Financial Planning: Setting Goals

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Questions and Answers

What is the primary factor that influences financial activities and decisions in an adult's life cycle?

Economic environment

Federal Reserve Bank's monetary policy

Global economy

Marital status and household size (correct)

What is the main function of intermediaries in the financial system?

To regulate the economy

To invest in foreign companies

To facilitate the flow of money from providers to users (correct)

To set prices for goods and services

What is the primary objective of the Federal Reserve Bank?

To regulate the balance of exports and imports

To set prices for goods and services

To promote foreign investments

To maintain an adequate money supply (correct)

What is the study of how wealth is created and distributed?

Economics Signup and view all the answers

What is the impact of a trade deficit on a nation's economy?

It decreases the value of a nation's money and increases the cost of items Signup and view all the answers

What is the role of foreign investments in the US money supply?

It increases the US money supply Signup and view all the answers

What is the core concept of every financial decision?

Giving up something to obtain something more desirable Signup and view all the answers

What is the result of saving or investing today?

More money tomorrow Signup and view all the answers

What are the three required amounts to calculate the time value of money?

Principal, interest rate, and time period Signup and view all the answers

What is the primary reason for considering the time value of money in financial decisions?

To assess the trade-offs between current and future needs Signup and view all the answers

What is the formula for computing simple interest?

Principal × interest rate × time period Signup and view all the answers

What is the relationship between spending and lost interest?

Spending leads to lost interest Signup and view all the answers

What is the purpose of identifying feelings about money and their sources?

To develop financial goals aligned with personal values Signup and view all the answers

What is the outcome of not evaluating alternatives in the financial planning process?

Inefficient allocation of financial resources Signup and view all the answers

What is the term for the value of the next best alternative given up when making a choice?

Opportunity cost Signup and view all the answers

Why is creativity important in the financial planning process?

To consider a range of alternatives Signup and view all the answers

What is the outcome of electing to 'do nothing' in the financial planning process?

Increased financial risk Signup and view all the answers

What is the primary goal of Step 2 in the financial planning process?

To develop specific financial goals Signup and view all the answers

What is the primary purpose of a financial plan?

To summarize your current financial situation, analyze your financial needs, and recommend future financial activities Signup and view all the answers

Why is it important to have appropriate insurance protection?

To prevent financial disasters Signup and view all the answers

What is the relationship between present value and future value?

Present value is always less than future value Signup and view all the answers

What is the primary benefit of becoming informed about taxes and investments?

To expand one's financial resources Signup and view all the answers

What is the purpose of tracking spending in a financial plan?

To live within one's income and save and invest for the future Signup and view all the answers

Who can assist in creating a financial plan?

Either a financial planner, oneself, or a money management software package Signup and view all the answers

What is the primary consequence of increasing consumer prices on an individual's purchasing power?

Reduced ability to purchase goods and services Signup and view all the answers

How does an increase in consumer spending typically affect the job market?

Creates more jobs Signup and view all the answers

What is the primary effect of higher interest rates on borrowing?

It makes borrowing more expensive Signup and view all the answers

What is the consequence of an increase in the money supply on interest rates?

It decreases interest rates Signup and view all the answers

How does high unemployment affect an individual's financial decisions?

It discourages spending Signup and view all the answers

What is the relationship between consumer spending and consumer prices?

High consumer spending may push up consumer prices Signup and view all the answers

Study Notes

Economic Factors Influencing Financial Planning

Consumer prices measure the buying power of a dollar and inflation, affecting financial planning
Consumer spending influences financial planning by creating jobs and higher wages, but high levels may push up prices and interest rates
Interest rates measure the cost of money, affecting borrowing and saving
Money supply refers to the dollars available for spending in the economy
Unemployment rates affect consumer spending and future job opportunities

Opportunity Costs and the Time Value of Money

Every financial decision involves giving up something to obtain something more desirable (opportunity cost)
Personal resources, like financial resources, require careful management
Time value of money refers to the increase in an amount of money due to 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, interest rate, and time period
Simple interest calculation: Amount in savings × annual interest rate × time period = interest amount

Financial Planning Process

Step 2: Develop financial goals by identifying feelings about money, determining financial priorities, and setting specific goals
Step 3: Identify alternative courses of action and consider the consequences of choices
Step 4: Evaluate alternatives by considering opportunity costs, risk, and personal values

The Financial System and Economic Factors

The financial system allows money to flow from providers to users through intermediaries and financial markets
Economics studies how wealth is created and distributed, with forces of supply and demand setting prices
The Federal Reserve Bank influences borrowing and interest rates by buying and selling government securities
Global influences, such as trade deficits and foreign investments, affect personal finance

Achieving Financial Goals

Develop a flexible financial plan that summarizes the current financial situation, analyzes needs, and recommends future activities
Implement a financial plan by tracking spending, having insurance protection, and staying informed about taxes and investments

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Description

Learn how to set financial goals by identifying feelings about money, determining priorities, and deciding on specific goals. This quiz covers the second step in the financial planning process.