year raise in January, sold stocks in March for $6,000 that were originally purchased for $4,000, and in July had a $100 monthly increase in mortgage payments on an adjustable rate mortgage. The increased mortgage payment was in effect the remainder of the year. What was the total impact on Jakob's cash flow for the year? A) $1,000 B) $5,400 C) $6,400 D) $7,600

C) $6,400

Your net worth will not be increased by which of the following actions? A) Increasing your savings from 10% to 15% of your earnings B) A $100 birthday present from your grandmother C) Buying a new stereo system and putting the entire amount on your credit card D) Receiving an inheritance

C) Buying a new stereo system and putting the entire amount on your credit card.

Which of the following could save a smaller proportion of their earnings to achieve the same level of wealth? A) Social worker B) School teacher C) Medical doctor D) All would save the same percentage of earnings to reach the same level of wealth

C) medical doctor

After your financial plan is developed it should be A) locked in a safe for keeping so it isn't stolen. B) reviewed every five years. C) monitored and updated annually. D) sold to others.

C) monitored and updated annually.

In the United States many people A) save about 50% of income earned. B) save about 25% of income earned. C) save less than 3% of income earned. D) have no savings.

C) save less than 3% of income earned.

If you have a cash deficiency this month, which of the following is the least desirable source from which you may obtain the necessary funds A) withdrawing from a savings account. B) borrowing from a line of credit. C) working additional hours to earn more money. D) borrowing funds from your 401(k) retirement account.

D) borrowing funds from your 401(k) retirement account.

Potential investments include all of the following instruments except A) stocks and bonds. B) mutual funds. C) real estate. D) lottery tickets.

D) lottery tickets.

A budget does not A) require thinking and planning. B) require an evaluation of your current financial position. C) help you account for all your income and expenses. D) require the preparation of a will.

D) require the preparation of a will.

The financial crisis of 2008-09 affected the financial position of individuals in all of the following ways except which of these? A) There was a reduction in new job opportunities. B) Employers could not afford to give their employees a raise. C) The value of many investments declined. D) The demand for homes increased because more homeowners were trying to sell their homes.

D) the demand for homes increased because more homeowners were trying to sell their homes.

The income in your budget is not affected by A) your education. B) your career decisions. C) the tax laws. D) the standard of living you experienced as a child.

D) the standard of living you experienced as a child.

A good understanding of the financial planning process will allow you to make informed decisions without relying on the advice of financial advisers.

False

A thorough understanding of this personal finance book qualifies you to become a financial adviser.

False

Determining how much money you should set aside for retirement and how those funds should be invested should not be of concern for people until they near their retirement age.

False

Effective estate planning will ensure that your wealth is distributed according to your wishes, but will do nothing to reduce the potential taxes your estate is subject to.

False

Goals should be set as high as possible regardless of reality because they may be obtainable.

False

Goals with a time frame of five or more years into the future are called intermediate-term goals.

False

Which of the following is an example of an opportunity cost? A) Renting an apartment near school B) Taking a class instead of working at your part-time job C) Setting aside money for paying income tax D) Purchasing automobile insurance

B) Taking a class instead of working at your part-time job

Josh has decided to take a course at the local community college that could help him get a promotion at work. The course begins at 5 p.m. and goes until 9 p.m. on Monday nights. Josh normally works until 5 p.m. each day, but because of the drive time to the community college, he will need to leave work at 3 p.m. on class days. Josh currently earns $18.50 per hour. His employer contributes 10% of Josh's gross earnings to a 401(k). If the class meets 16 times, what is Josh's total opportunity cost for the class? A) $592.00 B) $800.00 C) $651.20 D) None

C) $651.20

________ management involves decisions regarding how much credit you need to support spending and which sources of credit to use. A) Investment B) Money C) Credit D) Liquidity

C) Credit

Which of the following is an example of an opportunity cost? A) Depositing money into a Christmas Club in order to pay cash for holiday gift-giving B) Buying a car so you no longer have to use public transportation C) Giving up going to a movie in order to study for your finance exam D) Purchasing a new computer

C) Giving up going to a movie in order to study for your finance exam

Which of the following is not a decision that you would probably encounter in managing your budget? A) What expenses should you anticipate B) How much money you should attempt to save each month C) How will you allocate your estate among your heirs D) How long will you take to pay off a specific loan

C) How will you allocate your estate among your heirs.

