Questions and Answers
What is personal financial planning?
What is a financial plan?
A formalized report that summarizes your current financial situation, analyzes your financial needs and recommends future financial activities.
What is one advantage of personal financial planning?
What does the term 'adult life cycle' refer to?
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Define values in the context of personal finance.
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What is the study of economics?
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What does The Fed stand for?
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What is inflation?
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What is the Rule of 72?
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What does CPI stand for?
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What are interest rates?
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What is a risk premium?
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Match the following financial goals with their timeframes:
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What are consumable-product goals?
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What characterizes durable-product goals?
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What are intangible-purchase goals?
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Effective financial goals should be: (Select all that apply)
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Define opportunity cost.
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What does the time value of money refer to?
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What is the formula for simple interest?
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What does the future value represent?
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What is an annuity?
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Define present value.
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What are the steps in the financial planning process?
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What are the five types of risk in financial planning?
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Identify sources of financial planning information.
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Study Notes
Personal Financial Planning
- Personal financial planning involves managing spending, saving, and investing to achieve desired life goals and financial security.
Financial Plan
- A financial plan is a formal report summarizing current financial status, analyzing needs, and recommending future financial actions.
Advantages of Personal Financial Planning
- Enhances effectiveness in obtaining, using, and safeguarding financial resources.
- Enables greater control over finances, reducing risks of debt and bankruptcy.
- Improves personal relationships through well-communicated financial decisions.
- Provides freedom from financial worries by planning for future expenses and achieving goals.
Adult Life Cycle
- Refers to the stages of family and financial needs an adult experiences over time.
Values
- Values are beliefs and principles individuals consider important and desirable.
Economics
- Economics studies the creation and distribution of wealth within a society.
The Federal Reserve (The Fed)
- The Federal Reserve is the government agency responsible for regulating money supply, controlling interest rates, and overseeing loan amounts.
Inflation
- Inflation signifies a general increase in the price level of goods and services.
Rule of 72
- This rule calculates the time required for an investment to double, using the formula: 72 divided by the annual interest rate.
Consumer Price Index (CPI)
- CPI measures the overall cost of goods and services purchased by a typical consumer.
Interest Rates
- Represent the cost associated with borrowing money.
Risk Premium
- The extra return expected from a risky investment compared to a risk-free one.
Financial Planning Activities
- Key activities include obtaining, planning, saving, borrowing, spending, managing risk, investing, retirement planning, and estate planning.
Investing for Current Income
- Current income from investments typically comes from dividends or interest payments.
Investing for Long-Term Growth
- Long-term growth is derived from investments like stocks, mutual funds, and real estate expected to appreciate in value.
Long-Term Financial Security
- Achieved by consistently spending less than earnings.
Factors Encouraging Over-Buying
- Influential aspects include extensive advertising, aggressive selling strategies, and product availability.
Types of Financial Goals
- Short Term: Goals achievable within a year.
- Intermediate Term: Goals planned for 2 to 5 years.
- Long Term: Goals set for over 5 years.
Consumable-Product Goals
- Involves items that are frequently purchased and used up quickly, such as food and clothing.
Durable-Product Goals
- Concerned with expensive, infrequently purchased items like appliances and vehicles.
Intangible-Purchase Goals
- Relate to non-physical aspects like personal relationships, health, education, and leisure.
Characteristics of Effective Financial Goals
- Should be realistic, measurable, time-defined, and action-oriented.
Opportunity Cost
- Refers to the value lost when choosing one option over another, illustrated through trade-offs (e.g., sacrificing daily coffee for a new dress).
Time Value of Money
- Refers to the increase in value of money over time due to earned interest or dividends.
Simple Interest Calculation
- Represented by the formula: I = prt (Interest = principal × rate × time).
Future Value with Compounding Interest
- Future value determines the worth of an initial deposit, calculated as FV = P(1 + i)ⁿ, where P is principal, i is interest rate, and n is the number of periods.
Annuity
- Provides a series of regular payments as income from capital investments.
Present Value
- Calculates how much needs to be invested today to reach a specific future amount.
Financial Planning Process
- Involves six steps: assessing your financial situation, setting goals, identifying options, evaluating alternatives, creating a plan of action, and reviewing progress.
Types of Financial Risk
- Includes inflation risk, interest risk, income risk, personal risk (relationships, health, safety), and liquidity risk (difficulty in converting assets to cash).
Sources of Financial Planning Information
- Information can be gathered from the Internet, financial institutions, media, and financial specialists.
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Description
Test your knowledge with these flashcards for Chapter 1 of Personal Finance. This section covers essential terms such as personal financial planning and financial plans, along with their definitions. Enhance your understanding of financial concepts to secure your financial future.
