Financial Planning and Management Quiz
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Questions and Answers

What is the formula for calculating Net Worth?

  • Assets + Liabilities
  • Assets - Liabilities (correct)
  • Cash Flow + Capital
  • Liabilities - Assets

    • Which of the following is NOT a component of cash flow?

  • Money in
  • Surplus
  • Money out
  • Net Worth (correct)

    • Which aspect of budgeting is crucial to maintain a positive cash flow?

  • Investing surplus immediately
  • Exceeding expenditures
  • Ignoring irregular income
  • Ensuring income is greater than expenditures (correct)

    • What must be included when identifying your budget surplus?

    <p>Consistent income sources (A)</p> Signup and view all the answers

    Which of the following documents should be retained for seven years?

    <p>Tax-related documents (B)</p> Signup and view all the answers

    What type of expenses are not included in the total of what your dependents may need?

    <p>Car maintenance costs (D)</p> Signup and view all the answers

    What calculation is used to determine if additional life insurance is needed?

    <p>C = B - A (B)</p> Signup and view all the answers

    What should be included in your total living expenses calculation for dependents?

    <p>75% of total family income before tax (A)</p> Signup and view all the answers

    Which of the following terms refers to life insurance that lasts for a specific number of years?

    <p>Term insurance (B)</p> Signup and view all the answers

    Which of the following best describes the cash value component of permanent life insurance?

    <p>It is an investment or annuity that accumulates over time. (C)</p> Signup and view all the answers

    Which type of insurance protects against the loss of structure and belongings when a borrower dies?

    <p>Mortgage Insurance (C)</p> Signup and view all the answers

    What is the primary purpose of life insurance?

    <p>To provide income/savings to loved ones (A)</p> Signup and view all the answers

    What does a higher deductible generally mean for an insurance policy?

    <p>Lower premium payments (B)</p> Signup and view all the answers

    Which of the following is NOT a method of risk management?

    <p>Capital Gains (A)</p> Signup and view all the answers

    In homeowner's insurance, what does the deductible refer to?

    <p>Amount insured pays first when there is a loss (D)</p> Signup and view all the answers

    Which type of insurance provides coverage for personal belongings within a rented property?

    <p>Tenant's Insurance (A)</p> Signup and view all the answers

    What is the main purpose of interest added to income at the Marginal Tax Rate?

    <p>To assess income from investments (D)</p> Signup and view all the answers

    Which of the following is an example of speculative risk that should not be insured against?

    <p>Investment in stocks (A)</p> Signup and view all the answers

    What is the recommended monthly saving ratio?

    <p>10% (A)</p> Signup and view all the answers

    Which of the following ratios should be high for a sound financial position?

    <p>Current Ratio (B), Liquidity Ratio (C)</p> Signup and view all the answers

    Which type of tax is charged on capital gains when selling an asset?

    <p>Capital Gains Tax (A)</p> Signup and view all the answers

    What is the contribution limit for a Tax-Free Savings Account (TFSA) in 2025?

    <p>$27,000 (D)</p> Signup and view all the answers

    What is the maximum combined income tax rate in Alberta for income over $314,928?

    <p>48% (D)</p> Signup and view all the answers

    What does MTR stand for in tax calculations?

    <p>Marginal Tax Rate (B)</p> Signup and view all the answers

    How are non-refundable tax credits applied?

    <p>Reduce the amount of tax owed dollar for dollar (A)</p> Signup and view all the answers

    In what scenario is tax evasion considered illegal?

    <p>Not reporting all income (D)</p> Signup and view all the answers

    When can TFSA withdrawals create new contribution room?

    <p>Every withdrawal creates new room for the following year (A)</p> Signup and view all the answers

    What is a significant benefit of tax-deferring techniques?

    <p>Tax is paid at a lower rate during deferral (C)</p> Signup and view all the answers

    How much of a capital gain is taxed when an asset is sold?

    <p>50% (B)</p> Signup and view all the answers

    What is the effect of over-contributing to a TFSA?

    <p>A 1% penalty applies for each month over-contributed (B)</p> Signup and view all the answers

    What type of account combines features of TFSA and RSP for first-time home buyers?

    <p>FHSA (D)</p> Signup and view all the answers

    Flashcards

    Net Worth

    A measurement of wealth calculated as assets owned minus liabilities owed.

    Cash Flow

    The movement of money in and out, reflected in a budget; cannot be negative.

    Budget

    A plan that outlines expected income and expenses to manage cash flows.

    Financial Sustainability

    The ability to maintain a certain level of financial capacity and capital over time.

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    Building Wealth

    The process of growing assets and generating revenue while managing liabilities.

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    Total Assets (A)

    The total value of bank accounts, investments, and insurance policies you currently own.

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    Dependents' Needs (B)

    The total financial needs of your dependents after your death, including debts and living expenses.

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    Life Insurance Need (C)

    The amount of life insurance you may need, calculated as B - A.

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    Term Life Insurance

    A life insurance policy that lasts for a specific period, like 'Term 10'.

