Personal Finance Basics and the Time Value of Money
What are two ways a person can implement their financial action plan to achieve financial goals?
- Decrease spending - Increase income
Three short-term financial planning activities include:
- Evaluating current economic conditions - Preparing a list of personal and financial information to help get organized - Setting financial goals
Liquidity needs vary based upon which of the following items?
- Family situation - The person's age -Health
The Fed influences the money supply by:
-buying and selling government securities - controlling interest rates
select four possible alternative courses of action when making decisions
1. Continue the same course of action 2. Expand the current situation 3. Change the current situation 4. Take a new course of action
Samantha is trying to decide between two investments. The first one will earn 5% simple interest annually The second investment will earn 5% compounded quarterly. Assuming they have the same amount of risk, which is the better investment?
5% compounded quarterly
Which term is a set of federal laws that allows you to either restructure your debts or remove certain debts?
Bankruptcy
What have poor financial management and extensive selling efforts created for Americans?
Financial problems
The ability to readily convert financial resources into cash without a loss in value is called:
Liquidity
What measures the increase in an amount of money as a result of interest earned?
Time value of money
True or False: Appropriate insurance coverage is an essential part of personal financial planning.
True
Saving for four years for a down payment on a house affects how soon you are able to purchase a home. This is an example of:
an intermediate goal that affects a long-term goal
A series of equal deposits or payments is called a(n):
annuity
Reports show that 5 billion dollars worth of products are being imported while 3 billion dollars worth of products are being exported. What does this mean for the Canadian money supply?
imports are greater than the exports by 2 billion dollars. This means there is more money exiting the Canadian money supply
Which economic factor measures the difference between a country's exports and imports
trade balance
Personal (blank) have a direct influence on such decisions as spending now versus saving for the future.
values
Sam has an investment of $200 that is expected to earn 10% annually. How much will the investment be worth at the end of the first year if the investment earns simple interest?
$220
When there is a decreased money supply, what typically increases?
- interest rates - unemployment
You have developed a savings plan and will be setting aside money for the next one year to make an investment. You plan to use the return from this investment to make down payment to purchase a home after three years. What are key time frames for this goal?
Achieving short-term and intermediate goals
The fifth step of the financial planning process is to create and implement the financial action plan. What is involved in this process?
Developing an action plan that identifies ways to achieve your financial goals?
A refrigerator is considered a(n):
Durable product
A financial plan should be reviewed and revised if necessary once every five years
False
Hannah has made her decision about which investment to choose. After making her decision, she is relieved and vows to "never look at the stock until retirement". Is this a wise decision?
No, decisions are an ongoing process that should be reviewed when appropriate.
A person that adheres to the same principles in all situation has:
Strong values
What is another term for opportunity cost?
Trade-off
In time value of money calculations, the future value of an amount will always be greater than the original amount
True
The purpose of the Federal Reserve System is to:
act as the central bank and maintain an adequate money supply
The first step in the financial planning process is
determining your financial situation regarding income, savings, living expenses, and debts
When planning your financial foals, what role does the economy play?
the economy can play a direct role in your planning process
Which are well- structured financial goals that follow the SMART guidelines?
- Accumulate funds in an emergency fund equal to three months' salary by the end of next year - Save $200 per month for two years for a down payment on a new car
What are the situational influences for financial decisions?
- Age - Martial status - Number and age of household members - Employment situation
The Fed has indirect control over interest rates. This will have an influence on which of the following items:
- Business expansion - Consumer spending
To methods that will NOT help develop long-term successful financial habits are:
- regularly using your emergency fund for routine expenses - saving as much money as possible for only one year
Housing starts are an economic factor that can predict the following changes in the economy:
- wage levels - employment - economic expansion - consumer spending
What type of global influence does American consumption have on foreign companies?
American consumers provide foreign companies with a market
True or False: Creating and implementing a financial action plan is the third step of the financial planning process.
False
True of False: A key factor in making financial decisions is time value of money.
True
What are the examples of things to consider when evaluating your personal alternative methods in the financial planning process?
