Podcast
Questions and Answers
Developing financial goals is the first step in the financial planning process.
Developing financial goals is the first step in the financial planning process.
False
Identifying alternative courses of action is the same as evaluating alternatives.
Identifying alternative courses of action is the same as evaluating alternatives.
False
The opportunity cost of a decision can always be measured in dollars.
The opportunity cost of a decision can always be measured in dollars.
False
Evaluating risk is a part of Step 3 in the financial planning process.
Evaluating risk is a part of Step 3 in the financial planning process.
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Determining the basis of financial priorities is the same as deciding on specific financial goals.
Determining the basis of financial priorities is the same as deciding on specific financial goals.
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Decision-making is a one-time event in the financial planning process.
Decision-making is a one-time event in the financial planning process.
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Liquidity risk is not a type of risk considered in financial planning.
Liquidity risk is not a type of risk considered in financial planning.
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Step 5 in the Financial Planning Process is to review and revise your plan.
Step 5 in the Financial Planning Process is to review and revise your plan.
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Financial planning decisions need to be assessed only once in a lifetime.
Financial planning decisions need to be assessed only once in a lifetime.
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Financial specialists are not a source of financial planning information.
Financial specialists are not a source of financial planning information.
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Increasing income by taking extra hours at work is not a possible action plan to achieve financial goals.
Increasing income by taking extra hours at work is not a possible action plan to achieve financial goals.
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Regular reviews of decision-making processes do not help in making priority adjustments to achieve financial goals.
Regular reviews of decision-making processes do not help in making priority adjustments to achieve financial goals.
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The formula for calculating the future value of a single amount is FV = (P × r × t) + P
The formula for calculating the future value of a single amount is FV = (P × r × t) + P
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A financial calculator is not a method for calculating the time value of money
A financial calculator is not a method for calculating the time value of money
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Compounding allows for the future value of a deposit to grow slower than it would if interest were paid only on the original deposit
Compounding allows for the future value of a deposit to grow slower than it would if interest were paid only on the original deposit
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The present value of a future amount is always greater than its future value
The present value of a future amount is always greater than its future value
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An annuity is a series of deposits made at the beginning of each period
An annuity is a series of deposits made at the beginning of each period
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The future value of a series of deposits can be computed using a single formula
The future value of a series of deposits can be computed using a single formula
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The family and financial needs of an adult that influence financial activities and decisions are known as personal values.
The family and financial needs of an adult that influence financial activities and decisions are known as personal values.
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Financial markets are the users of funds in the financial system.
Financial markets are the users of funds in the financial system.
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The study of how wealth is created and distributed is known as finance.
The study of how wealth is created and distributed is known as finance.
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The Federal Reserve Bank's primary role is to regulate foreign investments.
The Federal Reserve Bank's primary role is to regulate foreign investments.
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A trade surplus occurs when the value of a nation's exports exceeds the value of its imports.
A trade surplus occurs when the value of a nation's exports exceeds the value of its imports.
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Global economy influences have no impact on personal finance.
Global economy influences have no impact on personal finance.
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The present value of an amount is always greater than its future value.
The present value of an amount is always greater than its future value.
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A financial plan can only be created by a professional financial planner.
A financial plan can only be created by a professional financial planner.
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Tracking spending is not necessary for creating a spending plan.
Tracking spending is not necessary for creating a spending plan.
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A financial plan only analyzes your current financial situation.
A financial plan only analyzes your current financial situation.
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Insurance protection is not necessary for preventing financial disasters.
Insurance protection is not necessary for preventing financial disasters.
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Becoming informed about taxes is not necessary for expanding financial resources.
Becoming informed about taxes is not necessary for expanding financial resources.
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Study Notes
Financial Planning Process
- The financial planning process involves 6 steps: developing financial goals, identifying alternative courses of action, evaluating alternatives, creating and implementing a financial action plan, and reviewing and revising the plan
Developing Financial Goals
- Identify feelings about money and the reasons for those feelings
- Determine the source of feelings about money (facts or influence of others)
- Determine the basis of financial priorities (social pressures, household needs, or desires)
- Decide on specific financial goals to pursue for your situation
- Differentiate needs and wants to align with goals and priorities
Identifying Alternative Courses of Action
- Common courses of action: continue the same course of action, expand the current situation, change the current situation, or take a new course of action
- Creativity in decision-making is vital for effective choices
- Electing to “do nothing” can be a dangerous alternative
Evaluating Alternatives
- Consider the consequences of choices, including opportunity cost (what you give up by making a choice)
- Evaluate risk, including inflation risk, interest rate risk, income risk, personal risk, and liquidity risk
- Gather relevant information from print media sources, financial institutions, and financial specialists
Creating and Implementing a Financial Action Plan
- Develop an action plan that identifies ways to achieve financial goals
- Possible action plans: increasing savings, reducing spending, increasing income by working extra hours, or making provisions for taxes
- Implement action plans may require assistance from others, such as insurance agents or online investment tools
Reviewing and Revising the Plan
- Financial planning decisions need to be assessed regularly
- Complete review should be done at least once a year
- More frequent reviews may be required for changing personal, social, and economic factors
- Regular reviews of decision-making process can help in making priority adjustments to achieve financial goals
Influences on Personal Financial Planning
- Personal and economic factors that influence personal financial planning
- Examples: marital status, household size, employment, major events (e.g. graduation, engagement, career change, children, retirement)
Time Value of Money
- Future value: the amount to which current savings will increase based on a certain interest rate and a certain time period
- Compounding: earning interest on previously earned interest
- Methods for calculating time value of money: formula calculation, time value of money tables, financial calculator, spreadsheet software, and websites and apps
Present Value
- Present value: the current value of a future amount based on a certain interest rate and a certain time period
- Present value calculations are also called discounting
- Present value can be computed for a single amount or for a series of deposits
The Financial System and Economic Factors
- The financial system: money flows from providers of funds to users of funds through intermediaries and financial markets
- Economics: the study of how wealth is created and distributed
- Forces of supply and demand on setting prices
- The economic environment includes various institutions, including the Federal Reserve Bank
Global Influences
- Global economy influences personal finance
- American companies compete against foreign companies for US dollars
- Balance of exports and imports
- Foreign investments and their role in the US money supply
- Trade deficit affects the value of a nation’s money and the cost of items being purchased by consumers
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Description
Assess your understanding of the financial planning process, including identifying feelings about money, determining financial priorities, and setting specific financial goals. This quiz covers Step 2 of the financial planning process.
