Personal Finance Questions: The Financial Planning Process, Measuring Your Financial Health and Making a Plan, & Understanding and Appreciating the Time Value of Money

Here Are The 25 Most Important Pesonal Finance Questions on The Financial Planning Process, Measuring Your Financial Health and Making a Plan, & Understanding and Appreciating the Time Value of Money:

Question: The six financial objectives - What are they?

- Manage the unplanned.
- Accumulate wealth for special expenses.
- Realistically save for retirement.
- Cover your assets.
- Invest intelligently.
- Minimize your payments to Uncle Sam.


Question: How will a financial plan help you save for retirement?
A strong financial plan will help you forecast the costs of retirement and develop a plan that will allow you to live a comfortable life after you retire.


Question: Describe the five steps in the personal financial planning process-

Step 1: Evaluate your financial health by examining your current financial situation.
Look at your whole financial picture
- Keep records and determine your net worth.
Step 2: Define your financial goals by describing what, when, and how much you want to do
- Written goals will draw you to them.
Step 3: Develop a plan of action to reach your goals
- Don't just think about goals ? decide how you will carry them out! Let flexibility, liquidity, protection, and minimization of taxes guide your plan.
Step 4: Implement your plan by carrying it out ? just do it! Stick to your plan.
Step 5: Review your progress, reevaluate, and revise your plan periodically and as needed.


Question: Why do individuals need to plan for their finances?

Without financial planning individuals will suffer and be at a loss both in the present time and in the future
- Too many people reach retirement broke and in poor health
- Their financial means are so limited they live out a meager existence and become a burden upon family and society
- Life is meant to be enjoyed and only by planning can we do that
- Because it is always easier to spend than save, financial planning is a must!


Question: Elaborate upon the four common concerns that should guide all financial plans

Your financial plan should be flexible enough to respond to changes in your life and unexpected events
- Planning must allow some funds to be liquid to allow access to money when you need it quickly
- Plan for protecting your assets and yourself with adequate insurance
- Finally, your financial plan should take taxes into account to pay as little as legally possible.


Question: What elements are included in a solid financial plan?
A solid personal financial plan includes an informed and controlled budget, outlines your investment strategy, and reflects your unique personal and financial goals.


Question: Why do you need to have liquidity?

Liquidity allows you to access your money with ease, when you need it
- Life happens; at any moment, you could develop an illness, lose a job, or wreck your car
- When unforeseen circumstances occur, you need to have access to enough money to make it through.


Question: Explain the essence and importance of each of the stages in the financial life cycle

The overall financial life cycle allows you to better understand the timing and areas of financial concern that you'll probably experience
- It allows you to focus on those concerns earlier and to plan ahead to avoid future financial problems.
Stage 1 is a time of wealth accumulation, initial goal setting, home purchase, family formation, insurance planning, saving for goals, and some tax and estate planning
- It's a time to develop a regular pattern of saving because it's tempting to spend rather than save
- Consumers are ages 18 through 54 in this stage.
Stage 2 covers ages 55 to 64 or the golden years approaching retirement
- This is a transition from the earning years when you will earn more than you spend
- Much of the financial activities will be spent in fine tuning
- Consumers put an emphasis on tax and estate planning, paying ourselves first, and insurance planning.
Stage 3 consists of the retirement years, for most people age 65 and older
- Consumers reap the benefits of sound planning or the losses from unsound planning
- You will attempt to ensure continued financial security and perhaps work part-time.


Question: Differentiate between short-term, intermediate, and long-term goals
- Give examples

Short-term goals can be accomplished within one year, such as taking a vacation.
Intermediate goals take between one and ten years to reach, such as saving for a college education or the down payment on a house
- Long-term goals take more than ten years to accomplish
- Retirement planning is a common long-term goal.


Question: Why should you prioritize your financial goals?

Prioritizing goals might make you realize that some of your goals are simply unrealistic, leading you to reevaluate them
- However, once your final goals are in place, they become the cornerstone of your personal financial plan, serving as a guide to action and a benchmark for assessing the effectiveness of the plan.


Question: Give an example of a decision that might not be considered a financial decision but will have a major impact on your financial situation

The decision to have a child will have a major impact on your financial situation.
Although finances aren't considered the primary factor determining when to have children, the timing certainly has enormous financial implications, causing significant changes in housing, child care, and education costs
- Considering that childrearing can cost $9,683 to $22,210 per child per year, saving to finance that child's college education might pose as a real challenge.


Question: What is the relationship between earnings, education, and standard of living?

There is a direct relationship between earnings and standard of living and education
- The more education an individual has, the more he or she will earn in general and thus enjoy a higher standard of living
- The opposite holds true also
- The less education one has the lower the earnings and standard of living.


Question: Why is it important to conduct an effective self-assessment?
conducting an effective self-assessment allows you to look honestly at many aspects of your life
- After completing the assessment, you will have a valuable understanding of your interests, skills, values, personal traits, and desired lifestyle
- Then you can research career options and identify those in which your abilities are valued
- Once you've narrowed down a list of possibilities, weigh the positive and negative aspects of each profession.