- ages of children - interest rates that are available - what you want to do for a career
Retirement planning typically does NOT include:
- comparing your net worth to net worth of others - plan to repay college loans
What are the three decisions you can make with your money?
spend, save, share
If you deposit $500 per year in an account for six years at 9% how much will you have in the account?
$3,762
Simon will be receiving $200 per year for the next five years. The interest on the account is 6%, compounded annually. What is roughly the present value of this annuity?
$843
According to the text, what is the primary benefit for most people to organizing their personal finances?
- A person can take control of his/her financial situation - To gain personal and financial satisfaction
To calculate time value of money, the following items are needed:
- annual interest rate - length of time - principal amount
Choices we make that can influence PERSONAL opportunity costs are
- avoiding exercise - lack of sleep poor eating habits
What are some of the methods that cannot be used to compute time value of money?
- comparing depreciation as per different methods Measuring tape and ruler
Sound financial goals for a young family might include:
- saving for college for the children - saving money for a larger family car
When setting financial goals, you should insure they are:
-specific -measurable - action-oriented - realistic -time-based
What is required at each stage of the decision-making process?
Relevant information
What is the Federal Reserve doing when it lends more money, buys government bonds, and changes interest rates?
The Fed is maintaining or increasing the money supply.
Paul can invest his money in the stock market now instead of buying a new car; however, that would require a trade-off or:
opportunity costs
What is the best option for a recent college graduate who has a large amount of school loans during a recession when yields are low in the market?
paying off loans
Specific advantages of personal financial planning include:
- increased effectiveness with resources - increased control with financial affairs - improved personal relationships
What are the two things that are necessary for achieving your financial goals?
- Finding good sources to obtain financial information - An eagerness to learn
What are some ways to improve your knowledge of personal finance?
- Study the text carefully - Talk to other knowledgeable investors. - Read periodicals for up=to-date financial information
True or False: When creating a financial plan, it is a simple process that is relatively easy to implement and maintain once started.
False
What is the term often used when an individual creates an organized process to achieve financial and personal satisfaction?
Personal money management
True or False: Opportunity cost is what you give up by making a choice
True
If you are going to get a raise in your salary next month, what factor will usually determine how you will spend or use your money?
individual values
When computing time value of money calculations, different approaches will yield slightly different results, primary due to:
rounding
True or False: Everyone has the same personal financial goals
False
Carl has decided to stop using credit. This will mean that there will be:
more money available for the future
Phillip has an investment of $200 that is expected to earn 10% annually. How much will the investment be worth at the end of the SECOND year if the investment earns simple interest compounded annually?
$242
Paula needs to have $400 in three years. The interest earned on the account is 6%, compounded annually. How much does she need to invest today?
$336
Paula invested $370. The interest earned is 4%, compounded annually. At the end of two years, Paula will have about:
$400
Bill is concerned about his year-end tax payments. What are some options that are available to him to lessen his concerns?
- Bill can increase his tax withheld from each paycheck - Bill can file quarterly tax payments
Which elements collectively create the national economy?
- Labor force - Businesses - Government
What are three main elements that affect overall financial planning?
- Life situation - Economic factors - Personal values
Kyle is a government contracted employee. His job is secure. He is going to invest all of his savings in a certificate of deposit for a 60-month period. He is not a financial expert but thinks the current interest rates are going to decrease over the next quarter. Kyle should consider what two types of risk?
- Liquidity Risk - Interest Rate Risk
Investors who are interested in receiving an income stream will probably not invest all or their money in:
- money market accounts paying next to nothing in interest - high-growth stocks that pay no dividends - high growth mutual funds
Examples of opportunity costs include:
- not having as much money in savings because you purchased new appliances to save energy costs - not getting a high yield because you have set aside funds in a low risk investment - taking home less pay now because you have increased tax withholdings to receive a larger tax refund
Long-term financial security begins with a regular savings plan to provide for
- replacement of major items - unexpected bills - emergencies
When determining goal-setting guidelines, what are 3 things should you take into account?
