Homework 5: Financial Planning

Many people who signed up for adjustable-rate mortgages during the sub-prime mortgage debacle were no longer able to afford their payments. Many of these people were misled by their lenders. Which financial principle from Chapter 1 most​ applies?

The best protection is knowledge.

What four common concerns should guide the development of their financial​ plan?

The four principles of​ flexibility, liquidity,​ protection, and minimization of taxes should guide the development of any financial plan.

Estate-planning tools such as​ wills, living​ wills, health​ proxies, powers of​ attorney, and record-keeping should all be in place to help protect​ you, your​ assets, and your heirs.

True

Financial planning is an ongoing process. As your financial situation and position in life​ change, the plan changes.

True

It is important to take a close look at the 2008 economic downturn as a means to highlight how vulnerable​ American's finances are.

True

The first steps in career planning are conducting a self-assessment and developing an understanding of what sort of lifestyle you wish to lead.

True

The goal of financing the cost of education is obviously important in your present stage of the financial life cycle. Explain how this goal might continue to be important in future stages. Judge whether the following statement is true or false.​ "Since the​ accumulation-of-wealth stage extends into the​ mid-50s, financing the cost of education could remain important to me should I choose to continue my education or for the education of others who are important to me​ (spouse, child,​ etc.). It is not until Stage​ 2: Approaching Retirement​ - The Golden Years that the goal of educating children is usually accomplished. During Stage​ 3: The Retirement​ Years, estate planning issues are​ significant, and leaving part of my estate to fund education for my grandchildren could become​ important."

True

What aspect of financial planning might you discuss with a friend who buys fancy coffee drinks twice a​ day, visits the mall at least once a week for recreational​ shopping, and prefers impulse buying to carefully researched​ purchasing?

Waste​ not, want not-smart spending matters.

Being financially secure involves balancing what you earn with

what you spend

Chapter 1 discusses 10 principles that form the foundation of personal finance. The principle stating that a person can expect to earn additional return for increasing his or her investment risk is the​ ________ principle.

"risk and return go hand in​ hand"

Charlie is sixty-four years old and is looking forward to his retirement next year. He currently has all of his​ 401(k) retirement money invested in the stock market. What financial principle from Chapter 1 does he need to understand​ better?

Risk and return go hand in hand.

During which stage of the financial life cycle do many people make their biggest​ investment, the purchase of a​ home?

Stage 1: Wealth Accumulation

Which stage in the Financial Life Cycle is the longest in terms of​ years?

Stage 1: Wealth Accumulation

Which basic step to personal financial planning should be considered when examining your current financial​ situation?

Step 1

A long term goal that should be important to Jeremiah and Bethany​ is:

saving for retirement.

One of the most important factors to remember when hunting for your first job is to

start early

Which of the following statements describe a​ good, or​ effective, job​ interview?

-Develop answers to the most common interview questions. -Gain a thorough knowledge of the company. -Look and act with professional confidence.

Why is financial​ planning, or just plain money​ management, a challenge for most​ people?

-Financial planning skills have to be learned -Learning financial planning skills isn't always easy -Financial planning is challenging for some people due to a lack of financial knowledge -In many families a fear of finance may develop from disagreements about money

Which of the following is outlined in the text as​ reason(s) why many people do not have an adequate financial​ plan?

-For most people it is easier to spend than save. -Procrastination can affect everyone. -There is never enough time for organizing and planning. -Many of us lack the proper knowledge.

Which of the following are the steps that make up the financial planning​ process?

-Implementing your plan -Defining your financial goals -Evaluating your financial health -Reviewing your progress, reevaluating, and revising your plan -Developing a plan of action

While reviewing your current financial​ plan, you discover that you most likely​ won't achieve your long term financial goals. What should you do​ now?

-Look at increasing your income -Look at cutting back on your expenses -Look at revising your goals

Jessica is very proud of herself for having​ $5,000 in her savings account that pays 4 percent interest. She currently has a balance of​ $2,300 on her credit card account that charges 21 percent interest. Jessica thinks she is making a wise financial decision by keeping her money in her savings account instead of paying off her credit card balance. What financial principle from Chapter 1 would you use to give her good​ advice?

-Mind​ games, financial​ personality, and your money -Taxes affect personal financial decisions.

What financial strategies should you develop as a result of studying personal financial​ planning?

-Minimize your tax payments -manage unplanned events -Save for retirement -Invest intelligently -Use insurance to cover your assets -Accumulate wealth for special goals

What are the reasons why college seniors returning to campus for the fall semester should have a​ résumé already​ prepared?

