PFCH1

The problem of bankruptcy is associated with poor decisions in the ______________ component of financial planning. A. Sharing B. Savings C. Obtaining D. Borrowing E. Protecting

D. Borrowing

The Rule of 72 is: A. A tool to determine the number of years until retirement for an employee. B. Used to estimate how long it takes for prices to double using a given annual inflation rate. C. The legal code for requiring companies to provide a match on retirement savings. D. Used to calculate interest rates for savings. E. The number of steps required to complete a financial plan.

B. Used to estimate how long it takes for prices to double using a given annual inflation rate.

Which institutions collectively create the National Economy?

- Labor force - Government - Businesses

Global Influences

- U.S economy affected by foreign investors and competition from foreign companies. - Level of Imports/Exports affects available supply of dollars. - Level of foreign investment affects domestic money supply. - Money supply affects consumer interest rates.

Methods for Calculating Time Value of money

1 Formula Calculation 2 Time Value of Money Tables 3 Financial Calculator 4 Spread Sheet Software 5 Websites and Apps

Four situational influences for financial decisions

1. Age 2. Marital status 3. Size of household 4. Employment situation

Three main elements that affect overall financial planning

1. Economic factors 2. Personal values 3. Life situation

Financial Plan

A formalized report that summarizes your current financial situation, analyses your financial needs, and recommends future financial activities.

Inflation

A rise in the general level of prices.

Bankruptcy

A set of federal laws allowing you to either restructure your debts or remove certain debts.

Attempts to increase income are part of the _____________ component of financial planning. A. Obtaining B. Planning C. Saving D. Borrowing E. Spending

A. Obtaining

Financial Planning in our Econmy

Domestic Economic influences Global Influences Inflation Interest Rates

The 'borrowing' activity in a financial plan relates to A. Acquiring adequate insurance coverage B. Investing for long-term growth C. Setting up a budget D. Obtaining financial resources from employment, investments or ownership E. Maintaining control of credit-buying habits

E. Maintaining control of credit-buying habits

Financial Plans are only created by financial planners. True of False?

False

Time Value Money

Increase in an amount of money as a result of interest earned.

S.M.A.R.T. Goals

S = Specific M = Measurable A = Action-oriented R = Realistic T = Time-based

Personal Financal Planning

The process of managing ypur money to achieve personal economic satisfaction.

When prices are increasing at a rate of 6 percent, the cost of products would double in about 12 years. True or False?

True Use rule of 72

Short-term goals

Within 1 year

Deflation

deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%

Young, single (18-35)

➡️ Establish financial independence ➡️ Obtain disability insurance to replace income during prolonged illness. ➡️ Consider home purchase for tax benefit

TVM Interest Calculation Example

$500 on deposit at 6% annual interest for 6 moths: Principal = $500 Interest rate = 6% Time period = 1/2 (6/12 months) = would earn $15

Life Situation and Personal Values

- Adult Cycle: The stages in the family situation and financial needs of an adult. - Life Situation Factors: Marital status, household size, employment. - Major Events: Graduation, marriage, divorce, birth or adoption of child, career or health changes. - Values: Ideas and principles that a person considers correct, desirable, and important.

Advantages of Financial Planning

- Increased effectiveness in obtaining, using and protecting financial resources. - Increased control of your financial affairs by avoiding excessive debt, bankruptcy, and dependence on others. - Improved personal relationships resulting form well-planned and effectively communicated financial decisions. - Sense of Freedom form financial worries obtained by looking to the future, anticipating expenses, and achieving personal economic goals.

Present Vaue

- The current value of a future amount based on a certain interest rate and time period. - The current value of an amount desired in the future. - How much to deposit now to obtain desired total in the future. - Discount (Present Value Computation) allows you determine how much to deposit now to obtain a desired total int he future. PV = Multiply Table Factor by Amount Deposited

Future Value

- The increased value of money from interest earned - Amount to which current savings will increase - Total amount available in the future - Compounding is earning interest on your interest - FV ⁼ PV（１＋i ）ⁿ Example = FV =100 (1.06)1 = $106

Financing Planning Activities

1. Obtaining 2. Planning 3. Saving 4. Borrowing 5. Spending 6. Managing Risk 7. Investing 8. Retirement and Estate Planning

Types of Financial Goals

1. Short-term goals 2. Intermediate goals 3. Long-term goals

Which of the following short-term goals is stated most clearly? A. Buy a car for less than $17,000 within 6 months B. Retire at age 65 with $2,000,000 in my 401(k) account C. Purchase a house with a mortgage no greater than $150,000 within 5 years D. Set up an emergency fund E. Invest $50 per month for the next 18 years for my nephew's college fund

A. Buy a car for less than $17,000 within 6 months The only complete short-term goal listed is A. B and E are long-term goals. C is an intermediate goal. D is a short-term goal; however, it is not measurable and does not have a time limit.

A question associated with the saving component of financial planning is: A. Do you have an adequate emergency fund? B. Is your will current? C. Is your investment program appropriate to your income and tax situation? D. Do you have a realistic budget for your current financial situation? E. Are your transportation expenses minimized through careful planning?