Your decision about one component of your financial plan can affect all other components. Which statement is true? A) The amount of insurance you choose to carry has no effect on your investing decisions. B) There will never be any trade-offs to consider when making decisions about your financial plan. C) If you make poor investment decisions, you may have to work longer than planned. D) You should contribute all of your extra money to your retirement account even if it means you don't have money available for products and services today.

C) If you make poor investment decisions, you may have to work longer than planned.

________ allows access to funds to cover any short-term cash deficiencies. A) Investment B) Money C) Liquidity D) Risk

C) Liquidity

Which of the following is a credit management decision? A) Purchasing a used car with cash B) Investing your savings in the stock market C) Obtaining a student loan to attend college D) Putting money into your retirement account

C) Obtaining a student loan to attend college

Which of the following would not be a factor in evaluating your current financial position? A) Income B) Expenses C) Possible lottery winnings D) Assets

C) Possible lottery winnings

Which of the following would not help protect you from unethical or incompetent advice from a financial adviser? A) Educate yourself on various financial products B) Ask questions of other clients C) Rely on the adviser as to when to buy and sell D) Know your risk tolerance

C) Rely on the adviser as to when to buy and sell

Which of the following goals would be easiest to measure? A) Reduce debt payments B) Save funds for an annual vacation C) Save $100 a month to create a $4,000 emergency fund D) Invest for a comfortable retirement

C) Save $100 a month to create a $4,000 emergency fund

Which of the following would be a long-term goal? A) Paying off a school loan in three years B) Purchasing a car within six months C) Saving enough money to retire in 20 years D) Paying for two years of college

C) Saving enough money to retire in 20 years.

Which of the following items is not a liability? A) The balance due on your credit card B) Your college loans C) The wages you give up to take a class D) An IOU to your roommate

C) The wages you give up to take a class.

Budgeting helps set goals by estimating ________ on a monthly basis to determine how much to save and spend. A) assets and income B) liabilities and expenses C) income and expenses D) net worth and income

C) income and expenses

If your income exceeds the amount you spend, you should ________ your investments or ________ loans. A) reduce; repay existing B) reduce; obtain more C) increase; repay existing D) increase; obtain more

C) increase; repay existing

Goals with a time frame of between one and five years are classified as A) short-term. B) long-term. C) intermediate. D) unrealistic.

C) intermediate

"Big spenders" focus their budgeting decisions on A) reducing expenses. B) increasing income. C) spending most of their income. D) saving most of their income.

C) spending most of their income.

The best measure of a person's or family's net wealth is A) the highest level of education received. B) the amount of annual income. C) the value of what you own minus the value of what you owe. D) their tax bracket.

C) the value of what you own minus the value of what you owe.

Retirement planning should take place A) when you retire. B) shortly after you retire. C) well before you retire. D) at any time.

C) well before you retire.

Which of the following Web sites should you question the accuracy of the information provided? A) Current tax rates and rules used for tax planning on the IRS Web site B) Investment performance on the SEC Web site C) New retirement plan rules used for retirement planning on a major bank's Web site D) A list of stocks you should buy that were mentioned on a free chat room

D) A list of stocks you should buy that were mentioned on a free chat room

Which of the following is not a step in developing a financial plan? A) Establish your financial goals B) Consider your current financial position C) Identify and evaluate alternative plans that could achieve your goals D) Put your plan away for six months to a year and then review it for accuracy

D) Put your plan away for six months to a year and then review it for accuracy.

"Big savers" focus their budget decisions on A) reducing expenses. B) increasing income. C) spending most of their income. D) saving most of their income.

D) saving most of their income.

A complete financial plan contains all of the following categories except A) managing liquidity. B) budgeting and tax planning. C) investing money. D) spiritual training.

D) spiritual training

Personal finance does not include the process of planning your A) spending. B) financing. C) investing. D) spirituality.

D) spirituality

Your financial position is highly influenced by all of the following except A) the amount of education you pursue. B) the current pay level you receive. C) the current economy. D) the bonus check your best friend just received.

D) the bonus check your best friend just received.

An understanding of personal finance is not necessary to judge the quality of advice that a financial adviser may give.

False

Put the following six steps in order for a financial plan: (a) identify and evaluate plans that could achieve your goals (b) consider current financial position (c) revise the plan (d) establish financial goals (e) evaluate the plan (f) select and implement the best plan

establish, consider current financial position, identify and evaluate plans, select and implement, evaluate the plan, revise the plan