Personal Finance Midterm (chapter 1)

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

A) Budgeting

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 not a relevant consideration when identifying alternatives for achieving your financial goals? A) Choosing a large versus small university B) Pursuing additional education C) Choosing a state versus private university D) Choosing a major for study that enhances earning power

A) Choosing a large versus small university

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

A) Money insurance

What is the core purpose of buying insurance? A) Protect your wealth and assets B) Make sure you make money on any claim C) Insurance is an expense a careful investor needs to minimize D) Make sure you leave an estate when you are gone

A) Protect your wealth and assets

Which of the following is an example of money management? A) Putting your money in a savings 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 savings account at your bank

Which item is not one of the components of a personal financial plan? A) Setting aside money for season tickets to your favorite football team B) Investing your money C) Planning your retirement D) Budgeting

A) Setting aside money for season tickets

Which of the following is not a financing decision? A) Should you buy Apple stock with savings B) Should you lease a car C) Should you take a loan and buy a car D) Should you take a 15 or 30 year mortgage to buy a house

A) Should you buy Apple stock with savings

Which of the following is not a reason to set realistic financial goals? A) So you have something to refer to every time you get paid B) So you have a high likelihood of achieving them C) If the goal is too onerous you will be unwilling to follow the plan D) If you fail you will be discouraged and lose interest in planning

A) So you have something to refer to every time you get paid

Why is it important to understand how taxes impact your personal financial planning? A) Taxes paid reduce your net income and cash flow available to save as well as the returns on your investments. B) Not paying taxes can result in penalties and jail time. C) It is not that important since savings are not taxable. D) It is only important if you are in a 25%+ tax bracket.

A) Taxes paid reduce your net income and cash flow available to save as well as the returns on your investments.

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

Why is it important to monitor and revise your financial plan from time to time? A) Your financial position changes over time as does your personal, job and family situation B) As you get older you will want to lower your goals C) So that you remember the goals you were striving for D) You may decide enjoying consumption now is more important than saving for retirement years

A) Your financial position changes over time as does your personal, job and family situation

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

A) Your house that you rent

Retirement planning should begin A) as early as possible in order that you accumulate sufficient funds for retirement. B) as soon as you start working full time. C) a few years before you plan on retiring. D) you do not need to plan since social security and your firm's pension will be sufficient.

A) as early as possible in order that you accumulate sufficient funds for retirement.

The first step in developing your financial plan is..... A) establish your financial goals. B) pay off all your credit cards. C) buy a cool car then begin saving money. D) get a good job.

A) establish your financial goals.

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.

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..... A) protects your wealth against unnecessary taxes. B) shelters your wealth against all taxes. C) ensures that your wealth is distributed in the manner that the court determines. D) involves saving to purchase a large country estate.

A) protects your wealth against unnecessary taxes.

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.

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 decision involved in managing 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

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

Which of these statements is true with regards to the 2008-2009 financial crisis? A) More than half of the people in the United States lost their jobs. B) The values of many homes were cut in half or more. C) The values of most investments declined by no more than 10%. D) Having a financial plan is of no help when economic conditions are as weak as they were during the crisis.

B) The values of many homes were cut in half or more.

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 how 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 the career that 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 in. 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.

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.

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 will try to save a small amount because that is better than saving nothing at all. C) you will 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 will try to save a small amount because that 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.

In the United States the level of savings is about.... A) 50% of income earned. B) 25% of income earned. C) 4.5% of income earned. D) less than 1% of income earned.

C) 4.5% of income earned.

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) Receiving a $100 birthday present from your grandmother C) Buying a new home entertainment system and putting the entire amount on your credit card D) Receiving an inheritance

C) Buying a new home entertainment system and putting the entire amount on your credit card

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

________ 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 savings account so you will be able to pay cash for holiday gifts B) Buying a car which depletes your savings 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 you should anticipate B) How much money you should attempt to save each month C) How you will allocate your estate among your heirs D) How long you will take to pay off a specific loan

C) How you will 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.

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

C) Liquidity

Which of the following could save a smaller proportion of their earnings to achieve the same level of wealth as the others? A) Social workers B) School teachers C) Medical doctors D) All would save the same percentage of earnings to reach the same level of wealth

C) Medical doctors

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) Educating yourself on various financial products B) Asking questions of other clients C) Relying on the adviser as to when to buy and sell D) Knowing your risk tolerance

C) Relying 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.

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.

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.

"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.

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.

A measure of your wealth is.... A) the highest level of education you've attained. B) the amount of your annual income. C) the value of what you own minus the value of what you owe. D) your 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.

On which of the following Web sites should you question the accuracy of the information provided? A) The Internal Revenue Service's web site lists current tax rates and rules used for tax planning B) The Securities and Exchange Commission's web site explains new regulations for stockbrokers C) A major bank's web site lists new retirement plans rules used for retirement plans D) A free chat room lists recommended stocks for you to buy

D) A free chat room lists recommended stocks for you to buy

Which of the following is not a way that insurance is designed to protect your wealth? A) Protecting the assets that you own B) Limiting your exposure to potential liabilities C) Protecting your income D) Protecting your investments from downturns in the stock market

D) Protecting your investments from downturns in the stock market

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

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.

Which of the following is not a decision involved in managing your financing? A) Whether to obtain a 3 year versus 4 year loan on a new car B) Whether to obtain a 15 year versus 30 year loan on a new home C) Whether to pay off an existing loan D) Whether to invest income in a savings account or in a stock

D) Whether to invest income in a savings account or in a stock

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.

"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 includes all of the following 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.

All of the following are true with regard to the demand for financial advisers except.... A) many people lack an understanding of personal finance. B) many people prefer to rely on advisers rather than making their own decision. C) many people are just not interested in making their own financial decisions. D) the law requires that you use advisers before making investments.

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

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.

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

False

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

False

True or 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

True or False.... Goals should be set as high as possible regardless of reality because they may eventually be obtainable.

False

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

False

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

False

True or False.... Liquidity cannot be enhanced using sound money and credit management.

False

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

False

True or False.... People do not need to determine how much money to set aside for retirement and how those funds should be invested until they near their retirement age.

False

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

False

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

False

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

False

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

False

True or False..... Most Americans will never be able to understand and develop a personal financial plan?

False

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

False

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

Liquidity

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

Risk

________ is the uncertainty surrounding the potential return on an investment.

Risk

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

True

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

True

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

True

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

True

True or False.... One of the considerations that determines your investment choices is the level of risk you are willing to tolerate.

True

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

True

True or False.... Your financial plan should include a plan for protecting your assets and income through insurance coverage.

True

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

True

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

True

True or False.....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

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

opportunity cost