A. Do you have an adequate emergency fund?

Which of the following would increase the interest rate for a loan? A. Poor credit rating B. Higher down payment C. Constant interest rates D. Lower consumer prices E. Short time to maturity

A. Poor credit rating

John Jones was laid off of his job two months ago. He just received an offer for a position that pays 2/3 the salary of his old job. Why should he set up a financial plan? A. To increase the effectiveness of obtaining, using, and protecting his financial resources. B. To decrease control of his financial affairs regarding debt. C. To accept the loss of freedom from financial worries due to his new position. D. To learn how to manage with less savings. E. To find out why he was laid off.

A. To increase the effectiveness of obtaining, using, and protecting his financial resources.

A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends a direction for your financial activities is a(n) A. Insurance prospectus. B. Financial plan. C. Budget. D. Investment forecast. E. Statement.

B. Financial plan.

Patricia Werner recently graduated from college with $20,000 in student loans and $5,000 in credit card debt. She usually makes minimum payments on her debts and she has been late with three payments in the last year. She wants to buy a new car but was told that her interest rate on a loan would be very high. What is the most likely reason this might be so? A. General interest rates are very low B. His credit rating is poor because of his late payments C. He already has a student loan outstanding D. Recent graduates are not allowed to have more than $25,000 in debt outstanding E. Interest rates must be tied to the CPI

B. His credit rating is poor because of his late payments

The major function of a financial plan is to A. Reduce taxes. B. Increase savings. C. Achieve financial goals. D. Improve your credit rating. E. Obtain adequate insurance protection.

C. Achieve financial goals.

Who is most likely to benefit by inflation? A. Retired people B. Lenders C. Borrowers D. Low-income consumers E. Government

C. Borrowers

An investor should expect to receive a risk premium for A. Expanded exports B. Lower consumer prices C. Higher potential earnings due to uncertainty D. Reduced availability of investments E. Expected lower inflation

C. Higher potential earnings due to uncertainty

An advantage of personal financial planning is: A. The use of low-interest savings B. Increased impulse spending C. Increased control of financial affairs D. More credit card debt E. Less monitoring of investments

C. Increased control of financial affairs

The consumer price index reflects: A. The prices of products and services in the United States. B. The prices of products and services around the world. C. The change in prices of products and services of urban consumers. D. The change in prices of products and services around the world. E. None of the above.

C. The change in prices of products and services of urban consumers.

Time Value of Money Interest calculations

Calculating Interest Earned - Principal = Amount of Savings - Annual Interest Rate - Length of Time money on deposit (in years) Simple Interest. Amount in Savings X Annual Interest Rate X Time Period = Interest.

The stages that an individual goes through based on stages in the family and financial needs is called the A. Financial planning process B. Budgeting procedure C. Personal economic cycle D. Adult life cycle E. Tax planning process

D. Adult life cycle

Future Value Example 1 If you left $100 in for 2 years with 6% interest rate :

FV = $100 (1.06)2 = $112,36 FV = $100 (Factor = 1.124) + $112.36 Notice the $6 interest for 2 years would give you $12. The extra $.36 is the result of Compounding.

The life situation of a household has little influence on personal financial planning decisions. True of False?

False

The long-term goals for a young single will probably be the same as those for an older couple with no dependent children at home. True of False?

False

Risks associated with most financial decisions are easy to measure. True or False?

False In many financial decisions, identifying and evaluating risk are difficult. common risk to consider are: - Inflation risk - Interest risk - Income risk - Personal risk - Liquidity risk

Inflation is most harmful to people with incomes expected to increase. True or False?

False Inflation is most harmful to people living on fixed incomes

Interest earned is calculated by multiplying the principle times the opportunity cost. True or False?

False Interest earned equals principal × rate × time.

Intermediate goals are usually achieved within the next year or so. True or False?

False Intermediate goals are to be met in 2 to 5 years.

Developing a budget is part of the "spending" component of financial planning. True or False?

False It is part of the "planning" activity.

Purchasing a car is an example of a consumable-product goal. True or False?

False Purchasing a car is a durable-product goal.

Values

Ideas and principles that a person considers correct, desirable, and important.

Who does inflation benefit and hurt?

Inflation benefits borrowers & hurts lenders

Long-term goals

Over 5 years

Present Value Example You want $1,000 five years from now You can earn 5% on your money

PV = $1,000 X 0.748 = $784

Present Value

The current value for a future amount based on a certain interest rate and certain time period; also referred to as compounding.

Purchasing a car is an example of a durable-product goal. True or False?

True

Opportunity Cost

What a person gives up by making a choice.

Financial Needs Goals

- Consumable-product goals: Food, clothing, entertainment. - Durable- product goals: Car, appliances, sporting equipment. - Intangible-purchase goals: Education, health, personal relationship.

Intermediate goals

1-5 years

Financial Planning Process

1. Determine current financial situation. 2. Develop financial goals. 3. Identify alternative courses of action. - Continue same course of action - Expand current situation - Change current situation - Take a new course of action 4 Evaluate alternatives - Consequences of choices - Evaluate risk - Financial planning information sources 5. Create and implement financial action plan. 6. Review an revise plan.

