ECON1200 Personal Finance Chapter 1

simple interest calculation example

$500 x 0.06 x 0.5 = $15

societal changes influence financial needs:

- delaying marriage - dual income households - single parent households - caring for both children and elderly parents

To calculate time value of money for savings, the following items are needed:

-annual interest rate -length of time -principal amount

long-term goals have a timeframe of

5+ years (such as retirement fund, college education fund, etc)

deflation

a decline in prices

financial plan

a formalized report that summarizes your current financial situation, analyzes financial needs, and recommends future financial activities

personal factors influences spending and saving habits include

age, income, household size, and personal beliefs

the Federal Reserve System (The Fed)

attempts to maintain an adequate money supply to encourage consumer spending, business growth, and job creation

Which of the following is not part of the fourth step in the personal financial planning process?

gold prices

time value of money

the increase in an amount of money as a result of interest earned

consumable-product goals

usually occur on a periodic basis and involve items that are used up relatively quickly, such as food, clothing and entertainment

three amounts are used in calculating the time value of money for savings in the form of interest earned:

- the amount of savings (the principal) - the annual interest rate - the length of time the money is on deposit

According to the text, there are ______ main factors that contribute to Americans having money problems.

2

American consumers spend hundreds of dollars on goods and services. The goods and services manufactured are offered by American companies and companies from other countries. this is an example of:

a global economy and foreign competition

inflation

a rise in the general level of prices

economic environment includes

business, labor, and govt working together to satisfy needs and wants

The steps in the financial planning process can guide your ______ planning.

career

Choosing to save a larger amount each month is an example of which possible course of action that is a part of step three in the financial planning process?

expanding

Managing risk is not a financial planning activity.

false

A rise in the general level of prices is called:

inflation

as borrowing by consumers, businesses and govt increases, interest rates are likely to

rise due to increased demand

future value

the amount that will be available at a later date

compounding

the amount to which current savings will increase based on a certain interest rate and time period ex: $100 deposited in a 6% account for 1 year will grow to $106 $100 + ($100 x 0.06 x 1yr) = $106

the CPI measures

the average change in the prices urban consumer pay for a fixed basket of goods and services

What is the purpose of developing and analyzing your financial goals?

to differentiate your needs from your wants

Three items needed to calculate future value include: principal, length of time, and annual interest rate.

true

Which of the following are part of evaluating alternative courses of action in the financial planning process?

-considering the consequences of choices -consideration inflation risk -evaluating risk

intermediate goals have a timeframe of

2-5 years

The main purpose of the Federal Reserve is to ______.

act as the central bank and maintain an adequate money supply

present value is referred to as

discounting

Your financial goals are the basis for measuring the progress of which of the following?

spending, saving, and investment activities

Interest rates are affected by the following:

supply and demand of money

present value

the current value of an amount desired in the future

time value of money tables can used to determine ?

the future value of equal yearly savings deposits

values

the ideas and principles that a person considers correct, desirable, and important

financial literacy

the use of knowledge and skills for earning, saving, spending, and investing money to achieve personal, family and community goals

opportunity cost

a trade off; every financial decision requires sacrifice in order to attain something more desirable

Determining your current financial situation involves which of the following?

-identifying current income, savings, living expenses, and debts - preparing personal financial statements

Every financial decision has a trade-off, also known as a(n):

opportunity cost

In the context of global influences, which of the following statements are true of American consumers and American businesses? Multiple select question.

American consumers provide foreign companies with a market AND American businesses compete against foreign companies for the spending dollars of Americans

Assume a $650 investment earning 8% for 10 years. What is the future value?

FV=PV (1+i)n FV= $650(1+.08)10 FV=$1,403.30

Which of the following is the first step in the financial planning process?

determine current financial situation

Opportunity costs can be viewed in terms of:

financial and personal resources

financial opportunity costs

involve monetary values of decisions made. For example, the purchase of an item with money from your savings means you will no longer obtain interest on those funds.

According to the text, what are the main reasons Americans have financial problems?

- advertising efforts and availability of goods encourage overspending - poor planning and weak management of money habits

Understanding how the ages of dependents will affect your savings goal is a part of step four in the financial planning process, which involves evaluating your ______.

alternatives

simple interest calculation

amount in savings x annual interest rate x time period = interest

When planning your financial goals, what role does the economy play?

daily economic transaction facilitate financial planning activities, which affect personal finance decisions

intangible-purchase, or nonfinancial goals

relate to personal relationships, health, education, community service, and leisure

SMART goals

specific, measurable, action oriented, realistic, time based

adult life cycle

the stages in the family situation and financial needs of an adult

annuity

a series of equal deposits or payments

Long-term financial security starts with a regular ______ plan for emergencies and unexpected bills.

savings

When discussing personal financial growth, what is an important aspect?

setting goals

interest rates represent

the cost of money

short-term goals will be achieved within

the next year or so

personal financial planning

the process of managing your money to achieve personal economic satisfaction

economics

the study of how wealth is created and distributed

personal opportunity costs

time, energy, health, abilities, knowledge

use the Rule of 72

to find out how fast prices (or savings) will double - divide 72 by the annual inflation or interest rate ex: annual inflation rate of 4% means prices will double in 18 years (72 / 4 = 18) for savings; if you earn 6%, your money will double in 12 years (72 / 6 = 12)

A key factor in making financial decisions is time value of money.

true

consumer price index (CPI)

is computed and published by the Bureau of Labor Statistics

advantages of financial planning

- effectiveness when using and protecting financial resources - expanded control of financial affairs by avoiding excessive debt and dependence on others - improved personal relationships - freedom from financial worries

Key factors for most people in making financial decisions include:

- financial opportunity cost - inflation cost - time value of money

time value of money calculation methods

- formula calculation - TVM tables - financial calculator - spreadsheet software - websites and apps

The Fed has indirect control over interest rates. The Fed attempts to make adequate funds available for which of the following?

consumer spending and business growth

After considering the alternative courses of action to reach financial goals, one of the possible courses of action is to ______.

continue the same course of action

in times of inflation, the buying power of the dollar ___

decreases

According to AICPA Insights, which of the following is a common mistake related to implementing a financial plan?

emotional decision making

Which of the following is a possible pitfall in creating and implementing your financial plan?

inflexibility

daily economic transactions facilitate financial planning activities, such as:

investing in debt securities (bonds), equity securities (stocks), buying and selling mutual funds, certificates of deposit (CDs) and commodity futures

durable-product goals

involve frequently purchased, expensive items such as appliances, cars, and sporting equipment

What measures the increase in an amount of money as a result of interest earned?

time value of money

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