Chapter 1: Understanding the Financial Planning Process

What are the steps in the process of personal financial planning?

(1) Define your financial goals. (2)Develop the financial plans and strategies needed to achieve those goals.(3)Implement your financial plans and strategies.(4)Develop and implement budgets to control your progress toward your goals.(5)Develop and use financial statements to evaluate the results of your plans and budgets.(6)As your personal circumstances change, redefine your goals and revise your plans and strategies.

Inflation

A steady and sustained increase in general price levels across economic sectors. Is measured by the changing cost over time of goods and services that a typical household might purchase.

Think about the characteristics of the expansion and contraction periods in a business cycle. How might the characteristics of these two phases affect your efforts to manage your financial resources?

During the early stage of an economic expansion, it is generally easier to buy expensive assets, such as a car or home, on credit due to lower product prices and interest rates.

The benefits of effective and efficient personal financial planning include:

Increased flexibility and ability to accommodate significant life changes and events• Better informed anddeliberate decision making regarding current and deferred spending

Which of the following is not a principal tool used by government organizations to constrain the activities of businesses and consumers?

Initiating negative social media campaigns

(Blank) goals, which identify wants and needs that occur between the other two categories

Intermediate

Asset acquisition planning is one of the earliest financial activities you undertake in life. It involves the purchase of (blank) , including tangible and financial assets, liquid assets, investments, and personal and real property.

Things we own

Business Cycle

This general term describes the wavelike pattern of rising and falling economic activity, consisting of expansions, peaks, contractions, and troughs.

Standard of Living

This term defines the necessities, comforts, and luxuries enjoyed or desired by an individual or family.

Money

This term describes the tool we use in financial transactions that allows us to value the exchange.

Purchasing Power

This term is used to characterize the value of a currency by describing the amount of goods and services that can be purchased by a dollar at a given time. Inflation tends to decrease this value.

Employee Benefits

This type of employment compensation is received in a form other than wages, salary, commissions, or other cash payments.

One of the first savings accumulations recommended by financial advisors is (Blank) fund, which should contain (Blank) months' worth of income.

an emergency, three to six

Ryan and his fiancée, Sarah, are getting married in two months. Both are facing expiring leases on their apartments, so they are debating whether to purchase a small house or a condominium. This is an example of (Blank) planning.

asset acquisition

Tax planning involves evaluating your current and projected earnings and developing strategies that can legally (Blank) and/or (Blank) your tax liability.

defer, reduce

Tax-free investments are so called because the interest or other income paid to their owners is (Blank) federal, and, perhaps, state taxes.

free of

Businesses sell to consumers and government organizations, providing them with (Blank) in return for (Blank) . To accomplish this, businesses transform the (Blank) to the production process provided by consumers (namely land, labor, equipment, managerial talent, and a willingness to take risks) into finished products and services. In return, consumers are paid (Blank) in the form of rent, wages, interest, and profits.

goods and services, monetary payments, inputs, money

In general, your borrowing needs tend to (Blank) as you acquire additional and/or more expensive assets.

increase

To achieve the best results, it is critical that you begin your retirement planning (Blank) your retirement. Most Americans, however, don't start thinking about retirement until well into their (Blank) The cost of this postponed planning is a substantially lower level of retirement income.

long before, 40s and 50s, lower

A contraction period is characterized by the following attributes: businesses that are operating with (Blank) levels of production activity, increasing unemployment,(Blank) retail sales, increasing or high prices and interest rates, a (Blank) stock market, and expectations of lower business profits.

lower, low, declining

As it is currently written, the U.S. tax code recognizes several types of taxable income, including: • Active, (Blank) , income• Passive income• Portfolio, or (Blank) , income• Tax-deferred and/or tax-free income

ordinary, investment

Utility

refers to the satisfaction received from buying and using certain types or quantities of goods and services. Will result from consuming free as well as costly goods and services. A basic economic goal is to achieve the maximum amount of utility per dollar of income spent.

Diana has decided to restructure some of her investments. Concerned about expected future downturns in the stock market, she's considering selling some shares of stock and purchasing a rental property to generate more stable income streams. This is an example of (Blank) planning.

savings and investment

Businesses, or (Blank) are probably the most constrained participant in the economy, because in the long term their choice of goods and services produced is dictated by the purchasing preferences of consumers and government organizations, or (Blank) . In addition, businesses are also constrained by the laws and regulations imposed by federal, state, and local government organizations.

sellers, buyers

Wealth

the total value of all items owned by an individual or family, including tangible and financial assets. ealth includes the value of home(s), personal belongings, car(s), and other tangible assets, as well as intangible assets like cash, checking and savings accounts, stocks, bonds, and other financial assets.