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    Permanent Life Insurance

    A life insurance policy that lasts for life and has a cash value component.

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    Interest income

    Earnings from savings, bonds, or GICS calculated at MTR.

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    Capital gains

    Profit earned from selling assets or securities, taxed at MTR.

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    Dividends

    Earnings from stocks, mutual funds, or ETFs, grossed up and taxed.

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    Pure risk

    A risk that can only result in a loss, not a gain.

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    Risk management techniques

    Strategies to handle risk: Avoidance, Reduction, Assumption, Shifting.

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    Home insurance

    Coverage protecting home structure and belongings from risks.

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    Deductible

    The amount paid out-of-pocket before insurance covers a loss.

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    Life insurance

    Financial protection for beneficiaries after the insured's death.

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    Debt Ratio

    A financial ratio that measures the proportion of debt in relation to assets.

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    Current Ratio

    A liquidity ratio that measures your ability to cover current liabilities with current assets.

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    Liquidity Ratio

    A measure of the ability to cover short-term obligations with liquid assets.

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    Debt Payments Ratio

    A measure indicating how much of your income is used to service debt.

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    Savings Ratio

    The proportion of income that is saved, ideally equal to or greater than 10%.

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    Taxable Income

    Income that is subject to tax after deductions and allowances.

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    Marginal Tax Rate (MTR)

    The rate at which the last dollar of income is taxed.

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    Average Tax Rate (ATR)

    The average rate at which your total income is taxed.

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    TFSA

    A Tax-Free Savings Account where contributions grow and withdrawals are tax-free.

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    Tax Deferral

    The postponement of tax payments to a future date.

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    Non-Refundable Tax Credit

    A tax credit that can only reduce tax owed to zero but not generate a refund.

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    Capital Gains Tax

    Tax on the profit made from the sale of a non-inventory asset.

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    Registered Plans

    Tax-advantaged accounts, like RRSPs and TFSAs, that provide specific tax benefits.

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    Income Splitting

    A tax strategy that involves distributing income among family members to minimize taxes.

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    Evasion

    Illegal act of not paying taxes owed.

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    Study Notes

    Financial Planning and Management

    • Net Worth: Calculating wealth by subtracting liabilities from assets.
    • Cash Flow Budget: Tracking income and expenses to ensure finances stay positive. Crucial for sustainability.
    • Financial Sustainability: Maintaining financial stability and growth over time.
    • Building Wealth: Increasing assets. Often involves saving and investing strategies.
    • Capacity vs. Capital: Capacity represents potential to grow, while capital is accumulated wealth or assets.
    • Government Relations: Important for tax, funding, and regulatory aspects in financial strategies.

    Taxes and Financial Planning

    • Income Tax: Four types (purchases, property, annual property, capital gains) are mentioned, along with calculations.
    • Financial Planning: Preparing personal income tax returns and understanding tax fundamentals.
    • Tax Brackets: Progressive tax system where higher income earners pay a higher percentage in taxes (Alberta tax brackets specifically are mentioned for several income levels).
    • Tax Planning Strategies: Methods for lowering taxes, leveraging tax credits.

    Taxable Income and Liability

    • Net Income: Income after deductions are subtracted. Net income used in tax calculations.
    • Taxable Income: Income used to calculate the amount of tax owed.
    • Tax Credits: Reductions in tax liabilities, dependent on specific situations.

    Insurance and Risk Management

    • Insurance: Protects against financial loss resulting from events like property damage, injuries, and death.
    • Premium: Fee paid for insurance coverage.
    • Deductible: Amount insured pays first when a loss or damage occurs. A higher deductible reduces premiums.
    • Risk Management: Strategies for handling risks, including avoidance, reduction, assumption, and transfer.
    • Property Insurance: Protects against damage to buildings or personal belongings.

    Insurance Coverages and Types

    • Automobile Insurance: Coverage for bodily injury liability, property damage liability, collision, comprehensive damage.
    • Homeowner's Insurance: Protects against property damage and loss of use, as well as personal liability.
    • Life Insurance: Provides financial security for beneficiaries after the insured's death (and possibly for other purposes).
    • Life Insurance Policy Options: Term policies (time limited) or Permanent policies (lifetime).

    Investing and Savings

    • TFSA: Tax-free savings account. Contributions are not taxed, withdrawals are not taxed.
    • RESP: Registered Education Savings Plan. Contributions are not taxed at the time they are made, only on the growth upon withdrawal.
    • Retirement Planning: Strategies for building retirement funds, like RRSPs (Registered Retirement Savings Plan), and contributing.

    Other Financial Considerations

    • Risk Management: Assessing and minimizing potential financial risks.
    • Tax Deductions: Items or expenses that can reduce taxable income.
    • Financial Statements: Tools for assessing financial health and progress towards goals.

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    Financial Planning Notes PDF

    Description

    Test your knowledge on financial planning and management concepts, including net worth calculations, cash flow budgeting, and tax fundamentals. This quiz covers crucial aspects like financial sustainability and government relations that impact financial strategies. Assess your understanding of income taxes and building wealth effectively.

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