30 Questions
What is the primary purpose of using a daily spending diary in the financial planning process?
To match goals with current and future monetary resources
What is the primary benefit of creativity in decision making in the context of financial planning?
Increasing the chances of making an effective choice
What is the term for the value of money or time given up when making a decision?
Opportunity cost
What is the primary outcome of electing to 'do nothing' in the financial planning process?
A dangerous alternative
What is the purpose of identifying alternative courses of action in the financial planning process?
To provide a range of options for effective decision making
What is the primary goal of evaluating alternatives in the financial planning process?
To make an effective choice that aligns with financial goals
What is a crucial aspect of decision-making in financial planning?
Risk
What is the primary purpose of reviewing and revising a financial plan?
To assess the effectiveness of the plan and make adjustments as needed
What is a potential source of information for minimizing risk in financial planning?
Print media sources
What is a possible action plan to achieve financial goals?
Increasing income by working extra hours
How often should a complete review of a financial plan be done?
At least once a year
What is the final step in the financial planning process?
Reviewing and revising the plan
What is a consequence of a higher interest rate on consumer spending?
It makes saving and investing more attractive
What is a potential consequence of high levels of consumer spending and borrowing?
Increased interest rates
What is the effect of higher consumer prices on the buying power of a dollar?
It decreases the buying power
What is the relationship between interest rates and the money supply?
Higher interest rates tend to reduce the money supply
What is the primary indication of a nation's economic viability?
Gross domestic product (GDP)
What is the impact of high unemployment on consumer spending?
It reduces consumer spending
What is the potential consequence of higher saving rates?
It reduces job opportunities
Which economic factor is most closely related to job creation and increased personal wealth?
Housing starts
What is the result of a country having more exports than imports?
Balance of trade deficit
What is the purpose of the Rule of 72?
To estimate the time it takes for prices or savings to double
What is the consequence of a decline in prices?
Deflation
What is the Consumer Price Index (CPI) a measure of?
The average change in prices consumers pay for a basket of goods and services
What is the primary reason why personal resources, such as health, abilities, and knowledge, require careful management?
Because they are finite and scarce
What is the time value of money?
The increase in an amount of money over time due to interest earned
What are the three amounts required to calculate the time value of money?
Principal, interest rate, and time period
What is the formula for computing simple interest?
Amount in savings × annual interest rate × time period
What is the opportunity cost of spending money today?
The interest lost on the money spent
Which of the following financial decisions involves considering the trade-offs between current needs and future uncertainty?
All of the above
Study Notes
Financial Planning Process
- Develop financial goals by identifying feelings about money and the reasons behind them
- Determine the source of feelings about money (facts or influence of others) and the basis of financial priorities (social pressures, household needs, or desires)
- Decide on specific financial goals to pursue and differentiate between needs and wants to align with goals and priorities
Identifying Alternative Courses of Action
- Common courses of action include continuing the same course, expanding the current situation, changing the current situation, or taking 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)
- Opportunity cost may refer to the value of money or time that you give up
- Decision-making will be an ongoing part of one’s life, and it is essential to consider the lost opportunities that will result from each decision
- 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 to minimize risk
Creating and Implementing a Financial Action Plan
- Develop an action plan to achieve financial goals, such as increasing savings, reducing spending, increasing income, or making provisions for taxes
- Implementing an action plan may require assistance from others, such as an insurance agent or online investment tools
Reviewing and Revising the Plan
- Financial planning decisions need to be assessed regularly, with a complete review done at least once a year
- More frequent reviews may be required for changing personal, social, and economic factors
- Regular reviews of the decision-making process can help in making priority adjustments to achieve financial goals
Influences on Personal Financial Planning
- Personal factors, such as feelings about money, influence personal financial planning
- Economic factors, including consumer prices, consumer spending, interest rates, money supply, unemployment, housing starts, gross domestic product (GDP), trade balance, and stock market indexes, also influence personal financial planning
Economic Conditions and Financial Decisions
- Consumer prices measure the buying power of a dollar and can influence financial planning
- Consumer spending measures the demand for goods and services by individuals and households and can influence financial planning
- Interest rates measure the cost of money and can influence financial planning
- Money supply measures the dollars available for spending in the economy and can influence financial planning
- Unemployment measures the number of people without jobs who are willing and able to work and can influence financial planning
- Housing starts measure the number of new homes being built and can influence financial planning
- GDP measures the total value of goods and services produced within a country’s borders and can influence financial planning
- Trade balance measures the difference between a country’s exports and its imports and can influence financial planning
- Stock market indexes measure the relative value of stocks and can influence financial planning
Opportunity Costs and the Time Value of Money
- Every financial decision involves giving up something to obtain something you consider more desirable
- Time used for working or studying is a personal opportunity cost
- Financial choices depend on current needs, future uncertainty, and current interest rates
- Time value of money refers to the increase in an amount of money as a result of interest earned
- Saving (or investing) today means more money tomorrow, while spending means lost interest
- Opportunity costs are present in retirement contributions, large purchases, and low-risk savings
Time Value of Money Calculations
- Three amounts are required to calculate the time value of money: principal (the amount of savings), interest rate (annual), and time period
- Computing simple interest involves multiplying the amount in savings by the annual interest rate and time period
Learn how to develop financial goals by identifying your feelings about money, determining the basis of your priorities, and deciding on specific goals to pursue. This quiz covers Step 2 of the financial planning process.
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