The inflation rate for a household will be: A. Greater than the inflation rate as reported by the CPI since the index excludes the product or service with the highest inflation rate for the past 12 months B. Lower than the inflation rate as reported by the CPI since the index excludes the product or service with the lowest inflation rate for the past 12 months C. Equal to the inflation rate as reported by the CPI since it includes all products and services whether or not the prices have changed in the past 12 months D. Either greater than or less than the inflation rate as reported by the CPI depending on the household's "basket" of goods and services purchased E. Zero since the CPI does not measure consumer price changes.

D. Either greater than or less than the inflation rate as reported by the CPI depending on the household's "basket" of goods and services purchased.

Higher consumer prices are likely to be accompanied by A. Lower union wages B. Lower interest rates C. Lower production costs D. Higher interest rates E. Higher exports

D. Higher interest rates

Sally Smith's friends have told her that they think she should consider a visit to a personal financial planner. Why do you think her friends made the suggestion? A. Sally usually saves 10 percent of her paycheck for long-term goals. B. Sally has no credit card debt. C. Sally tracks her investments and makes changes to her allocations once per year. D. Sally plans to quit her job and volunteer for local organizations. E. Sally has used a budget for years.

D. Sally plans to quit her job and volunteer for local organizations. Sally's job loss will affect her financial situation. Her income, expenses, insurance coverage, and investing may all be affected.

Domestic Economic Influences

Economy's Influence on Financial Planning - Business, Labor and Government. The Federal Reserve - Sets the nation's monetary policy to promote the objectives of maximum employment, stable prices and moderate long-term interest rates.

Risk premium Factors

Extra amount you expect to receive for investing in an instrument due to factors such as: - length of time - uncertainty of getting money back - expected inflation - interest rates

Future Value Example 2 $650 invested at %8 for 10 years

Factor = 2.159 FV = $650 X 2.159 = $1,404.35

A financial plan is another name for a budget. True of False?

False

Higher inflation usually results in lower interest rates. True or False?

False

Opportunity costs refer to money already spent. True or False?

False An opportunity cost is the time, money, or resource given up when a decision is made.

A financial plan is an informal report that analyzes past financial decisions. True or False?

False Financial plan is a formal report that summarizes present conditions, analyzes financial needs, and recommends future financial activities.

Rule of 72

Just divide 72 by the annual inflation (or interest) rate Example: An annual inflation rate of 4%, for example, means prices will double in 18 years (72 / 4 = 18) . Regarding savings, if you earn a 6%, your money will double in 12 years (72 / 6 = 12).

Hidden inflation exists when the cost of ______ rise at a higher rate than ______ items.

Necessities; nonessential

Interest Rate

Represent the cost of money. - Affected by supply and demand. - Risk premium - people with poor credit pay higher interest rated - Major impact on financial planning

Annuity

Series of equal deposits or payments at equal intervals earning at constant rate. Examples are retirement savings, or any other savings goal in which you deposit an equal amount at equal intervals.

Future Value

The amount to which current savings will increase based on certain interest rate and a certain time period; also referred to as compounding.

Economics

The study of how wealth is created and distributed.

Inflation reduces the buying power of money. True or False?

True

Opportunity costs refer to time, money, and other resources that are given up when a decision is made. True or False?

True

Personal financial planning is the process of managing your money to achieve personal economic satisfaction. True or False?

True

Retirement planning includes thinking about your housing situation, recreational activities, and possible volunteer or part-time work. True or False?

True

Short-term goals are usually achieved within the next year or so. True or False?

True

Opportunity Cost

What a person gives up by making choice. - The Trade-off of a decision. - Not always measurable in dollars: may be time. - Consider lost opportunities resulting from your decisions

Time Value Money

increase in an amount of money as a result of interest earned. Saving today = more money tomorrow Spending tomorrow = lost interest

Older (50+), single

➡️ Arrange for long-term health coverage. ➡️ Review will and estate plan. ➡️ Plan retirement living facilities, living expenses, and activities.

Young couple with children under 18

➡️ Carefully manage the increased need for the use of credit. ➡️ Obtain an appropriate amount of life insurance for the care of dependents ➡️ Use a will to name Guardian for children.

Older couple (50+), no dependent children at home

➡️ Consolidate financial assets and review estate plans. ➡️ Consider household budget changes several years prior to retirement. ➡️ Plan retirement housing, living expenses, recreational activities, and part-time work.

Young, dual-income couple no children

➡️ Coordinate insurance coverage and other benefits. ➡️ Develop savings and investment program for changes in life situation (larger house, children). ➡️ Consider tax-deferred contributions for retirement fund.

Mixed generation household, (elderly individuals and children under 18)

➡️ Obtain Long-term health care insurance and life/disability income for care of younger dependents. ➡️ Use dependent care services if needed. ➡️ Provide arrangements for handling finances of elderly if they become ill. ➡️ Consider splitting of investment cost, with elderly income while alive and principal going to survive relatives.

Single parent with children under 18

➡️ Obtain adequate amounts of health, life, and disability insurance. ➡️ Contribute to a savings and investment fund for college. ➡️ Name a guardian for children and make other estate plans.