-Starting your job search immediately conveys to employers that you are organized and serious about employment. -The hectic fall schedule will likely prevent you from immediately preparing a​ résumé. -Many companies begin recruiting in the fall.

In Chapter​ 1, Principle 3 espouses the time value of money. Why is this principle so important to financial​ planning?

-The principle allows us to determine how much money we will need to achieve our future goals. -The principle shows us how important time and interest rates are to the accumulation of wealth. -The principle shows us how inflation impacts our money over time. -The principle helps us determine our savings needs​ today, in order to meet our future retirement goals.

What is the significance of the financial life​ cycle?

-To better understand how your financial needs will most likely changer over time -To allow you to be more proactive in dealing with expected changes in the future and take steps to prepare for them

List five tips for Bethany to keep in mind when preparing for interviews.

-Use the​ library, the​ Internet, or other sources to learn about the company. -Make a good impression by getting a good​ night's sleep, dressing​ appropriately, and arriving early. -Look and act​ confident, but relaxed. -Review the commonly asked​ questions, prepare and practice a succinct answer for each. - Thank the interviewer and immediately send a​ follow-up letter.

Young professionals can insure success in their chosen careers​ by:

-building a visible reputation for good​ work, a willingness to take on new​ challenges, and an image that fits the organization. -understanding and using the organizational power structure to their​ benefit, including being loyal and supportive of the boss. -developing a strong network of people knowledgeable of their character and capabilities. -updating and maintaining marketable​ skills, especially those that are not easy to duplicate.

Saving enough money for a down payment on a home is an example of an ________________ goal, saving enough money for retirement is an example of a ________________ goal, and paying off a credit card is an example of a _________________ goal

-intermediate term -long term -short term

Personal financial planning can help you to

-minimize your tax payments to Uncle Sam -deal with unplanned health issues -minimize your chances of personal bankruptcy -have enough money for a comfortable retirement

Evaluating your financial health consists of

-preparing a personal income statement. -preparing a personal balance sheet. -determining where your money comes from and where it goes. -determining what you are worth.

Short-term, intermediate-term, and​ long-term goals are similar in that all represent important financial objectives to be accomplished in the future. They differ in time horizon. A _____________ goal can be accomplished within a​ 1-year period. An ________________ goal may take from 1 year to 10 years to accomplish. A _____________ goal is one for which it takes more than 10 years to accumulate the money.

-short term -intermediate term -long term

List the five steps in the financial planning process. For​ each, list an​ activity, or financial​ task, that you should accomplish in each stage of the financial life cycle.

1. Evaluate your financial health. Record all expenses for a month to compare income and expenses. 2.Define your financial goals. Pay off credit​ card(s) by the end of this school term. 3. Develop a plan of action. Develop a budget matching income and projected expenses for the remainder of this academic year. 4.Implement the plan. Reduce expenses in problem areas so amounts do not exceed budgeted projections. 5.Review progress on the​ plan, reevaluate the​ plan, and revise the plan or start over with a new one. Based on this​ year, develop a revised budget for next year based on projected income and expenses.

The major reason to make a financial plan is to

Achieve your financial goals

Why do​ "ethical violations end​ careers"?

Although ethical behavior has always been a professional​ expectation, recent national attention on the​ "transparency" of corporate and individual actions has increased the importance of ethical behavior. A loss of confidence by the boss or other​ co-workers in individual professional integrity can end a career.

Define the terms​ "diversification" and​ "liquidity". Give an example to illustrate each concept. ______________ means that an investor buys several​ investments, each with a unique level of​ risk, instead of putting all the money in one investment. _________ refers to the speed and ease associated with turning non-cash​ assets, such as investments or other​ tangibles, into cash. For​ example, the ____________ of​ exchange-traded stocks is much higher than collections​ (e.g., baseball​ cards, stamps,​ jewelry, etc.) and______________ occurs when an investor chooses a combination of​ stocks, bonds, and mutual funds.

Diversification Liquidity Liquidity Diversification

Most individuals will reach their financial goals without planning or budgeting.

FALSE

A financial plan is only concerned with your future earnings and expenses. An examination of your current financial situation is not so important.

False

A short-term goal might take from one to 10 years to accomplish.

False

A well-educated and trained employee is virtually guaranteed job security by​ today's employers.​ Therefore, he or she​ doesn't need to worry about keeping his or her skills current.

False

Once a sound financial plan is in​ place, there should be no need to ever change it.

