Mid-term Quiz Study Guide
1.1 List the 5 steps in the personal financial planning process: 1. Analyze your current finances
2. Develop goals
3. Identify and evaluate strategies to achieve your goals 4. Establish and implement your plan
5. Reevaluate and revise your plan as needed
1.1 Self Check
Define personal finance and personal financial planning:
* Personal Finance- a specialized area of study that focuses on individual and household financial decisions, such as budgeting, saving, spending, insurance, and investments. * Personal Financial Planning- the process of developing and implementing an integrated, comprehensive plan designed to meet financial goals, to improve financial well-being, and to prepare for financial emergencies.
1.2 Summarize what influences personal financial planning:
1. Life cycle
2. Family composition
5. Interest rates
6. Inflations Rates
1.3 Identify the parts of a financial plan:
1. Establishing a firm foundation: Establish the necessary foundations, including an understanding of the personal financial planning process, the necessary tools, and the tax effects of your financial decisions. 2. Secure your basic needs: This step includes meeting your consumption and housing needs, setting aside funds for financial emergencies, protecting your assets with insurance, establishing a career path, and making educated employee benefits decisions. 3. Building wealth: After you have secured your basic needs, you can begin to think about wealth building to meet future needs, such as retirement and college funding. With financial security comes the need to protect your wealth. 4. Protecting wealth and dependents: The final stage in the process of developing a comprehensive financial plan includes the protective elements of life insurance, long term care insurance, and estate planning.
1.3 Self Check
What are the basic needs you need to meet after you have a financial foundation? * Consumption and housing needs
* Setting aside funds for financial emergencies
* Protecting your assets with insurance
* Establishing a career path
* Make educated employee benefits decisions
1.4 Describe how to organize and prepare personal financial statements: 1. Base your decisions on reasonable assumptions: Don’t be unreasonably optimistic about your finances. 2. Apply marginal reasoning: Marginal refers to the change in outcome or the additional benefit that will result from the decision you make. 3. Consider opportunity costs: An opportunity cost is a measure of what you have to give up in order to take a particular action. 4. Use sensitivity analysis: A sensitivity analysis asks the question “What effect would it have on my personal finances if my assumptions turned out to be wrong?”
1.5 Identify cash management products and services:
* Quicken and other personal finance software
* Account reconcilement services- Banks have developed a system which allows companies to upload a list of all the checks that they issue on a daily basis, so that at the end of the month the bank statement will show not only which checks have cleared, but also which have not.
Personal financial planning can mean the difference between financial success in your life and problems down the road. The five-step planning process is a continuous cycle that helps you assess your position and get to where you want to be. Personal factors as well as general economic factors influence the planning process. The stages of a plan include laying a foundation, securing basic needs, building wealth, and protecting wealth and dependents.
* Attitudes Opinions and psychological differences between people that affect their decisions. * Consumer price index (CPI) a measure of the price of a representative basket of household goods and services in the U.S. market. *...
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