Personal Finance Chapter 1 Flashcards

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Questions and Answers

What is personal financial planning?

A strategy to increase wealth

Spending, saving, and investing your money (correct)

A formalized report of financial needs

None of the above

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?

Less control over financial affairs

Dependence on others

Increased debt

Improved personal relationships (correct)

What does the term 'adult life cycle' refer to?

Stages in the family and financial needs of an adult. Signup and view all the answers

Define values in the context of personal finance.

Ideas and principles a person considers correct, desirable and important. Signup and view all the answers

What is the study of economics?

The study of how wealth is created and distributed. Signup and view all the answers

What does The Fed stand for?

The Federal Reserve. Signup and view all the answers

What is inflation?

A rise in the general level of prices. Signup and view all the answers

What is the Rule of 72?

The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest. Signup and view all the answers

What does CPI stand for?

Consumer Price Index. Signup and view all the answers

What are interest rates?

These represent the cost of borrowing money. Signup and view all the answers

What is a risk premium?

The excess return required from an investment in a risky asset over that required from a risk-free investment. Signup and view all the answers

Match the following financial goals with their timeframes:

Short-term = Within one year Intermediate-term = 2 to 5 years Long-term = More than 5 years Signup and view all the answers

What are consumable-product goals?

Occur on a periodic basis and involve items that are used up relatively quickly. Signup and view all the answers

What characterizes durable-product goals?

Involve infrequently purchased, expensive items such as appliances and cars. Signup and view all the answers

What are intangible-purchase goals?

Relate to personal relationships, health, education, and leisure. Signup and view all the answers

Effective financial goals should be: (Select all that apply)

Stated in specific, measurable terms Signup and view all the answers

Define opportunity cost.

Whatever must be given up to obtain some item. Signup and view all the answers

What does the time value of money refer to?

Increase of an amount of money as a result of interest or dividends earned. Signup and view all the answers

What is the formula for simple interest?

I = prt. Signup and view all the answers

What does the future value represent?

The amount your original deposit will be worth in the future based on earning a specific interest rate. Signup and view all the answers

What is an annuity?

Income from capital investment paid in a series of regular payments. Signup and view all the answers

Define present value.

The amount of money you would need to deposit now in order to attain a desired amount in the future. Signup and view all the answers

What are the steps in the financial planning process?

Determine your financial situation, develop financial goals, identify alternative courses of action, evaluate alternatives, create and use plan of action, review and revise plan. Signup and view all the answers

What are the five types of risk in financial planning?

All of the above Signup and view all the answers

Identify sources of financial planning information.

Internet, financial institutions, media sources, financial specialists. Signup and view all the answers

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.