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