Estate planning, the second half of retirement planning, involves the method by which your (Blank) will be passed on to your heirs, often by way of wills, trusts, and gifts.

wealth

Short-term goals, which address more immediate needs and wants, such as those occurring within the next (blank) months

12

These benefits can include sick leave, vacation, and personal time; life, health, and disability insurance; tuition reimbursement programs; pension, profit-sharing, and (Blank) retirement plans; and flexible spending accounts (FSAs) for (Blank) care and health care expenses. Points

401(k), child

Long-term goals, which identify wants and needs that are expected to be realized (Blank) from now

6-40 years

An example of a tangible asset is

A car or house

Which of the following statements accurately describe the phases of a business cycle?

A peak level of business activity occurs at the end of the expansion phase and the beginning of the contraction phase. A period of expansion is when an economy exhibits increasing levels of production and spending.

Federal, state, and local government organizations fulfill several roles within the economy. Which of the following are roles provided by government organizations?

Acting as a consumer of goods and services & Regulating economic activity

Another indication of the importance of consumers is the effect their collective spending has on the economic activity level observed in the economy. (Blank) in the level of consumer spending is usually credited with causing (Blank) and all benefits or costs that go with it.

An increase, economic growth

Liability acquisition planning addresses how you are going to pay for your asset purchases using liabilities, or (Blank) money

Borrowed

Which of the following are tasks included in the process of employee benefit planning?

Coordinate self-purchased policies and coverages with benefits provided by your and your spouse's employer. Determine the best methods for financing purchases of expensive and long-lived assets.

If the federal government wants to decrease production and purchasing activity levels in the economy, which of the following policy tools could it use?

Decrease government spending.

The (Blank) of liabilities is that, by law, the money (Blank) be repaid.

Disadvantage, must

In general, the cost and value of your tangible, personal, and real assets tend to (Blank) with your age, income, and wealth, all other things remaining constant. The value of your financial and liquid assets, on the other hand, tends to be a function of economic conditions and your investment returns.

Increase

Liam's desired financial outcomes are not expressed in monetary terms and are not prioritized.

Less Effective

Neal's financial goals are not consistent with his wants, needs, and financial resources.

Less Effective

The two principal policy tools that the federal government uses to manage economic conditions are monetary policy and fiscal policy. (Blank) is used to control the size of the money supply to stimulate or moderate business activity levels in the economy. In contrast, (Blank) uses government spending and taxation to do the same.

Monetary policy, fiscal policy

Eve's desired financial outcomes are expressed in monetary terms

More Effective

Heather's goals include target completion dates and are prioritized according to their perceived importance.

More Effective

In general, it is best to begin the six planning activities—asset acquisition, liability and insurance, savings and investment, tax, employee benefit, and retirement and estate—planning as soon as possible. However, at what age is it generally recommended that you begin your retirement and estate planning activities?

My early 20's

Financial goals describe the desired (Blank) of your financial planning activities.

Outcomes

Tangible assets are (blank) and are held either to consume and use or to generate a return or income as an investment.

Physical Assests

Insurance planning, on the other hand, provides a way of (Blank) your financial risks and (Blank) your income and assets. Improper insurance planning can be expensive and can lead to unprotected possessions.

Reducing, protecting

Employee benefit planning involves selecting, coordinating, and managing employer-provided compensation that (Blank) the form of cash payments, such as wages, salaries, and commissions.

does not take

Financial Planner

financial professional who provides financial evaluations and advice to individuals and families and who receives compensation in the form of commissions, fees, or some combination thereof.

The purpose of most long-term savings activity is to accumulate funds for (Blank)

important and expensive expenditures and retirement

In general, it is desirable to (Blank) the return earned on your invested funds (assuming you are not significantly increasing risk), to earn (Blank) interest on your funds, and to (Blank) the fees associated with the accounts.

increase, compound, reduce

Expansion periods tend to end with a (Blank) , whereas contraction periods end with a (Blank) .

peak,trough

Owners of tax-deferred investments, on the other hand, are allowed to (Blank) paying taxes on any returns generated by the investment.

postpone

Most people recognize that, as a group, consumers are the pivotal participants in the economy. The (Blank) decisions made by consumers determine which goods and services will be produced by businesses, just as their investment and saving decisions will strongly influence conditions in the (Blank) markets.

purchasing,financial

Average Propensity to Consume (APC)

refers to the percentage of each dollar of income, on average, that is spent for current needs and wants, rather than saved.

In overseeing the economy, the goals of the federal government are economic (Blank) and a high employment level.

stability, employment