False

​Today, most Americans over the age of 65 have adequate savings and income available to them during retirement.

False

Financial planning is critical to __________ success as the process is repeated throughout ________________ in response to changing financial and life situations. Through financial​ planning, __________ are accomplished and new ____________ are identified. The​ five-step process begins and ends with __________________

Financial the life cycle goals goals evaluation

Which statement is true about managing personal​ finances?

Financial difficulties can be a major cause of marital problems

Suppose that you just completed your first year of college with​ $12,000 in loans and plan to borrow the maximum each year from now until graduation. You have never accounted for the way you spend your​ money, do not have a​ budget, and want to insure that you will be able to repay your loans after college. What is the most important thing you can do right​ now?

Immediately begin to develop a personal financial plan.

Which of the following statements applies to obtaining an undergraduate college​ degree?

It may be the single best investment you will ever make.

Step 3 of the personal financial planning process is​ "Develop a Plan of​ Action." According to your​ text, which of the following is not one of the​ "common concerns" that should guide all financial​ plans?

Long-Term Profitability

Why is Principle 10 the most important​ principle? Why is it equally relevant to financial and career​ planning?

Principle​ 10, "just do​ it", means that Jeremiah and Bethany must make a commitment and avoid procrastination​ - both critical strategies for success in financial or career planning.​ Furthermore, positive reinforcement from making progress toward their goals and taking control of their careers and their finances should provide momentum to keep them committed and successful.

nvest intelligently so that you can avoid the problem​ of:

choosing poor investment advisors and investment products.

On his goals​ worksheet, James has written down his short-term goals for the next year. He has prioritized his goals and determined a feasible due date by which he wants to achieve his goals. According to the​ textbook, the final step James needs to complete in the goals process is to

determine an appropriate cost for each of his listed goals.

The concept that emphasizes that people should not put all their eggs in one basket is

diversification reduces risk.

Use insurance to cover your assets so that you can avoid the problem​ of:

driving a car with a badly dented fender because you​ couldn't afford the repair bill.

Financial security comes from balancing what you ________ with what you __________to meet the needs of today and tomorrow. Financial planning is critical to making that happen. Principle 4 cautions that the tax implications of earning and investing require Jeremiah and Bethany to consider how to ____________ the money available after paying their taxes. Principles 5 and 7 parallel the other principles of plan development. _____________ events in life demand access to cash and __________ in the​ budget, or financial​ plan, to accommodate those costs. ______________ insures access to savings without a loss of value.​ Likewise, planning ahead by purchasing insurance ___________ provides coverage in the event the loss exceeds what can comfortably be paid from personal savings due to a major​ (or minor) catastrophe.

earn spend maximize Unexpected Flexibility Liquidity Protection

When you are involved in​ ________ planning, you are planning for your eventual death and the distribution of your wealth to your heirs.

estate

The five steps in the financial planning process​ are:

evaluate your financial​ health, define your financial​ goals, develop a plan of​ action, implement your​ plan, and​ finally, review your​ progress, reevaluate, and revise your plan.

When comparing two different investment opportunities the investor should always choose the investment that minimizes the total amount of taxes paid.

false

The personal financial planning process consists of​ ________ steps.

five

According to a recent Rockefeller Foundation​ report, the financial issue Americans worry about the most is the ability to pay

for retirement expenses.

Intermediate​ goals, within the next one to ten​ years, important to Jeremiah and Bethany might​ include:

funds for a home purchase as well as other assets to support their lifestyle. With children come additional financial planning needs for​ savings, insurance, and estate planning.

Manage unplanned events so that you can avoid the problem​ of:

going to the coin-operated laundry because your washer is beyond repair and you have no emergency funds for buying a new one

Save for retirement so that you can avoid the problem​ of:

having to work during your​ "golden years" or having to sell your home because you can no longer afford it.

An economic condition in which rising prices reduce the purchasing power of money is termed

inflation

Accumulate wealth for special goals so that you can avoid the problem​ of:

never taking that trip to Australia that you once promised yourself

Minimize your tax payments so that you can avoid the problem​ of:

paying more taxes than necessary on your income or your investments.

As​ newlyweds, short-term goals important to Jeremiah and Bethany might​ include:

paying off any debt they brought to the​ marriage, reviewing their insurance​ coverage, and beginning to save for an emergency fund.

Chapter 1 discusses 10 principles that form the foundation of personal finance. The principle that considers the importance of insurance is the​ ________ principle.

protect yourself against major catastrophes