- spending - investing activities - saving
Place the steps of the financial planning process in order
1 Determine current financial situation 2. Develop your financial goals 3. Identify alternative courses of action 4. Evaluate alternatives 5. Create and implement financial plan 6. Review and revise financial plan
True or False: Intangible-purchase goals all deal with very similar areas of focus.
False
The Robinson family has learned that Mr. Robinson, the primary income source for the family, has been laid off from his job. The family will have a better change of being able to handle this situation if they have a:
Financial plan
The amount to which current savings will increase based on a certain interest rate and a certain time period is called?
Future value
Which of the following do not influence personal financial planning, as shown in the fourth step of the financial planning process?
Gold prices
When Mark is developing his financial plan, what three things should he consider?
He should consider the timing of his plan, the goals he sets, and his personal life situation.
What is the current value of a future amount based on a certain interest rate and a certain time period?
Present value
You are thinking of purchasing a home. You want to educate yourself about the financial aspects of purchasing a home. What would be good sources of information?
Printed materials, financial specialists, financial institutions, and online sources are the best resources.
Jason is a portfolio manager at a private investment company. He finds three very lucrative investments. They are oil contracts, construction contracts and Initial Public Offering of a company's stock. What is the opportunity cost if Jason invests all of the money with the construction contracts?
The opportunity cost in this situation are the other possible investments.
What is the definition of the adult life cycle?
The stages in the family and financial needs of an adult
What is the definition of economics as described in this text under economic factors?
The study of how wealth is created and distributed
True or False: A financial plan is a formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities.
True
Match the goal with the action required to meet the goal. a. Provide $10,000 for college in 10 years b. Provide for financial needs of parents c. Provide insurance coverage for medical needs
a. Make regular savings deposits b. Purchase life insurance with parents as beneficiaries c. Evaluate insurance options, evaluate and select coverage's
Another name used for calculating present value is
discounting
Obtaining monetary resources is the foundation of personal (blank) planning.
financial
You are thinking of investing and you are concerned bout the risks involved. Which of the following can be used to evaluate the risk that is involved?
identify a successful investor as a mentor and read financial planning sources to gain knowledge
Spending (blank) you earn is the only way to achieve long-term financial security
less than
When people first begin planning for retirement, saving for a child's college education, and planning the purchase of a vacation home, these are usually?
long- term goals
Spending money from your savings account would mean:
lost interest
A 'SMART' financial goal is specific (blank), action-oriented, realistic, and time based.
measurable
A key aspect to using financial goals is:
periodically analyzing financial values and goals
Food and clothing are examples of :
short-term consumable goods
A married couple are going to purchase a car that is 5 years old. Should the couple make their decision using sources that are 5 years old or updated sources?
the couple should use updated information sources to make their decision
The definition of personal financial planning is
the process of managing your money to achieve personal economic satisfaction
Bill recently created his financial plan after much thought and decision making. He implemented his plan, and so far the plan is working. What must Bill do now?
He must maintain and his financial plan. He must continue to review and revise his plan.
What do people begin to assess when global markets and economies begin to slow?
People begin to assess personal economic factors
Rachel has been shopping for a new refrigerator over the course of three days instead of being at work. This is an example of:
Personal opportunity costs
Financial planning would NOT improve your quality of life by:
- creating specific rules for how everyone should live - creating barriers to enjoying life -guaranteeing happiness
Two long-term financial planning activities include:
- determining savings activities needed to meet financial goals - Identifying financial activities for the next ten years
Personal opportunity costs include using your time, in addition to or in place of money:
- meet your needs - satisfy your personal values - achieve your goals
Examples where "no action is an action" will usually have an adverse outcome are:
B: choosing not to go to school to avoid taking a test C: avoiding making a decision because you are not sure which alternative to choose D: avoiding looking for a job because you are unsure what type of job you would like
True or False: Creating and implementing your financial action plan is the fifth step of the financial planning process
True
True or False: The most commonly overlooked type of insurance is disability insurance.
True