Question: List some way to increase your value as an employee.
Do your best work.
Project the right image–one aligned with the organization's values.
Gain an understanding of the organization's power structure so that you can work within it.
Gain visibility
- Make those with power aware of your contributions.
Request new assignments in order to gain experience and an understanding of the various operations of the organization.
Be loyal to and supportive of your boss
- Remember, he or she controls your immediate future.
Continually acquire new skills–particularly skills that are not easy to duplicate.
Question: Develop a strong network of people who can assist you when you look for a new job.
Pay attention to ethical considerations
- The most damaging event that you can experience is for your coworkers to lose confidence in your ethical standards
- Ethical violations end careers.


Question: What did the economic downturn that began in 2008 reveal about many Americans' financial concerns? How can you alleviate those concerns in your own personal financial planning?

Many Americans are not adequately prepared for retirement and have insufficient emergency funds, too much debt, and inadequate health insurance.
These concerns can be alleviated with proper financial planning, maintaining a sufficient emergency fund, avoiding excessive debt, and carrying adequate health insurance.


Question: List the ten principles of personal finance

Principle 1: The best protection is knowledge.
Principle 2: Nothing happens without a plan.
Principle 3: The time value of money
Principle 4: Taxes affect personal finance decisions.
Principle 5: Stuff happens, or the importance of liquidity.
Principle 6: Waste not, want not?smart spending matters.
Principle 7: Protect yourself against major catastrophes.
Principle 8: Risk and return go hand in hand.
Principle 9: Mind games, your financial personality, and your money
Principle 10: Just do it!


Question: Why is the time value of money an important concept in financial planning?

The time value of money allows us to see the relationship between time and the value of accumulated sums of money
- We can clearly understand that starting a savings or retirement plan at a younger age will create much more wealth than waiting to start it at a later time
- It also becomes clear that starting younger means saving a smaller monthly amount and having the option of skipping some months or years later if it becomes necessary to do so.


Question: What are some practical uses of present and future values?

There are basically two practical uses for these values
- Present values will tell you how much must be saved or invested annually to achieve a future financial goal
- It also works for determining the monthly payment on a loan of a specified amount to be paid back in the future
- Future values show the total future accumulated values of specified sums of money saved or invested now and into the future
- Budgeting and financial planning would be very difficult if not impossible without the time value of money skills.


Question: A compound interest table is useful in solving a time value of money problem
- Name the variables involved

The interest rate, the period of time involved, the sum of money involved, and the frequency of compounding are variables to consider when using a compound interest table.


Question: Describe the two factors that affect how much we need to save to achieve financial goals

The two variable factors that affect total accumulation are the interest rate received and the time period the savings/investment is allowed to accumulate
- Increasing the interest rate and/or the period of time to accumulate will create a much larger end product
- By decreasing either of these two factors, total accumulation will be decreased
- Experiment with increasing either of these factors and the results will be both apparent and amazing.


Question: List four reasons why you should care about the power of compounding and the time value of money

The concepts are critical to your efforts to achieve financial goals.
The sooner you start saving for retirement, the less you have to save each year.
You may outlive your Social Security benefits and employer retirement plans.
The concepts will help you develop a large estate for yourself, spouse, and children.


Question: List at least five common examples of annuities

a one year lease on an apartment, your five year car loan, your parents' mortgage payments, monthly savings to reach a college education expense goal, a monthly paycheck if you are on salary, and constant monthly contributions to retirement plans are all examples of annuities.
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Question: For someone who has $100,000 to save for 20 years, would a 4% Certificate of Deposit that compounds annually be a better deal than a 3.94% Certificate of Deposit that compounds quarterly? Why?

With the 4% annual compounding, your $100,000 would compound into $219,112.31.
There would be 20 compounding periods at 4% per year and the interest would be calculated at the end of every year
- Your $4,000 in interest from year one would not earn any interest until the end of year two ($160)
- With the quarterly compounding your interest would start earning interest itself starting with the second quarter of year one.
There would be a total of 80 compounding periods (4 quarters per year times 20 years) and this would mean that even with the lower interest rate, your money would grow to $219,053.19 for a slight difference of $59.12!


Question: What recommendations would you offer to someone who is trying to break poor financial habits and save money in order to achieve his or her financial goals?

Recommendation one: First, gain an understanding of how compounding works–that as the number of years and the interest rate you earn go up, so does the future value of an investment.
Recommendation two: Think of savings as a 'snowball effect.' You earn interest on your initial investment, and those interest earnings and the initial investment both continue to earn interest
- When these earnings are extended over multiple decades, your money can really add up
- In other words, you want to start investing as soon as possible.
Recommendation three: Pay yourself–your future self, that is–first
- To make this process as painless as possible, automate the payments so that when your paycheck is deposited into your bank account, a percentage is automatically transferred to a separate investment account–perhaps your retirement account
- Or ask your employer's payroll department about a mandatory payroll deduction
- It is much easier to save the money that you never really see!